A Surge of Mergers
Repeal of a 1935 law spurs power companies' consolidation
CreditSights has a list of 10 utilities, led by Alliant Energy in Iowa and Pinnacle West in Arizona, most likely to be taken over, not only because of favorable financial factors but because they have cheap coal, hydroelectric, or nuclear plants. All are seen as attractive, since much of the market is overinvested in expensive natural-gas-powered generators.
Joseph Kelliher, chairman of the Federal Energy Regulatory Commission, says the concerns of consumer groups haven't been ignored. "Congress reaffirmed that competition as a national policy is not the goal but the means" when it voted to repeal PUHCA last summer, he says. "Effective competition is the way to protect consumers."
That hasn't necessarily been the script in other industries, notably cable television, where rampant consolidation has occurred. One of several big utility deals already underway, the merger of Exelon and PSEG in Illinois, Pennsylvania, and New Jersey, now is being challenged by Philadelphia's municipally owned gas utility and others worried that the big new company will be able to manipulate gas and electric markets in the region.
State utility commissions will have the final say on mergers, and they have rejected leveraged buyouts proposed in the past year in Arizona and Oregon. Peter Rigby, analyst for Standard & Poor's, says that the utility industry and prospective investors may be overestimating the value of synergies in future mergers and acquisitions, forgetting the role of the state regulators. "I know one utility lawyer who tells his clients not to talk about cost savings, because you're going to lose them immediately," he says. State regulators frequently require utilities to freeze or reduce the rates to consumers as a condition of a deal.
But Scott Hempling, an attorney who represents state utility commissions, thinks the regulators may be outgunned by the lawyers and investment bankers who put megadeals together. He says unseen costs are passed on to consumers, not the least of which is financing the premium acquirers pay to stockholders of the target utility. "The ratepayer doesn't see an increase, but the rates are being held above the costs" of delivering electricity, he says. Under PUHCA, Hempling says, U.S. customers who still have essentially no choice in their local power company at least could know that they were not being served by a huge conglomerate with only a minor interest in providing reliable electric service. He thinks the very character of the companies involved in the utility industry will change.
The industry is already attracting capital from some well-known investors. Warren Buffett promises to sink $10 billion to $15 billion into the new industry. His strategy is underway, as MidAmerican Energy Holdings, controlled by Buffett's Berkshire Hathaway, is finalizing its $9.4 billion takeover of PacifiCorp in Oregon.
Jonathan Weisgall, a MidAmerican vice president, points out that Buffett has often called utilities "a good business, not a great business." "That may sound like a midwestern platitude, but it is a deep, significant comment," Weisgall says. "It should be a 'good, not great' business, because you're still dealing with a monopoly that sells a commodity--electricity--that is a necessity that, while not up in the field of oxygen, is not down with pork bellies either." Buffett's forte, of course, is seeking out the cash flow of old, reliable industries to support his investment in more-profitable ventures.
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