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Consolidation Picks Up in Electric Industry
By Mark Babineck   Associated Press
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HOUSTON — During the Depression, the federal government was so concerned about the economic clout yielded by electric utilities that it wrote a law to cap their size and keep their operations distinctly regional.

That statute is still on the books 66 years later, but a more recent federal law is pushing big utilities toward mergers that strain their geographic choke chains — for some power companies, their "region" now stretches across much of the country.

American Electric Power Co., the nation's largest power distributor, does business with millions of customers in 11 states from Texas to Michigan and Virginia. A pending deal between two large utilities would create an even larger entity with business interests in 19 states from coast to coast.

Critics complain that expanded service areas through consolidation are not in the best interests of electricity consumers, who would be at the mercy of mighty companies for the most part free of state regulation.

"We're returning ourselves to where we were in the '20s and '30s," said economist Dave Penn, deputy executive director of the American Public Power Association, a coalition of municipal utilities.

But defenders contend that the electricity business is changing and that utilities have to change to remain competitive.

"The core model that used to exist is just going away," said Graham Painter, a spokesman for Houston-based Reliant Energy Inc., which has national aspirations. "(Utilities) have to redefine who they are and who they want to be."

Utilities are redefining themselves by setting up as registered holding companies under the Public Utility Holding Company Act of 1935 — the same law whose onerous public-disclosure requirements had for decades confined most of them within a single state.

The industry started looking at the statute differently in the early 1990s, after a federal deregulation law was passed that allowed non-utilities to generate and market electricity, essentially breaking the legal monopoly that public utilities had long enjoyed.

Adam Wenner, a Washington, D.C., attorney who specializes in electric power issues, says governmental red tape became less of an issue.

"It became tolerable, even though they have to get (Securities and Exchange Commission) approval of virtually every corporate activity," said Wenner, whose practice includes public utility holding companies.

Twenty electric utility holding companies served more than 39 million customers by the end of 1999, according to the Energy Information Administration's latest figures. Both figures have roughly doubled since 1992, when the first electric utility merger in a quarter-century occurred.

The biggest one yet is a pending marriage between Entergy Corp. and Florida Power & Light that would create the nation's largest utility — a generating capacity of 48,000 megawatts and more than 6 million customers.

The combined company, which had combined revenue of more than $15 billion in 1999, has utility operations in five southern states. It also has non-utility business — independent power generation, power plant investing, energy marketing and trading, and electric transmission — in much of the contiguous United States.

Penn says consumers are ill-served by companies that operate in many states using systems spanning 1,000 miles or more.

"Who are you going to call when it turns out the generation in your region is owned by people elsewhere," Penn said. "You may get a response, but not the same response as from utilities chartered in your state and regulated by your state commission."

The Federal Energy Regulatory Commission oversees interstate utility holding companies, though Penn says companies have been able to stretch the definition of "regional" holding companies set forth in the 1935 law.

His Washington, D.C.-based group unsuccessfully fought the merger between American Electric Power Co., based in Columbus, Ohio, and Central and South West Corp, which was headquartered in Dallas. The deal, which gave the combined company 5 percent of U.S. electricity market, closed last summer after 2 1/2 years of regulatory scrutiny.

Al Destribats, executive director of the utility and telecommunications practice at J.D. Powers and Associates, said the number of major U.S. utility companies could shrink from 125 a few years ago to 50 over the next decade. A similar consolidation could occur among the non-utility electricity generators and marketers that jumped into the market after 1992, he said.

Though non-utility generators, such as major California producer Dynegy Inc., are acquiring capacity throughout the United States, utilities remain the largest power generators.

Reliant Energy is among the nation's largest generators and marketers, but its roots are in the utility business. Its Houston Lighting and Power subsidiary distributes more electricity annually than any other local utility.

By the time Texas fully deregulates its power market next Jan. 1, Reliant will have spun off its utility side operation to focus on generation and marketing nationally, spokesman Painter said.

"All these utilities are changing internally the way they operate, encouraging innovation," Painter said.

James Smith, a professor at Southern Methodist University in Dallas, said unregulated non-utility operators eventually could own most U.S. power generation, with traditional utilities limited to transmission and distribution.

"I think it will be a successful trend because the core companies doing this will do so efficiently," Smith said. "Customers will choose the least cost, and further technological innovation will cause further reductions in the cost of power."

California's two largest utilities sold off generation plants under the state's embattled deregulation plan, though retail price caps left them unable to pass rising wholesale costs on to consumers. The Texas plan creates a wide-open market, though there are measures in place to prevent one company from emerging as dominant.

Wenner and others agree that other states might wait for deregulation in Texas, the nation's second-largest state, before proceeding themselves. Texas has plenty of capacity and a better plan than California, he said.

"For competition to flourish, you have to let it happen," Wenner said. "People will build power plants so long as there's no reason to think they won't make money."

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