When it comes to producing and selling electricity in the newly competitive U.S. marketplace, big is good but bigger is better, the latest round of utility mergers suggests.
"The whole industry is changing," said Edward Tirello, a utility analyst at NatWest Securities Corp., New York. "Competition is breathing down everyone's neck."
Open access to the nation's utility grid for wholesale power transactions, already ordered by federal regulators, will allow utilities to buy and distribute the least-cost power from the cheapest suppliers. What's more, large power users in several states will soon be able to buy the cheapest available power from any producer, not just their local utility.
That means larger, highly efficient utilities that can cut unit costs to the bone -- and offer the lowest rates -- will have a competitive advantage over smaller, less efficient companies, Mr. Tirello said.
"If you are a small or midsized utility, you won't have enough bulk to survive," he said.
Last month, the quest for economies of scale produced friendly proposals to merge Union Electric Co. of St. Louis with Central Illinois Public Service Co. of Springfield, and Denver-based Public Service Co. of Colorado with Southwestern Public Service Co. of Amarillo, Texas.
August also saw a hostile $3.8 billion takeover bid by Peco Energy Co. of Philadelphia to acquire the assets of neighboring PP&L; Resources Inc. of Allentown.
That move was rejected Wednesday by PP&L; management, on the grounds that it was not in the best interest of PP&L; shareholders. That merger would have created the fourth-largest utility in the United States, with assets of $24.5 billion.
Those proposals were preceded in May by the announced merger of Wisconsin Energy Corp. of Milwaukee and Northern States Power Co. of Minneapolis to form Primergy Corp., the second-largest utility in the Midwest with $10 billion in assets. And in June, federal regulators approved the merger of Iowa-Illinois Gas & Electric Co. of Davenport, Iowa, and Midwest Resources Inc. of Des Moines.
U.S. companies also are taking their merger and acquisition activities into open markets overseas. In the latest example, the giant Southern Co. of Atlanta announced a plan in July to buy South Western Electric PLC of England, one of 12 local distribution companies that were privatized in 1990.
That deal, initiated as a hostile takeover, became a friendly merger at the end of August when Southern added a 65-pence dividend to its 9-pound-a-share bid (about $14) for South Western, which the British wcompany's management found acceptable.
Southern Co., one of the largest utility holding companies in the United States, owns and operates five utilities in Alabama, Florida, Georgia and Mississippi, as well as other facilities in Alabama, Hawaii, Argentina, the Bahamas and Chile.
"It's a natural response to the current circumstances that utilities find themselves in," said John Watt, a fixed-income analyst at Fitch Investors Service, New York. "The so-called native load, or built-in business, is growing very slowly. To maintain profitability they have to cut costs, and the larger utilities are saying, let's see if we can take on new customers and continue the cost-cutting."
Under the Union Electric/Central Illinois merger plan, which would create the third-largest utility in the Midwest with $6 billion in assets, savings are expected to total $570 million over 10 years.
That includes reductions in administration and power generation costs, as well as the gradual elimination of 300 jobs, or 3.5 percent of the 8,620 employees that will be working at the two companies when the merger takes effect on Jan. 1, 1997.
Similar efficiency moves at Public Service of Colorado/Southwestern Public Service, including the loss of 600 jobs from a combined work force of 7,000 today, would save customers $770 million over 10 years.
On a larger scale, Peco said its merger bid would result in a $2 billion savings over 10 years, in part through the loss of 1,100 jobs, or 8 percent of combined employees at the two companies.
The number of investor-owned electric utilities could eventually shrink to 50 or fewer from about 200 today, according to some analysts. But whatever the pace or ultimate outcome, the merger trend is likely to continue, said Barry Abramson, utility analyst at Prudential Securities Research, New York.
A first round of cost cutting had already reduced the electric services industry's work force to about 409,000 this year from close to 460,000 in 1990, an 11 percent drop, according to the U.S. Bureau of Labor Statistics.
That's about the most that could be obtained by stand-alone companies, said Mr. Abramson. But mergers allow for further cuts, and about 50 percent of the savings will come from labor reductions, he said.
What's more, the merger trend is likely to be fueled by smaller utilities that will have a hard time surviving on their own.
But hostile mergers, like the apparently failed Peco attempt, are harder to analyze, he said.
"Peco and PP&L; both have high costs and excess capacity in a region with a lot of excess capacity," Mr. Abramson said. "Even though mergers create savings, the operating synergies of the two companies are less than they should be."
Still, most successful utility combinations have few if any negatives, he said. "Every merger has to be proposed as a win-win situation," Mr. Abramson said. "It has to be good for investors or they won't vote for it, and it has to be good for customers or the regulators won't approve it."