Lynne Kiesling
I saw an interesting article over the weekend about M&A activity in electricity. Currently there are two large electricity mergers that are receiving both federal and state regulatory review (Exelon/PSEG and Constellation/FPL), and the reviews are causing a lot of contentious political machinations because they are occurring at the same time as fuel costs are rising. But wasn’t one of the provisions of last year’s Energy Policy Act supposed to make such mergers easier to bring about?
The strict regulatory climate comes even as the national energy policy has changed with the repeal of the Public Utility Holding Companies Act in February. The move was expected to pave the way for utility M&A that had been held back by the Depression-era federal statute, but no deals have happened that could not have before its repeal.
Instead, the attention has been on the state level, as each deal must be approved by local regulators. In Oregon and Arizona, they have been powerful advocates who have shut down private equity purchases. Because of their investment statutes, most private equity firms hold investments for a limited time and are seeking to make profits — a concern to regulators who want consumers to benefit.
Regulators, nervous after the energy crisis earlier this decade, are concerned that consolidation of power providers will hurt consumers because of decreased competition.
But some favor consolidation because the industry is going to need new power plants in the upcoming decade, an expensive proposition that requires companies to be well capitalized.
Lazard’s head power and energy investment banker, George Bilicic, says mergers take too long to close and that there is not enough communication with the state regulators about consolidation’s benefits to customers.
Mr. Bilicic is right; communicating those benefits is difficult. I recommend to Mr. Bilicic that investment banks consider using economic experiments as an education and outreach tool: model different merger scenarios, put state regulators (and, I would add, legislators) in as participants in the experiment, and they will learn in a very real and visceral way what the possible costs and benefits are, all without risking service to any politically powerful constituency.
A recent Harvard Electricity Policy Group meeting featured a panel on the ramifications of PUHCA’s repeal. [There are probably some papers and presentations available from that session here: http://www.ksg.harvard.edu/hepg/ ] As I recall, the consensus of the panel was the PUHCA repeal wouldn’t really change the landscape for mergers all that much, owing to the likely activities of the state commissions.
It is an interesting thought that benefits of mergers could be demonstrated through experimentation, especially given the complexity of utility mergers and the nature of the benefits. Hard [for a D.O.U.G.] to imagine an experiment that would really give regulators comfort. How would you structure such a thing?
I am thinking of starting with the parameters of the existing market share, product mix (or what passes for product mix in the lame retail universe we have), etc. Have the merger happen, see what happens to prices, market share, etc. I’m thinking from a competition policy perspective more than anything else.