The top traders, investors and managers tell why energy convergence is still a pipe dream.
[Graphic tables included in the print version of the Fortnightly are not included in this electronic version.]
Energy investors seemed less willing in 1999 to greet electric/gas combination mergers with the kind of blind enthusiasm they tended to show in prior years.
Instead, they now demand proof that energy convergence really does create tangible value beyond the mere sum of the parts. At least that's the impression gained from talking with John W.
Mergers & Acquisitions
NSP + New Century. The Federal Energy Regulatory Commission OK'd the merger of Northern States Power Co. (NSP) and New Century Energies Inc. (NCE), to form Xcel Energy Inc., on condition that the new company would join the Midwest Independent System Operator. FERC Docket No. EC99-101- 000, Jan. 12, 2000, 90 FERC ¶61,020.
* Rate Pancaking. The FERC found no problem with transmission rate pancaking with the MISO condition, even though NCE subsidiary Southwestern Public Service Co. (SPS) belongs to the rival Southwest Power Pool.
Gas Retail Rate Design. In a move toward equalizing rates of return between customer classes, the Oregon PUC authorized Northwest Natural Gas Co. to increase base rates by nearly $246,000, at the same time boosting residential rates by 1.3 percent but lowering rates for large commercial and industrial users. It set return on equity at 10.25 percent, finding the rate "consistent with the downward trend of ROEs authorized by other regulatory commissions." Order No. 99-697, Nov. 12, 1999 (Ore.P.U.C.).
Mergers & Acquisitions
Joint Ventures. The Federal Trade Commission, in consultation with the Antitrust Division of the U.S. Department of Justice, issued draft antitrust guidelines for "collaborations among competitors" that will apply to a wide range of joint ventures and strategic alliances other than actual mergers.
Such collaborations would include R&D efforts, information sharing and joint efforts in marketing, distribution, sales or purchasing, plus various types of trade association activities. File No. 971201, Oct. 1, 1999 (F.T.C.), published at 64 Fed. Reg.
S.R. Rajan, Ph.D.
An alternative measure of performance - not based on dividends, earnings growth or P/E ratios.
How to place a value on a utility company? That is the question.
The traditional models no longer work very well. Dividend discount models will not work well if utilities cut dividends and buy back stock to return capital to the shareholders. Earnings growth offers no reliable performance gauge either, as utilities acquire or divest large amounts of capital. Restructuring charges often become necessary to shift resources to their best use.
Lori A. Burkhart, and Regina R. Johnson
Online services are popping up - for commodity trading, retail marketing and back-office billing. But is the Web right for every application?
A recent study by Connecticut-based META Group Inc. finds that while less than 5 percent of all utility commerce will be conducted electronically in 1999, 30 percent of customer service and retail bill payments will flow over the Internet by 2004. That prediction highlights a torrent of Web activity in recent months, from power trading online to retail solicitations to electronic customer billing and payment.
The state foots the bill, while northern neighbors profit from a managed power market.
California's electric restructuring plan, launched on April 1, 1998, marks one of the most ambitious attempts in U.S. history to place the state in a social engineering role. Not only was the scale of the project daunting, with implementation cost estimates running as high as $1.2 billion, but the plan places California government in control of the most minute components of the electric system.
How has the experiment gone?
Lori A. Burkhart, Phillip S. Cross, and Carl J. Levesque
Studies and Reports
Natural Gas Retail Choice. Utility affiliates hold large market shares in natural gas customer choice programs, raising questions about the extent of true competition, according to a study released on Dec. 15 by the U.S. General Accounting Office. Participation varies by region, however, according to the report, "Energy Deregulation - Status of Natural Gas Customer Choice Programs."
In Pennsylvania, for example, three out of four programs showed very high shares for utility affiliates. The Equitable Gas Co.
Charles W. Thurston
Projects sprout in the United States and overseas, pushing the limits of grid capacity, turbine manufacturers and available sites.
Merchant power plants are emerging en masse to address the growing electricity needs of the United States and other countries, thanks to deregulation and fearless developers. While some plants are built to replace older, less-efficient utility-owned units, others would serve demand growth. Still more are planned as niche-oriented peakers - ready to supply the grid when marginal prices rise high enough. Ancillary services might offer another niche.
Carl J. Levesque
Hurdles loom in 10 states eyeing deregulation.
Lawsuits and delayed deadlines. A "go slow" approach and more studies. Stranded cost debates and commission reports that make recommendations but avoid concrete action.
With a new wave of states addressing electric competition, these are a few of the themes that have emerged in 1998. In most states, the process has been slow, though the start of competition does, in fact, appear closer in many.