A Surge of Mergers
Repeal of a 1935 law spurs power companies' consolidation
It has happened at the movie theaters. It has happened at the car dealer. It has happened at the supermarket. And now it's about to happen to your local utility.
The doors are opening for high-voltage merger mania, as a New Deal-era federal law limiting consolidation among power companies is repealed this week.
Those who have worked for years to relegate the 1935 Public Utility Holding Company Act (PUHCA) to the history books say this will usher in a new era of investment in a sector that desperately needs it. Under their scenario, consumers will benefit from new combinations that produce economies of scale, bolster financial strength, and pour new capital into the nation's aging and inadequate transmission grid. Others are skeptical that the emergence of more megacompanies will lower prices or improve service in an industry that retains monopoly power at the retail level, and some think shareholders and bondholders could get burned as well.
"Utilities provide an essential service to citizens as well as the economy," says Lowrey Brown of the Citizens' Utility Board of Oregon, a public-interest group. "You want to protect them from being dragged around by the business whims of a large holding company, which could use the very regular income from utility customers to support other, much riskier ventures."
One only has to look at Enron, whose former executives were being tried on federal fraud charges last week (story, Page 46), to see what the critics fear. Enron was allowed to buy Portland General Electric by changing its state of incorporation to Oregon, even though Enron's far-flung businesses were by no means limited to the state. The lights stayed on for Portland's customers through Enron's demise, but some analysts argue that was because PUHCA helped keep the utility's revenue in Oregon.
Penniless in Paris. The holding-company law passed Congress in the midst of the Great Depression. The utility industry had collapsed under the weight of a few large, complicated holding companies with interlocking relationships, which had become overly leveraged in their drive to expand. Mastermind entrepreneur Samuel Insull, a onetime secretary to Thomas Edison, had been hailed as the hero who brought cheap electricity to the masses. But he was vilified for his role in a ruined electric empire that spanned 32 states. While acquitted of fraud, he died penniless in a Paris subway, "too broke to be bankrupt," in one banker's words.
The law established a regime for 70 years that sharply limited the business activities of utilities and prevented mergers except among utilities with a geographic connection. Over the past 20 years, the industry--and outsiders who wanted their hands on the steady cash flows that utilities produce--have complained that the law was an outdated relic blocking needed new investment.
The industry is fragmented--there are more than 3,000 U.S. utilities, with the 240 investor-owned companies generating about three quarters of the industry's power. Critics say consumers have been paying excessive prices for electricity in many small systems. "We're the last industry in the United States to rationalize," says Dot Matthews, senior utility analyst at the investment advisory firm CreditSights. "It really hurt the United States because we don't have a national grid system where we can transport power easily from many places to other places."
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