Utilities Look Toward Role as ‘Energy Brokers’ With Merger Proposals
The 11th-hour merger bid that SCEcorp delivered to San Diego Gas & Electric--coupled with the merger proposal that SDG&E; made to an Arizona utility in June--underscored the rapid pace of change facing the once-staid electric utility industry.
As traditional utilities--part of the highly regulated monopoly system that has governed electrical power since the 1920s--prepare for increased competition from a new breed of largely non-regulated companies, a flurry of mergers and acquisitions has occurred.
During the past two years, Cleveland Electric merged with Toledo Edison, to form Centerior Energy Corp., with 1 million customers. Pacificorp is one step away from completing its $2.2-billion bid for Utah Power & Light. Atlanta-based Southern Co. recently acquired Savannah Electric, boosting its customer count to 3.1 million, and Charlotte, N.C.-based Duke Power is completing its acquisition of tiny Nantahala Power & Light Co., with 45,000 customers.
Those deals--and the recent moves in Southern California--offer support for the bold prediction by Shearson Lehman Hutton analyst Edward J. Tirello Jr. that just 40 of the nation’s 136 investor-owned utilities will survive a consolidation that will transform the electric utility industry along the lines of the nation’s airline and retail industries.
SDG&E; Chairman and Chief Executive Tom Page, who is generally regarded as a maverick in the electric utility industry, welcomes the changes, including a proposal by the Federal Energy Regulatory Commission that would introduce “free market principles” by allowing utilities to seek competitive bids on new electrical generating capacity.
“Give Uncle Sam some credit,” Page wrote recently in a utility industry trade magazine. “The electric industry . . . has been shocked to attention. And I don’t think there’s anything wrong with that.”
Page’s confidence is based upon SDG&E;’s decision to ignore the utility industry’s plant-building heritage and instead concentrate on building its reputation as an “energy broker.”
To Page that means buying electricity where it is cheapest--the Pacific Northwest, Arizona or Mexico--and transporting it to San Diego, which Page describes as an “energy desert.” SDG&E; now uses purchased power to meet about half of its electrical demand.
The energy broker’s role led Page to investigate the proposed merger with Tucson Electric Power. Page was attracted to Tucson’s role as the Southwest’s low-cost producer but he also wants access to the company’s string of strategically located transmission lines.
However, SCE’s merger offer was dependent upon SDG&E; scuttling the Tucson Electric merger. SCE Chairman Howard Allen has acknowledged that his bid for SDG&E; was in part spurred by SDG&E;’s bid for Tucson Electric. Tirello believes that SCE wanted SDG&E; because of San Diego County’s anticipated rapid growth rate.
But the merger also would mean that SCE would “no longer will have to fight with SDG&E; for (excess) power” in the coal-rich Southwest, according to Tirello.
SDG&E;’s appetite for purchased power has not been lost on state Public Utilities Commission members. PUC Chairman Stanley Hulett on Tuesday described SCE’s merger proposal as “interesting . . . because there are some things that fit together very well. There’s the fact that SDG&E; purchases so much of its power from out of state and the fact that Edison has excess capacity that could meet this (SDG&E;) demand.”
Meanwhile, the Edison Electric Institute has floated a proposal that would clear the way for most large corporations to operate generating plants and sell electrical power directly to utilities.
That proposal would allow utilities to build electrical generating plants that would provide power for other utilities. It would also permit the sale of electricity by other large companies, including companies such as General Electric, Fluor and Bechtel, which now build power plants for utilities.
Increasingly, utilities face competition from other utilities.
Nearly 50 electrical utilities recently submitted bids when the Sacramento Municipal Utility District decided to contract for electric power rather than build a new generating plant.
“We asked for people to submit proposals to sell us power,” said SMUD spokeswoman Monica Siewert. “Instead of going to the market, we asked the market to come to us.”
SMUD, which during the past week signed agreements with PG&E; and SCE, now is tackling the thorny question of how to transport that electricity to its service area.
In addition to competition from other utilities, skyrocketing electric rates have led many large industrial and commercial companies to install generation plants that produce lower-cost electricity, along with steam and hot water that is used to drive machinery or operate air-conditioning systems. Those “customers” also generate excess electricity that is sold to the local utility.
Two years ago in San Diego, SDG&E; snapped to attention when the Navy, upset that its annual electric bill was approaching $80 million, threatened to abandon SDG&E; and build its own plant. SDG&E; has been negotiating to keep the sprawling Navy complex--which accounts for 10% of SDG&E;’s demand--from bypassing the SDG&E; electrical grid.
The problem of “industrial bypass” is plaguing other California utilities as well. Pacific Gas & Electric, which expects to lose about $300 million in annual revenue by 1990 as industrial customers install their own generation plants, recently signed a special contract that kept Chevron from setting up its own power plant at a refinery in Richmond, Calif.
