NCPA - National Center for Policy Analysis

Deregulation Leads To Utility Restructuring

February 23, 1999

Deregulation of energy companies is causing the utility industry to restructure and consolidate through mergers and acquisitions, say industry observers. Interest in restructuring is at a peak as states are implementing competition in retail sales of electricity to consumers.

  • Prior to the 1992 Energy Policy Act (EPAct), most mergers and acquisitions among energy companies involved a larger company absorbing a smaller company with a contiguous service area; but since the EPAct began the process of deregulation, utilities have been freed to cross state lines and offer additional services.
  • For instance, Ohio can sell power in Oregon, and New England utilities can sell electricity to Southern states.
  • Changes in wholesale electricity markets have created a "robust wholesale competition" that is saving customers an estimated $3.5 billion to $5 billion annually, says the Federal Energy Regulatory Commission (FERC), which regulates the utilities market.

Under deregulation, some companies are becoming total energy providers, such as electricity providers merging with natural gas companies. In fact, the union of natural gas and electric companies is much less time-consuming than mergers involving two or more electric power utilities. This is because FERC regulates the interstate price of electric power and the rate utilities can charge to move that power.

  • Of all the mergers and acquisitions announced since 1992, nearly 40 percent have involved an electric company and a gas company.
  • The Consolidation of FirstEnergy, an electric-electric merger, took approximately two years to obtain FERC approval.
  • But when Tampa Energy Company purchased West Florida Gas, the transaction was completed in about six weeks and the FERC was not involved.

Some states have implemented pilot programs for competition in the sale of electricity to consumers, while 18 states are already implementing retail competition. Utilities are also acquiring companies to complement their distribution network, including such services as home security, cable, telecom and water.

Source: Paula Fels, "The Road Ahead for the American Utility Undustry: Mergers and Deregulation," Outlook (Afiniti Communications), February 1999.


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