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Mighty Morphin' Power Rangers
Connecticut's drive toward utilities deregulation brings lightning consolidation and diversification as major players move in and branch out. Where will it all lead
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Business New Haven
8/9/1999
By: Susan Banfield
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Deregulation of the electric industry is looming - and suddenly electric companies are gobbling up gas companies. Obviously there is a connection, but what exactly is it, and what other surprises await us in the fast-changing utilities industry?
For 70, 80, or in some cases even 100 years, Connecticut's utilities have been among the state's most stable industries. In large measure this has been due to the fact that at every level they have been subject to government regulation. Now this is about to change as deregulation begins to take effect.
The part of deregulation that consumers are most aware of is the approaching date (January 1, 2000 for residents of New Haven, Bridgeport, Waterbury, Meriden and other so-called "distressed urban areas"; July 1 for the state's remaining communities) at which time customers will be able to choose the supplier of their electricity. The scenario will be quite similar to what happened to the telecommunications industry a while back, where customers chose their long-distance carriers, but still were provided with basic telephone service by their local, regulated telephone company.
Delivery of electricity will continue to be regulated; that is, the United Illuminating Co. (UI) will continue to provide electricity to all New Haven-area residents, while individual households, offices and plants may be choosing different suppliers of power.
(The natural-gas industry is likewise undergoing a similar process of deregulation, or, as it is often referred to in that industry, "unbundling." Vertical integration is being dismantled, with the supply end of the business separated from the delivery part of it. Already, commercial establishments are able to buy their gas on the open market. All delivery of gas, however, both residential and commercial, remains regulated.)
The approaching open market for electric power is only the latest chapter in the deregulation process, however. And earlier phases have already begun to have significant, even dramatic effects on these industries.
Prior to officially beginning the deregulation of the power supply, the area's electric companies were required to sell off most of their generating plants (only the nuclear plants remain, but they too will have to be auctioned off by the year 2003). The companies were allowed to bid on their own plants, but some, such as UI, elected not to.
UI's generation plants are now owned by Wisvest, a Wisconsin company. Other electric companies in some cases bid on but lost their plants to out-of-state companies. Northeast Utilities, for example, lost its New Hampshire plant to Con Edison.
As a result of selling off their generating assets, Northeastern power companies wound up with bulked-up balance sheets. Energy East, for example, a company best known for its chief subsidiary, New York State Electric & Gas, yielded $1.8 billion before taxes on the sale of its plants, according to Treasurer Robert Kump.
It is this cash, representing proceeds of the first phase of deregulation, that powered the recent acquisitions (pending approval by the state's Department of Public Utility Control) of Connecticut Energy Corp., parent company of the Southern Connecticut Gas Co., and CTG Resources Inc., owner of Connecticut Natural Gas, by Energy East; and of Yankee Energy Systems by Northeast Utilities.
The chief reason for the rush to acquire other companies is that, as David Silverstone, group vice president of Southern Connecticut Gas puts it, "Size counts." In other words, in the coming era of deregulation, bigger is better.
"The industry is in a consolidating phase right now," says Gary Simon, NU's senior vice president of strategy and development. That seems self-evident. The acquisitions that have taken place recently in our own back yard are not the only ones. Energy East, for example, also acquired the Central Maine Power Group. "Central Maine felt they were too small to be a viable competitor," explains Energy East's Kump.
What remains doubtful is how long, in the scramble of the big guys to get yet bigger, UI will be able to hold out. "I don't think there's any reason why they can't continue to do their job well," notes Paul McCary, a partner in Murtha, Cullina, Richter & Pinney, a law firm with a number of utility companies as clients. Since UI has essentially pulled out of the generating business, it will not have to worry about competing on the new open market for electricity; it will be handling only the delivery of power, which is still regulated.
However, McCary also points out that "When there are a lot of shoppers who have their checkbook out, [UI] has a responsibility to its shareholders." Accepting an offer from a larger company may well be in the company's best interests financially.
There are several reasons why utility companies are aggressively seeking to grow right now. The most obvious is that larger companies can strike better deals in the new open market for gas and electricity, since they will be buying in greater volume.
Also, points out Santa Mendoza, assistant counsel for regulatory affairs for the Connecticut Business & Industry Association (CBIA), "It requires big money for consumers to go your way." The new importance that marketing will acquire in the unregulated world will require formidable resources.
Some of the profits realized by Energy East and Northeast Utilities when they were required to sell off their generating assets were funneled right back in to the supply side of the electric power industry. Northeast Utilities, for example, has an affiliate, Select Energy, which sells both gas and electricity on the open market in states where this is now permissible. According to Gary Simon, Northeast Utilities looks to buy "generation we think is a good value."
What is more interesting, though, is the obvious interest both power giants have in the gas industry. Ten or more years ago, many experts thought the gas industry was dying. "Back in the '70s, we believed we were running out of natural gas," says McCary. "Gas was very expensive, and companies were selling off gas companies."
(A bit of historical irony: Yankee Gas, which NU just acquired, had been spun off from the same company just ten years ago as part of the process McCary describes.)
Those earlier projections about the future of the gas industry proved wrong, however, and now gas is a substantial growth area. "We've been growing the gas part of the company - we like that part," says Energy East's Kump. He explains: "Gas has very low saturation. We like the opportunity."
NU's Simon echoes Kump. "We think gas companies are a good value because there is more growth in adding more customers in gas than in electricity." Simon also notes that "The volume growth of gas is twice that of electricity."
Not only is there ample opportunity to bring gas lines into previously unserved areas, but new high-pressure lines are also making gas a more desirable energy source for many industrial uses. According to Yankee's David Silverstone, "Ninety percent of power plants being built today use gas."
The acquisition of Connecticut's natural-gas companies by the energy giants will do much to increase still further the growth of the gas industry. Yankee's Silverstone explains: "[Energy East] is nine times the size of Connecticut Energy [SCG's parent company]. Connecticut Energy will have additional money to invest in its distribution system. We will be able to expand our distribution system, and will be able to increase marketing."
Accelerating growth in the gas industry is bound to be just one of numerous changes in the utilities industries that deregulation will bring in its wake.
Deregulation is here to stay. Mendoza notes that legislation is now being discussed in Congress that will make it a federal policy to have a competitive market in energy. Silverstone projects that over the next few years, deregulation of gas supply for residential customers "will be there as well."
"Deregulation unleashes a lot of creativity," points out NU's Simon. "I don't know exactly what form it will take, but I'm very excited about all the things you might be able to do now."
The speculative nature of talk about future changes in the utilities industries can be seen, for example, in conflicting projections about the future of municipal utilities. "We will see municipal systems continue to exist," says SCG's Silverstone. "The forces driving the mergers are different." NU's Simon believes some communities will sell their municipal utilities to investor-owned companies, while in other communities the opposite may happen.
One thing is certain, however. Whatever changes this new creative energy brings about, they will not be sudden. As an example, Beryl Lyons, spokesperson for the DPUC, notes that the 25 documents which must be reviewed for approval of Energy East's acquisition of Connecticut Energy finally reached the DPUC's offices only in late July. The acquisition was announced in April. Lyons further notes that the DPUC cannot even begin to consider the unbundling of residential gas supplies until its staff has finished with the Energy East/Connecticut Energy deal.
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