A Call for Consolidation

Deck: 

Electric utility mergers loom as the next step in restructuring.

Fortnightly Magazine - July 2014
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Despite the cost advantages enjoyed by large producers, at present the electric utility delivery system resembles a "cottage industry," consisting of many relatively small firms. Mergers and acquisitions of electric utilities, in which smaller companies combine to form larger ones, have been noticeably lacking.

Yet under a true rationalization of the industry, mergers would be expected to play a role similar in effect to electric industry restructuring. Mergers would produce benefits in terms of more efficient and effective organizations, resulting in increased productivity and as a consequence lower prices. And given the large size of the electric utility industry, the macroeconomic gains could be substantial.

Why have we not seen more electric utility mergers?

In fact, the electric utility industry in the United States is comprised of a large number of relatively small firms most of which were formed years ago based on factors such as geographic boundaries, legal concerns or political considerations, but usually not based on economic efficiency. The graph labeled "Distribution of Investor-Owned Electric Utilities by Market Capitalization" (see Figure 1) will illustrate this fact. It is based on data from the Edison Electric Institute and includes data on United States based investor-owned utilities.

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