In the utility industry's brave new world of deregulation, information technology (IT) (em and, specifically, "outsourcing" (em has acquired an entirely new meaning.
IT has become strategic....
Electric utility mergers loom as the next step in restructuring.
Digital Equipment, Prime, Wang and many other computer companies did not survive. Wal-Mart's efficiency in distribution produced a list of casualties in retail too numerous to mention. Large pharmaceutical companies have merged to maintain earnings growth because of patent expirations and a paucity of successful new drugs. The railroad industry has become much more efficient through restructuring and consolidation. The wireless telecommunications industry continues to consolidate as have the chemical and oil industries.
Increasing transparency and intense competition throughout the economy assure that high cost producers cannot survive when lower cost alternatives exist. Once profit margins decline and/or markets for products become commoditized, industry consolidation frequently results because only large, low cost producers can create shareholder value in low margin businesses.
For all these reasons, consolidation in the electric utility industry is inevitable as customers demand better products at lower prices. The continuing need to reduce costs, enhance competitiveness and increase shareholder value will lead to further industry consolidation despite cost of service pricing and regulatory protectionism. Electric utilities are characterized by low revenue growth; cost cutting and a low level of revenue generating investment do not produce significant earnings growth and stock price appreciation. Mergers can have a salutary impact on earnings growth, innovation, investment, rates and shareholder value as a result of economies of scale, better resource allocation and lower cost structure.
1. Developing a list of merger candidates is beyond the scope of this paper, however, a merger between Consolidated Edison, Inc. and Public Service Enterprise Group, Inc. would have the potential to produce synergy savings, lower rates and fund innovation in distribution and transmission which could produce extraordinary benefits for both ratepayers and shareholders.
2. This discussion is not meant to imply that merchant generation is an inferior business just that investors value the business based on different metrics, and that competitive businesses require different management and financial skills to maximize shareholder value.
3. Well capitalized new entrants such as Google or IBM in energy management or smart grid could negatively impact utility revenues while large, well capitalized entrants such as oil companies could invest downstream in generation which would erode energy and capacity revenues in merchant markets but could maximize the value of their gas assets.
4. The impact of low natural gas prices on merchant generation is important as even some nuclear plants are having trouble recovering fixed costs in markets where prices are determined based on marginal costs. In addition, low gas prices encourage distributed generation thereby depriving distribution utilities of revenue especially if combined with net metering.
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