Can consolidation create sustainable long-term value, or will it prove seductive but, ultimately, disappointing to shareholders, employees, customers, and management alike?
Where Have All the Mergers Gone?
EPACT and the repeal of PUHCA have not affected the pace of utility acquisitions.
acquirers may perceive that FERC or state oversight could make the acquisition a long, expensive, and uncertain undertaking at the outset.
Furthermore, the cost of approval (particularly if multiple states are involved) could eliminate most if not all of the anticipated savings/returns. Acquirers also may be reluctant to go from a modestly or minimally regulated situation to a highly regulated one. In fact, regulation could limit their ability to achieve fund improvements and investment through siting new facilities ( e.g., approval of new transmission lines). Then there are the many new regulations being implemented ( e.g., CAIR, CAMR) and anticipated (CO 2 regulation) that pose an uncertain cost and set of challenges.
In summary, in light of this litany, it is not surprising that relatively few utility M&A deals are proposed, and even fewer are successful, in spite of the removal of PUHCA as a factor. In fact, it was probably unrealistic to expect that EPACT would eliminate these fundamental barriers to utility M&A. Rather, it appears that instead of there being an environment in which there is an incentive, we have one in which there needs to be compelling reasons for entering into a utility acquisition effort. It seems more appropriate to regard the “steady-state” level of acquisitions of electric utilities as the number before and after the 1997-2002 period—a couple per year. The years 1997-2002 were likely an anomaly, one characterized by “dot-com” mania, inflated stock prices, and “irrational exuberance” that provided expectations of growth in the utility industry that could not be sustained.
The Shape of Things to Come
Looking to the future, and using the recently successful and unsuccessful deals as signposts, what do we see in terms of the types of transactions likely to take place in the next few years?
Bigger deals will tend to dominate. Of the several hundred investor-owned utilities in the United States, perhaps 10 to 15 percent can be considered large; while most are medium-sized or smaller. If a utility is going to seek to overcome the barriers described above, it will tend to do so only if there is sufficient upside potential, for both customers and shareholders, and if that potential is greater with larger transactions. Most of the deals, both successful and non-successful ( e.g., MidAmerican-PacifiCorp; Duke-Cinergy; FPL- Constellation and Exelon-PSEG) fall into this category.
Furthermore, a handful of not-so-large utilities will acquire their peers. Within the medium and smaller categories, we would expect some future acquisitions. Those deals are “big” relative to the size of the merging companies, if not large in terms of the market. These deals will tend to be among contiguous utilities, and will be proposed primarily to achieve the hoped-for economies of scale that may be more readily realized in this size category. Because of their size, these deals will tend to raise few market-power concerns, involve fewer states, and cause less regulatory pushback.
The huge amount of investment required will facilitate some M&A activity. EEI estimates that among the shareholder utilities, $275 billion will be required in generation between