A frenzy of mergers and acquisitions have swept through the electricity and natural gas industry and the trend is expected to continue in a deregulated market. There is a sense by utilities that in the era of competition they must be bigger. As one utility CEO has said, "There seems to be a consensus building that probably 10 million (customers) is big enough (to compete)..." That is larger than any existing electric utility.

To give a sense of the vast scale of these new mergers, here is an example. Florida Power & Light has proposed a merger that would create a company with a market capitalization of $16.4 billion (second to the $19 billion of the Unicom-PECO merger), it would serve 6.3 million customers, own 48,000 MW of capacity and have $15 billion in combined revenues (Unicom-PECO boasts combined revenues of about $12 billion).

Mergers by definition move those who make the decisions further away from those who feel the impact of such decisions. Currently there are over 200 investor-owned utilities in the U.S, many still headquartered near their customers. None has more than a 3 percent national market share. But many observers, including FERC Commissioner William Massey, expect that within a decade only a handful or so will remain. "I think you'll eventually have a half dozen or so big generating companies and a dozen or so big transmission companies," he says.

Such prognostications are already proving correct. By the end of 2000, the number of investor owned utilities (IOUs) that own generation capacity was an estimated 141 - down from 172 in 1992. Consolidation is even more apparent when capacity is aggregated by holding companies. In 1992, there were 70 electric holding companies owning 78 percent of the IOU-held generation capacity. By the end of 2000, the number of electric holding companies has dwindled to 53, the ten largest of which own fully 50 percent of the total IOU-owned capacity.

These new utility behemoths hearken back to the pre-regulation days of the 1920s and 30s, when ten holding companies controlled three-fourths of the nation's electricity business, with JP Morgan alone owning nearly half.

To date FERC has taken a very lax attitude toward mergers. Indeed, from January 1998 through January 1999 it disapproved only one proposed merger. When Long Island Lighting Company proposed to merge with Brooklyn Union Gas, evidence showed that together they would control 47 percent of the aggregate natural gas pipeline capacity into Long Island. FERC saw no problem. In the merger case involving Enova and Pacific Enterprises, evidence showed that Southern California Gas Co delivered natural gas to 60 percent of the generating capacity that generally was available to supply electricity to the Southern California market. FERC approved the merger.

Even while FERC works out the rules for wholesale wheeling and the governance structures of regional transmission systems, it is approving massive mergers. This has led Joseph Klein, head of the U.S. Department of Justice Antitrust Division to call for a moratorium on further merger approvals. "A moratorium" he said, would "postpone making difficult competitive evaluations for a brief period until we have developed a market-based history." The American Public Power Association and the National Rural Electric Cooperative Association petitioned FERC in 1998 to declare a moratorium on future mergers of large utilities.

Merger proponents argue that they improve efficiency, but the utilities' own data indicates that at best, the improvements are meager. In March 1999 Northern States Power proposed to merge with New Century Energies, a merger that would create a new utility (called Xcel Energy) serving 3.5 million electric and 1.5 million natural gas customers in 11 states. The utilities estimated that ratepayers would see a l percent reduction in rates as a result of efficiencies generated by the merger. The majority of those savings come from personnel reductions. Despite minimal evidence of any benefits from the merger, it was approved by federal and state regulators in 2000.

Given the fluid situation in the energy sector because of changes in rules at the federal and state level, the at best trivial cost savings produced by mergers, and the increasing market concentration that could potentially limit the amount of new generation that comes on line, FERC and state regulatory commissions should oppose any further mergers. At a minimum, the burden of proof should be on utilities to prove that the positive impacts of their mergers outweigh the negative impacts of removing control and authority even further from their customers.

A Rule Proposed in Massachusetts

In March 2001, the Massachusetts state attorney general proposed legislation that would require gas and electric companies to report how much money mergers and consolidations are saving consumers. The bill would assure that shareholders, and not consumers, take on the risk that a merger or acquisition may not save money.

The bill (S. 434) would require gas or electricity companies make annual reports to the MA Dept. of Telecommunications and Energy (DTE) demonstrating the savings to its consumers from any mergers or consolidations. The companies would bear the burden of proof that merger-related savings outweigh the amount of any merger-related costs included in their rates. This bill would assure that utility shareholders, and not consumers, fairly assume the risk that savings from a merger or acquisition may not offset the costs.

More:

• Massachusetts Attorney General

Other Resources:

Seeing the Light: Regaining Control of Our Electricity System
is the newest book from the New Rules Project by David Morris.
Order Online Now! $15.00
Federal Energy Regulatory Commission's Mergers and Other Corporate Applications Information Site - includes lists of mergers filed with the Commission since January 1, 1995, including merger orders.
American Public Power Association has a page devoted to tracking Investor-owned Utilities: Mergers and Major Acquisitions