Magazine article Insight on the News

Deregulation Jolts Utilities into a Frenzy of Mergers; Power Companies Are Looking to Expand in Order to Avoid Being Swallowed by the Bigger Fish

Magazine article Insight on the News

Deregulation Jolts Utilities into a Frenzy of Mergers; Power Companies Are Looking to Expand in Order to Avoid Being Swallowed by the Bigger Fish

Article excerpt

Power companies are looking to expand in order to avoid being swallowed by the bigger fish.

Electric utilities are hot, and it's not the summer's searing temperature.

Long favored by risk-averse investors attracted by the security that comes with owning a piece of a monopoly, electric companies suddenly have become as merger-crazy as airlines, banks and entertainment companies, as prospects of competition at the plug turn into more than a vague concept.

In the past two months, Union Electric Co. of St. Louis said it would merge with Cipsco Inc., a Springfield, Ill.-based utility, in a friendly, $1.2 billion deal.

A few days later, Southwestern Public Service Co., based in Amarillo, Texas, and Denver-based Public Service Co. of Colorado agreed to merge, forming a company with revenues of $3 billion.

Philadelphia's Peco Energy Co.launched a hot pursuit of northeastern Pennsylvania's PP&L Resources Inc. on Aug. 14 with a $3.8 billion hostile bid. The two companies still were battling as this issue of Insight went to press.

And the mergers are not going to stop, analysts say.

"Smaller companies may know that in the long run they will have to be part of a larger utility, and they know it would be wise to choose their partner quickly before someone else steps in," Prudential Securities analyst Barry Abramson says.

That was the case for Washington-based Potomac Electric Power Co. and its northeastern neighbor, Baltimore Gas & Electric Corp. In late September, the two agreed to merge, forming the nation's ninth-largest electric company, with annual revenues of $4.8 billion.

NatWest Securities analyst Edward Tirello and others cite a 1992 federal law that set in motion a deregulation as sweeping as that of the airline and trucking industries, but one that is starting to be understood only as state regulatory agencies rewrite century-old rules.

California and Wisconsin have begun the restructuring for their industries; Massachusett launched its version last month; and Maryland is taking its first steps. Although each state's revision is complex and different, most seek to increase competition by forcing utilities to "unbundle" their businesses by segment, separating actual power generation from transmission, transportation, storage and marketing. …

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