Why a Merger Wave Zaps Electric Utilities

Power suppliers seek to cut costs, improve marketing

If your electric company hasn't merged with one of its peers lately, just wait - it probably will.

Driven by forces unleashed by deregulation, mergers and acquisitions are spreading like wildfire.

Several deals were announced Monday, and already this year, more than $20 billion worth of power-company mergers have been announced, according to Securities Data Company in Newark, N.J.

Analysts say the moves will lead to lower costs for consumers, uncertainty for investors, and chaos in an an industry that, since it was heavily regulated in the 1930s, has been characterized by stability, even stodginess. The result may be bigger companies offering new types of service - you may buy electric power, gas heat, and even phone service or a home-security service from the same firm.

The mergers so far represent just the "tip of the iceberg," says Henry Lee, a lecturer at Harvard University's Kennedy School of Government in Cambridge, Mass. Utility mergers will continue for several more years, predicts Mr. Lee, who also works as a consultant to several utilities.

Lee sees the electric industry segmenting into three parts: generation, transmission, and distribution. One set of companies will generate power, another group will transmit it over high-voltage cables, and the third will distribute it to local customers.

That process still has a long way to go.

So far, many of the deals are motivated by a fairly simple issue: costs.

"Mostly it's just to combine facilities, get bigger exposure, and less costs," says Maureen Carini, an analyst at Standard & Poor's Corp. in New York.

By merging, utilities can cut overhead costs to fend off low-price competition in a deregulated market. Most at risk in the new landscape are high-cost utilities, including some heavily reliant on nuclear plants, while the hottest competitors rely on low-cost natural gas.

The latest trend seems to be combinations between natural-gas and electricity vendors.

In one of Monday's deals, Houston Industries Inc., the nation's ninth-largest electric utility, said it would buy NorAm Energy Corp., America's third largest natural gas utility, for $3.8 billion.

Meanwhile, gas giants Enron Corp. and Texas Utilities, are also in the midst of megamergers. Houston-based Enron, which has diversified into the power generation business, said it would acquire Portland General Corp., an electric utility, for $2.1 billion in stock. In April, Dallas-based Texas Utilities, the nation's fourth-largest electric utility, said it would buy Enserch Corp., the largest gas-distribution company in Texas, for $1.7 billion.

Gas companies have the marketing skills needed in a deregulated environment, says Robert LaFortune, who sits on the board of Williams Companies, a Tulsa gas-pipeline company. Williams itself is rumored to be in merger talks with Cinergy, a Cincinnati electric utility.

Ever since natural-gas transportation was deregulated, companies like Williams have been forced to develop sales and marketing strategies to keep their customers. "Similar kinds of marketing opportunities are taking shape," in electricity, Mr. LaFortune says, "So it's natural for companies who have developed an expertise in petroleum and natural-gas marketing to look at marketing opportunities in another industry." Another reason for the mergers, he says, is that electric utilities are increasingly reliant upon natural gas as a generation fuel. "There's a strategic fit there."

Some of the mergers and buyouts have a hostile tone, as some utilities try to break up deals forged by others.

The future viability of hostile deals may be determined by Western Resources Inc's $1.9 billion hostile bid for Kansas City Power & Light, a deal intended to crash Kansas City Power's friendly $1.7 billion merger pact with UtiliCorp United Corp.

Kansas City Power shareholders are scheduled to vote on the deals tomorrow.

Also closely watched will be MidAmerican Energy's bid to unravel a three-way merger agreement with its unwelcome, $1.2 billion offer for IES Industries Inc.

Christopher Flavin, an energy analyst at WorldWatch Institute, an environmental group in Washington, expects the next few years to be chaotic.

"This is a market that still has major monopoly elements in it and, government will have to govern the entire process," he says. "In many states, the process of writing these rules will have to speed up because the mergers are happening so fast." If regulators do not keep pace, he believes consumers may actually face higher prices as large companies take advantage of their dominant position in regional markets.

Still, Mr. Flavin is cautiously optimistic about the consolidation of the industry. In the past, many electric companies were required to help their customers become more energy efficient. In a deregulated market, Flavin foresees niche markets where small companies will be able to offer energy-efficiency packages directly to consumers. In addition, power generators who rely on solar or wind power could market their "green electricity" directly to consumers, who may be willing to pay a premium for power produced without fossil fuels or nuclear energy.

Lee at Harvard predicts regulation of the power market will fall primarily to federal officials rather than state rulemakers. Newly merged companies may have customers in half a dozen states. Thus he says, "the Federal Energy Regulatory Commission will play a bigger role because the market won't obey state lines."

State and federal officials will also have to deal with utilities that are offering more than one service. Central & South West Corp., a Dallas-based electric utility, is now offering home energy-management services and Internet access to several hundred of its customers in Laredo. The company plans to add phone services in the near future.

*Staff writer Mark Trumbull contributed to this story from Boston.

Boosting the Voltage

Electric utilities are merging or buying each other as deregulation moves ahead. Here are some of the biggest pending deals of the last 18 months.

Size of deal Date deal

Company (billions) announced

Houston Industries/NorAm Energy $3.8 Aug. 12, 1996

Atlantic Energy/Delmarva 2.0 Aug. 12, 1996

Enron/Portland General 2.1 July 19, 1996

Texas Utilities/Enserch 1.7 April 15, 1996

UtiliCorp/Kansas City P&L 1.7 Jan. 22, 1996

WPL Holdings/IES/Interstate Power 1.2 Nov. 10, 1995

Baltimore G&E/Potomac Electric 3.1 Sept. 25, 1995

Union Electric/CIPSCO 1.2 Aug. 14, 1995

Wisconsin Energy/Northern States 3.0 May 1, 1995

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