POWER June 2011 - 47

MERGERS & ACQUISITIONS
You need stronger balance sheets to change
the fleet over. "
The Brattle Group's Fox-Penner isn't buying
all of Tirello's analysis. " The industry
is always considering mergers and acquisitions, "
he said. " Nothing jumps out at me
as a major driving force today. There are
always a lot of factors hitting the industry
at any one time, things such as the cost of
debt and equity, strategic factors, regulation.
Maybe there are times when they all align, as
Ed Tirello thought they did in the 1980s, but
I don't see any kind of alignment of factors
at this time. "
Fox-Penner points to the deal last year
when PPL Corp. agreed to buy E.ON.US for
$7.6 billion (cash and debt) as an example of
how particulars drive business marriages. In
that case, PPL, based in Allentown, Pa., had
become essentially an unregulated merchant
generator. The U.S. arm of the German multinational
E.ON was the owner of conventional,
state-regulated, cost-of-service utilities: Louisville
Gas & Electric and Kentucky Utilities.
The particular structural elements " led to that
particular deal " and not some larger force at
work in the industry.
Following the same playbook as Tirello,
Todd Shipman of Standard & Poor's said the
rating agency expects to see " 25 in 5 " or 25
utility mergers in the next five years. Given the
Duke-Progress, Northeast Utilities-NStar, and
FirstEnergy-Allegheny hookups over the past
year, that prediction seems a safe bet.
Shipman pointed to several factors that are
likely to bring utilities together over the next
few years:
■ Low electricity sales growth putting pressure
on dividend growth.
■ Rising costs of environmental retrofits in
response to regulatory and legislative requirements.
■
The perpetual regulatory uncertainty that
hangs over the industry.
■ Direct investment by deep-pocketed foreign
countries or companies (often there
is little difference between the two) in
either equities or as a market for technology
sales.
A carefully designed complementary merger
can reduce corporate risks and, therefore,
costs, providing desirable upward pressure on
company earnings over the long term.
Veteran Washington energy lawyer Clint
Vince is agnostic when it comes to merger
trends. " There is a certain logic " to electric
generating company mergers, he said in an
interview. " The businesses have spread out
beyond state borders, it's an increasingly
competitive business, and major capital
costs, particularly for nuclear, are increasJune
2011 | POWER
ing, so it makes sense to spread out over a
larger customer base for some companies. "
On the other hand, Vince said, " It's hard to
know if we are actually seeing a trend. It
will take some more time to reach any conclusion
on that question. "
Add the market research firm of Wood
Mackenzie to those who see a merger
trend in progress. In a recent report, Wood
Mackenzie says it expects M&A activity
in the power business to " intensify in 2011
as North American power markets remain
Though it's difficult to find a clear-cut
merger trend, one new element feeds the urge
to merge. Since 2005 it has become easier-
although still time-consuming and costly-to
pull off a major merger. For 70 years, starting
with the 1935 Public Utility Holding Company
Act (PUHCA), federal policy looked
askance at electric utility mergers, although
the vigilance waned considerably in the final
two decades of that period. The 1935 law was
the result of the collapse of Samuel Insull's
pyramid of utility holding companies in the
During the past two years, some 13% of
installed North American power plant
capacity has been involved in M&A deals.
oversupplied with power generating capacity
and face sluggish demand growth prospects
and environmental policy pressures. "
Hind Farag, North American research
manager for the firm, notes that during
the past two years, some 13% of installed
North American power plant capacity
has been involved in M&A deals. " Since
January 2009, " she said, " completed and
announced M&A activity has involved at
least 148 gigawatts of existing generators
in North America while only about 70 GW
of new resources achieved commercial operation
during the same time period. "
Generalizations are dangerous when
discussing " energy " mergers, because that
rubric encompasses so much: Integrated
oil companies, wildcatters, new shale gas
developers, merchant electric generators,
regulated electric companies, and local
gas distribution companies all fall under
the heading. Tracking trends across such a
diverse landscape becomes daunting. One
indicator, and it is far from conclusive,
is the pace of mergers coming before the
Federal Energy Regulatory Commission
(FERC). FERC must review all mergers
that involve electric utility assets used in
interstate commerce. According to FERC
data, the late 1990s represented the peak
of the agency's merger activity. FERC
dealt with 17 merger applications in 1997,
15 in 1999, and 16 in 2000. In contrast, it
saw four merger applications in 2005, 10
in 2006, five in 2007, three in 2008 and
2009, and two last year.
www.powermag.com
Great Depression, a disaster that dwarfed this
century's Fall of the House of Enron.
Congress in the 2005 Energy Policy Act
essentially repealed PUHCA requirements
for vigorous FERC merger oversight.
Since then, the states have largely supervised
mergers of firms under their jurisdiction.
New Jersey, not FERC, killed the
Exelon-PSEG affair.
Only a few states have taken their merger
authority to heart. Scott Hempling, head
of the National Regulatory Research Institute,
the policy think tank for the National
Association of Regulatory Utility Commissioners,
said he has been trying to " encourage
states to develop a merger policy "
but has had limited success.
Hempling argues that states should look
hard at mergers based on whether they further
the broad interests of consumers in the
state, not simply based on whether they are
benign or on what state regulators can extort
from the parties in merger conditions.
" There has not really been an understanding
of the key effects a merger can have "
on a state, Hempling says, citing potential
issues such as the impact on ancillary services,
renewable generation, and transmission
needs. " Are we producing corporate
structures so diverse and complex and financing
too difficult for normally staffed
regulators to keep track of, " he asks? His
implication is that the answer is yes. ■
-Kennedy Maize is a POWER contributing
editor and executive editor of
MANAGING POWER.
47
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POWER June 2011

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