Eat or be eaten. It’s the law of the jungle, but those four words seem as applicable to today’s electric utility industry as they are to the Amazon Rain Forest.
The Federal Energy Regulatory Commission, or FERC, has seen the number of proposed utility mergers jump from one or two a year before 1995 to dozens a year since. FERC, which must sign off on most utility mergers, has approved nearly 30 mergers in the last five years including New England Electric System’s pending acquisition of Eastern Utilities Associates.
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Some observers fear the rapid consolidation might eventually prove harmful for customers, but others expect the flood of mergers to save Americans billions of dollars by creating larger, more efficient electric companies.
Susan Stratton, director of the Wisconsin Public Utility Institute at the University of Wisconsin at Madison, credits electric deregulation with creating the urge to merge among electric utilities. Several states including Massachusetts and Rhode Island have passed deregulation legislation intended to promote competition among power companies, although the former monopolies haven’t faced many challengers yet.
“I think a lot of the electric utilities, knowing that competition is looming, want to become a bigger company,” said Stratton, a former state utility regulator in Wisconsin. “Even though the utilities will no longer have captive customers at some point in the future, the bigger base they have now, the better off they think they’ll be in the future.”
Economist William Shepherd of the University of Massachusetts at Amherst isn’t so sure that consumers will be any better off.
“To some extent this wave of mergers is an attempt by these companies to get ahead of deregulation and reduce the dangers of competing with each other by just merging,” Shepherd said. “This is bottling up chances for future competition even before many of the regulations have even been taken off the books.”
New England Electric and Eastern Utilities have sold most of their power generating plants, but the merger would roll their transmission wires into a single system that would then be rolled into an even larger network of power lines owned by National Grid Group PLC of Coventry, England, in a second proposed merger.
National Grid has said it plans to use New England Electric as a springboard for further acquisitions in the Northeast.
Public Citizen, a consumer advocacy group founded by Ralph Nader, shares Shepherd’s doubts about electric utility consolidation.
“This doesn’t bode well for consumers. If you’re going to have competition you have to have competitors,” said Wenonah Hauter, director of Public Citizen’s Critical Mass Energy Project. “We have begun to ask, ‘What’s wrong with this new system we’re creating?'”
Because the ink is barely dry on many of the merger agreements, it’s difficult to know whether the merged utilities are actually operating more efficiently than before or whether they’re just bigger and more powerful. Shepherd said he can’t get a read on which it is, but, given the uncertainty, he’d like to see federal regulators impose a moratorium on further utility mergers until more is known about the impact of consolidation.
The Industry’s trade association, the Edison Electric Institute in Washington, D.C., expects the value of electric mergers to become apparent in a few more years, once the merged companies have had time to integrate their computer systems and trim their payrolls.
“It’s not something that you can just snap your fingers and all of a sudden you have $100 million in savings,” said Tom Schimelpfenig, Edison Electric Institute’s director of business services and finance.
FERC revised its guidelines for approving mergers in 1996 to focus on each deal’s potential effect on competition, prices, regulation and whether a utility might fail if not allowed to merge. The five-member commission has approved 29 of 33 merger applications it has considered since 1995. Four mergers have been terminated or withdrawn and eight were still pending as of last week.
“Some of the commissioners are, well, virtual pushovers for the industry. They just go along with whatever is proposed,” Shepherd said. “Others are a bit more cautious. But I would say FERC has not taken a strong line on electric mergers.”
But many state regulators have lined up to extract financial concessions for customers from merging electric companies, Schimelpfenig said.
” ‘Yeah, we’ll approve your merger if you give us a portion of those cost reductions you expect to receive from the merger,’ ” he said. “Over the long run the customers should benefit anyway if the economies of scale are really there. The cost of delivering that electricity to customers should go down.”
For now, though, it’s unclear just what affect the tide of electric utility mergers washing over the nation will have on the companies and their customers.
