By Michael Arndt.
In December, Commonwealth Edison Co. announced an innovative plan to restructure itself, asking regulators to allow it to create a wholesale electric company made up of three of its nuclear power plants.
Though the proposal was rejected, the reconfiguration of the electric industry continues.
In just the last week, two utilities said they would merge and another filed plans to break itself in two. Meanwhile, Edison said it probably will submit a modification of its failed proposal by next Monday.
These plans may be only the start. Many analysts and those in the industry say that dozens of other electric companies will take on new forms in the next few years as they seek advantages in an increasingly competitive marketplace.
”Our motto is 150 to 50 in 5,” says Edward Trillo, senior utility analyst at Shearson Lehman Brothers Inc., New York. In other words, he says, only 50 of the nation`s approximately 150 electric utilities will still be here in five years.
Special conditions, of course, contributed to each of the recent restructuring ideas put forward by the utilities.
The merger of Utah Power & Light Co. into Portland, Ore.-based Pacificorp, which was announced Thursday, came about in part because of Utah Power`s weakened financial condition, caused by alleged mismanagement of its coal operations.
And the filing last Friday by Public Service Co. of New Mexico to transform its distribution system into a limited partnership separate from its power-generating facilities relies on special federal tax breaks for business partnerships.
Yet industry analysts see common causes behind last week`s actions.
”These are just two manifestations of the same trend,” said Philip O`Connor, former chairman of the Illinois Commerce Commission and president of Palmer Bellevue Corp., a Chicago consulting firm that put together P.S. New Mexico`s plan.
”A whole range of things is occurring because of the growing competitive nature of the electric business,” he said.
The root cause of the changes, according to Trillo and others, is increasing unwillingness of large users of power to accept higher rates from local utilities. Instead, many of these consumers, including big industrial users, are making electricity with huge generators of their own.
Power created by entities other than utilities accounts for 4 percent of the nation`s electrical output. That share is getting larger every year and could double in the next decade.
Big power users are also comparison-shopping among utilities, and where they run into problems getting a utility to transmit, or wheel, electricity from an outsider to them, they are taking their case to state and federal authorities.
Trillo says the Federal Energy Regulatory Commission will soon succumb to the consumers` lobby and enact a rule for electric utilities similar to one requiring interstate natural gas pipelines to transmit fuel to ”end-users”
at cost.
Such an order would greatly expand the electric marketplace, adding sellers and buyers.
Consumers seeking to lower their costs may not be limited to private industry. The Chicago suburb of Geneva, for instance, is receiving power from a Wisconsin utility wheeled over Edison transmission lines.
Chicago, meanwhile, is weighing taking over the municipal power grid from Edison, a move that would enable the city to buy electricity on the wholesale market, too.
Though costly, Chicago`s move could be worthwhile. Wholesale power is cheap because of excess capacity.
Analysts say that even with today`s dearth of plant construction, the nation has enough power to meet demand into the 1990s because of conservation and earlier construction. More generation by nonutilities could extend supplies even further into the future.
But as set up, most utilities complain that they cannot compete in the changing marketplace, hindered by size or regulation. To unshackle themselves, the electric companies are moving to restructure, say the analysts.
Merging is one avenue Trillo and others say many more utilities will take. They say the $2.2 billion Pacificorp-Utah Light deal shows why.
Pacificorp has an abundance of low-cost power from hydroelectric generators. But the utility has lacked access to markets outside its six-state Northwest region.
By combining with Utah Light, Pacificorp obtains north-south transmission lines tying it to growing markets in California and Arizona and providing an outlet for its heretofore unsold output.
The companies also complement one another. Demand peaks in Pacificorp`s service area in winter, and they`re greatest in Utah Light`s area in summer. Combined, the utilities can more efficiently produce power.
In addition, the merged utility will achieve economies of scale, needing fewer employees or power plants. Utah Light said it will be able to postpone building a generator planned for the 1990s.
This, in turn, will save consumers money. Utah Light said it hopes to lower rates 5 to 10 percent in the next four years.
”There could be another 20 mergers coming,” said Mark Luftig, an electric analyst at Salomon Brothers Inc., New York. ”I think there probably will be a lot more. Companies can be more efficient if they are larger buyers or sellers.”
Trillo makes the same argument: ”The bigger you are, the better off you are in this environment. A bigger company has larger cost savings and this can be passed on to your industrial customers, your base customers.
”At little companies, the inefficiencies are tremendous,” he continued. ”Big industrial customers have the opportunity today to shop for power, and if you lose them, you have two options: Rates have to go up or you merge. ”Commissions (regulatory agencies) are not going to allow rates to go up, so that leaves one option: You merge.”
Not everyone agrees. Other analysts, such as Bert Kramer at PaineWebber Inc., New York, foresee far fewer mergers.
But that does not mean they think things will remain static. They predict that a growing number of utilities will split, restructuring themselves as Edison and now Public Service of New Mexico have proposed to do.
Public Service Co. of New Mexico`s plan is Edison`s taken two or three steps further.
It asks state regulators to break the utility in two. The distribution company would be a limited partnership, but it would act as a traditional utility, providing retail power at regulated rates to anyone in its statewide service area.
The other half of the company would be a public corporation composed of all of P.S. New Mexico`s generating facilities (unlike Edison`s plan which would have created a generating subsidiary of only three nuclear plants).
The generating company would enter into a 27-year contract with the distributing company for wholesale power. But the distributing company would be free to buy electricity from other sources as well.
The payoff for consumers: Rates would drop 9.5 percent rather than rising 30 percent, which the utility says would be needed for power-plant construction costs under traditional ratemaking.
The payoff for the utility: It would be able to vend wholesale power at market prices through a link-up from Texas to British Columbia.
Don Begley, P.S. New Mexico`s group manager for stragetic planning and communication, explains the utility`s motivation: ”Going back decades, there has been a social compact between utilities and customers. The utilities would be there whenever the customers wanted electricity, and the customers had an obligation to buy from the utility.
”That compact has eroded dramatically in this decade,” he said. ”There are alternative suppliers competing with us. The rules of the game are up in the air. We believe the generating company should have the same rules as other suppliers.”
Despite the anticipated push by utilities to restructure, most analysts and those in the industry say they do not believe change will be sudden. One reason is restructuring has seldom been tried before.
A plan such as P.S. New Mexico`s was filed only once before, by Edison, and it was dismissed by the Illinois Commerce Commission in late July. Edison says it may rework the proposal and try it again, though.
Meanwhile, the Pacificorp-Utah Light deal is only the second large electric utility merger in the last 20 years. The other was the $3.3 billion melding last year of Cleveland Electric Illuminating Co. and Toledo Edison Co. into Centerior Energy Corp.
”Competition is real, but state commissions are not going to approve mergers unless they can see real benefits from changing the status quo,” said Anne Prebensen, an analyst at Drexel Burnham Lambert Inc., New York.
”This won`t be a revolution,” agreed Kramer of PaineWebber. ”I don`t see these plans coming all over the place. But five, ten years down the road, there`s no question the industry will look different than it does now.”
