Why a Merger Wave Zaps Electric Utilities Power Suppliers Seek to Cut Costs, Improve Marketing

Article excerpt

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. …

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