The future of the U.S. electric utility industry

The Future of the U.S. Electric Utility Industry Thefuture of the electricity industry will be shaped by five forces, already unleashed, and industry leaders'reaction to them. The opportunitiesfor heady executives in wellpositioned companies will extend far beyond the borders of today's confined industry. How the game is played will determine whether utilities are the conquerors or vanquished. Vinod K. Dar

here are five major strategic

T forces shaping the U.S. elecVinod Dar is in charge of worldwide strategic services for Hagler Bailly Consulting. He is also a member of the management committee of liB Capital, a private investment bank; the controlling shareholder of Jefferson Gas Systems, Inc.; and a director of HarCor Energy, Inc., a public oil and gas company. Mr. Dar holds a Bachelor's degree in engineering and a Master's degree in business and corporatefinance from the Massachusetts Institute of Technology.

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tric utility enterprise that, at their confluence, will unalterably change the structure of an industry that has endured, largely extant, longer than the working experience of today's utility executives. The future history of the industry will be written by those who are beginning to fashion their strategic responses to these forces: the deregulation of energy distribution, technological change, intellectual capital, interindustry convergence and cultural dissonance. For most utilities, strategies are now being contemplated---some coherently

others inchoatelymaccordingto the perceived competences and weaknesses of each company in the eyes of its management and board. A few utilities have elected denial or dismissal (facing the onrushing tide while rooted in the sand is also a response, albeit one that invites drowning); in general the more common responses are: reluctant retreat, preemptive repositioning and imperial amalgamation.

I. Strategic Forces and Trends The forces behind dramatic change often build gradually for years before suddenly becoming The ElectricityJournal

manifest. Recall, for example, the former Soviet Union, which collapsed within two years of the fall of the Berlin Wall, after thirty years of post-war tension. Each of the trends discussed below has been accumulating momentum for over a decade. Their culmination is now palpable.

A. Deregulation of Energy Distribution Deregulation of energy distribution is the third wave of energy deregulation in the U.S. The first wave deregulated oil and gas supply and, to a growing extent, electricity production. The second wave provided the foundations for deregulating wholesale gas and electric markets (FERC Order 636 and the Energy Security Act) through the deregulation of bulk logistics (interstate gas pipeline and storage capacity and wholesale power transmission). The third wave is deregulation of retail energy markets by opening up gas and electric utility systems (i.e., energy distribution) to competition and providing middle market and eventually residential consumers the means to exercise choice. Deregulation of energy distribution is neither an isolated nor a novel public policy trend. It builds on the intellectual and regulatory victories of the advocates of economic democracy from the late 1970s through the present. It is also part of a global trend of increasing deregulation and competition in distribution, ranging from telecommunications and financial services to appliJuly 1995

ances, pharmaceuticals and personal computers. As a result, the global distribution industry for virtually everything is being restructured and the "rate base" of distributors everywhere is crumbling with relentless pressure on margins. The concept of the rate base is also not unique to the electric utility or energy transportation and distribution industries. It is a convenient shorthand to define a collection of capital-intensive fixed assets, accumulated over decades,

Deregulation of energy distribution is the third wave of energy deregulation in the U.S.

that have been protected from competition through high barriers to entry. These barriers can be regulation, technology4 uninformed consumers, tax laws or political power. Electricity deregulation and restructuring will certainly be untidy and awkward. But after a muddy and not always gentlemanly transition of several years, a new structure will indeed emerge. Quite likely it will consist of: (1) deregulated power supply; (2) regional transmission companies subject to both federal and state jurisdiction; (3) local or intra-

state wire companies engaged in the physical distribution of electrons and regulated by state commissions; and (4) an unregulated merchant industry providing fully unbundled, partially bundied and rebundled services to all customer groups. The merchant industry will be populated by dozens of power wholesalers, brokers and traders and a few unregulated retail merchants. The latter will provide portfolios of electric and gas information, efficienc}~ consumer financing, and environmental compliance services to middle market and residential consumers. The former will sell to bulk consumers, municipalities, buying groups, large state and federal facilities, retail merchants and each other. The regulated wire companies will, through holding companies or affiliated investment companies, have business interests in the deregulated suppliers, wholesalers and retail merchants, although most distribution companies will wisely refrain from such investments in their own service areas.

B. Technological Change Technological product and process change is now rippling through every aspect of the utility business, from generation to use. It is eliminating the advantage engineering and production scale has enjoyed for decades and reducing the reliability premium intrinsic to being hooked up to the network grid. Indeed, decentralized and smaller production and consumption units will soon overmatch the old central station in 17

price, technical performance and operating costs. A scattered sampling of technologies includes: • The modem gas turbine that, in the near future, will profitably deliver power for less than 3.0 cents per kWh at the busbar, making both new stand-alone merchant and industrial and larger commercial on-site generation fiercely competitive; • Electricity storage systems; • Electro-technologies and control systems that can increase the efficiency of use and shape load patterns in not just the large industrial but also the middle market and residential sectors; • Next-generation renewable technologies that will finally be capable of moving the solar, wind, biomass conversion subculture from a craft to a manufacturing industry; • Remote automated measurement; and • Products and systems that dramatically increase the quality and usefulness of information while reducing transaction costs. In transmission, active sensing and control devices incorporating both artificial intelligence and fuzzy logic could increase line capacity by several percent (maybe even 10 to 15 percent) and reduce the need for backup power margins by 15 to 20 percent. The resulting expansion in transmission capacity could obviate the need for expensive debottlenecking construction, while compromising transmission margins where surplus capacity exists or is created. Hard technology will actu18

ally widen the competitive gap among transmission systems, creating irresistible pressure on the backward system. Technological change will also be cumulative in its effect so that change in one segment will amplify the impact of change in another. Consequent134 a large portion of the fixed asset base of utilities will be exposed to obsolescence even though its book value is still large. Electricity con-

Technological change will create a pincer movement against the rate base, from the busbar on one side and the customer meter on the other.

sumers will be empowered to scan and exercise choices never before available; unregulated competitors will engage in guerrilla or niche generation, largely decoupiing lucrative meters from the grid and selectively devaluing the grid's role as the sole vendor of re-

liability In short, technological change will create a pincer movement against the rate base, from the busbar on one side and the customer meter on the other. Many utility executives still deny that the jaws of the pincer are wide or strong enough to be a threat. But that is

what IBM and the Soviet Empire once thought too, and they had the most intimidating rate bases the world has known. C. Intellectual Capital

At Yorktown, the British played "The World Turned Upside Down" after George Washington beat them. The time is approaching when utilities may feel like tuning up their own bands. Intellectual capital is a strategic trend that really can turn the utility world upside down, leaving many utility executives as baffled and chagrined as General Cornwallis. Intellectual capital is often dismissed by utility executives as soft and intangible and, therefore, unimportant. It will turn out to be the hardest battering ram of all. Intellectual capital is a term often used interchangeably with human capital and refers to novel approaches to solving problems or capturing opportunities that are both cheaper and much more effective than old methods, new ways of adding large value by applying fresh and powerful insights and perspectives, and using ideas as substitutes for physical and financial capital. Indeed, intellectual capital is turning almost all physical and financial assets into commodities, globally. It is propelling the U.S. toward a "Cerebral Economy" whose chief resource is the systematic creation and metabolizing of information. Its mobility and power to create wealth is forcing industries and companies to create structures that are highly decentralized, replete with choices, The Electricity Journal

flat, democratic, competitive and astonishingly creative. The areas where intellectual capital will change the electricity enterprise are billing, collection and customer service; lobbying and regulatory participation; and mass customer aggregation. Intellectual capital is the software or cerebral complement to hardwired technology and hardware. ther industries are already deploying intellectual capital, which is often linked with information systems, to increase productivity in the area of billing, collections and customer service. Using information technology, one insurance company in California was able to double the number of policy holders who meet with a representative within nine hours of an accident, yet reduce its workforce by 20 percent, increase market share and, for the first time, lower its premiums. Also using new ideas coupled with information systems, the City of Chicago developed a billing and (outsourced) collections system for traffic tickets that increased the collection rate to 66 percent from 10 percent, lowered billing costs by a third, and captured $55 million in revenue from previously uncollected tickets. In the electricity industr~ the emerging billing, collection and automated customer service systems will turn the utilities' existing billing and collection software, computer hardware, and associated large staff from a barrier keeping competitors out to a commercial stockade penning the utility in.

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The vast majority of utility systems were developed using techniques and technologies now obsolete and for needs now transcended. Virtually no utility billing and collection system is capable of being modified or, using that awkward term, reengineered to meet the requirements of the nascent world of modern electricity retailing. In contrast, the systems being designed, tested and improved (incorporating features such as speech recognition codes

Virtually no utility billing system is capable of being modified to meet the requirements of the world of modem electricity retailing.

and information navigators) by ambitious unregulated energy retailers are innately suited to the new competitive requirements of customization, speed, low transaction costs and information value added. The utility systems redoubt is on its way to becoming a prison. Those who think that customizing invoices is a frill or a gimmick with no real marketing power have only to look at the example of the Fingerhut companies, which generated $1.8 billion in sales by customizing payment terms. It has created a large and

profitable business in a market segment that others abandoned or cannot effectively address: inner city consumers. nother province where intellectual capital is the great equalizer is shaping public policy and lobbying. An overwhelming strategic asset utilities possessed until recently; and in many places still own, was their access to regulators and legislators and the practically limitless lobbying resources of their staffs and special interest allies. Now, however, new entrants can combine forces with an array of groups seeking consumer choice and savings using the unparalleled connectivity of the Internet and E-mail. Deploying this great gift of intellectual capital, powerful temporary or "virtual" political, lobbying and regulatory activist groups can be created swiftly and with modest expense. The oligopoly on political commerce long maintained by utilities and their allies is being eroded by this electronic bypass and will be largely smashed within two years. The Internet has already proved its effectiveness in offsetting the large advantages of incumbency and entrenched groups in politics. It is inevitable that this will spread to regulatory forums as well. Merchant activities are another obvious function where intellectual capital provides an edge for unregulated entrants. Designing features that appeal to electricity consumers (especially middle market and residential) based on extensive user profiling, then packaging those features in hun-

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dreds, perhaps thousands, of different products and services, will enable unregulated merchants to segment and capture the electricity market in ways unfathomed by most utilities. Using techniques based on mass merchandizing and affinity group marketing, these thrusting new merchants will also efficiently aggregate first thousands, then hundreds of thousands and finally millions of meters. By positioning themselves as champions of the consumer, especially the smaller consumer, unregulated merchants can establish credibility and goodwill with consumers that the typical utility once possessed but cannot now readily recapture. pplying hypertext software on which information services such as the business network World Wide Web are being built, unregulated mass merchants will leapfrog many a baffled utility and directly reach the core of the retail rate base: middle market and residential customers. Through educational essays, electronic catalogs and sample billing formats sent over the business network, the new merchants will inform milh'ons of electricity customers about the deregulation of the electricity industry, the benefits of switching from utility sales tariffs, free market choices, and simple steps for exercising choice and selecting a merchant. Naturally; promotions and image advertising will influence which merchant the consumer elects. The day of the Net Merchant is near.

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Cyberspace marketing is particularly suited to selling electricity services. A relatively small core of features such as pricing, payment terms, consumption monitoring and analysis, installation and financing of retail electrotechnologies, and invoicing format can be endlessly combined to generate thousands of differentiated products and contracts. By linking advanced billing, collection and customer service systems

Cyberspace marketing is particularly suited to selling electricity services. Electronic sales contracts wilt record and memorialize transactions.

to on-line, interactive, electronic distribution networks, the new merchants of electricity will empower consumers to create customized electricity services at their own terminal or video screen, decide how to order from the merchant of their choice and then be billed either through a traditional hard copy invoice or via credit card. Hard copy or electronic sales contracts will record and memorialize the transaction. Technological change and intellectual capital provide an opening for new entry into the electricity enterprise by some of the largest

companies in the world. These companies can be in the energ~ engineered products or industrial finance industries. Their balance sheet, cash, and business sophistication easily dwarf ninety percent of U.S. electric utilities. D. Cultural Dissonance

Most large institutions, including electric utilities, owe their structure and corporate culture to the Prussian military which provided the model for the late 19th and early 20th century industrial organization. This established the rigid, hierarchical and often arrogant template big institutions have adopted for decades. Such a corporate and institutional design is well suited to a world of mechanization, regimented production, homogeneous needs and interchangeable parts. This, of course, has historically described the world of the electricity industry where the very few executives, legislators, regulators and barons of special interest groups made all the decisions and thousands of employees and millions of consumers obeyed. In the Cerebral Economy this corporate and institutional model is becoming invalid (and hence obsolete) because it is contrary to the impulses and preferences of consumers and voters. There is an increasing cultural chasm between many big institutions and ordinary people, particularly institutions in and around Big Government. Big Press, Big Government, Big Labor and segments of Big Business are mistrusted in various degrees. In an era where growing

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individualism, political choice, impatience with failed policies and practices, and economic democracy characterize the country and perhaps the world, large institutions are generally viewed as remote and inflexible, even oppressive. Such restlessness takes tangible form in the desire to either change these institutions or, where the institutions are perceived as being incorrigible, to smash them. The problem with the Berlin Wall was not its architecture but its existence. airly or not, large regulated entities, induding electric utilities, are increasingly characterized by consumers as revenue collectors for the Welfare State. When people turn against the State, the collectors become visible and convenient targets. Just as government is now widely seen as being a creature of special interests, so too utilities are being viewed by many consumers as similarly captive to special interests. In time, political polls translate into political change which, in turn, brings epochal transformation. The more utilities resist or make only cosmetic changes to the high cost, vertically integrated, domineering electricity delivery system, the more likely eventual regulatory reform will be punitive. In contrast, the more utilities accede to popular will and begin a good faith metamorphosis, the more likely it is that reform will not just be understanding but even indulgent on issues such as transition costs, transmission and distribution pricing, incentive rate-of-return regula-

tion, and the residual retention of a merchant function.

E. Inter-Industry Convergence Trends in public polic~ technology and corporate strategy are creating two kinds of inter-industry convergence which will become visible before the decade is out. The first is the convergence between the electric and gas industries and the second is among the electric, telecommunications and cable industries.

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these energies provide. Consumers want heat, light, motive force, cleanliness, reliabili~, ubiquitous access and noiseless performance. Whichever final energy form provides them these services they will buy. Eventually they will not buy energy at all but only the services energy can deliver. Merchants of energy will encourage this transformation by directly marketing results and performance in the next century and not merely the means to desired performance. t the generating station, gas and electricity will converge as friends as state of the art gas turbines become the preferred way of producing electricity for no more than 3.0 cents per kWh at the busbar by the end of the 1990s, and around 2.5 cents per kWh in the next decade. The refining of gas into electricity through merchant plants, on-site facilities, market area peakers or toll refining of underused dedicated generating assets will present gas with its only other growth market opportunity (aside from natural gas vehicles) in the next 10 to 15 years--provided gas continues to be cheap (under $2.50 per MMBtu delivered to the generating plant), reliable and responsive to volatile loads; that the heat rate of gas turbines continues to improve; and that the all-in capital cost of gasfired plants continues to decline in real terms. This converging horizon suggests that in time (say by 2005) an integrated gas/electric delivery system will emerge with large and specialty gas/electric supply companies at one end of

The gas~electric convergence is schizophrenic because it is a joining together of simultaneous foes and friends.

The gas/electric convergence is schizophrenic because it is a joining together of simultaneous foes and friends. At the end user's meter the two industries must be foes, as unregulated merchants of electricity and gas jostle furiously for the energy consumer's dollar by proffering savings, convenience, environmental compliance, energy efficienc~ prompt response and customized features as marketing inducements. Energy merchants realize that consumers do not desire gas, electricity, oil or other energy forms per se, but the useful services that

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the energy value chain and gas/electric wholesalers, traders and retail merchants at the other, with big and little pipes and wires in the middle. as and electricity have met in energy combat before. Decades ago gas (from both coal and natural methane) had captured the market for lighting and believed itself securely in command. Then, within a generation of its invention, the electricity industry had conquered this market. The gas industry regrouped magnificently and successfully positioned itself as a fuel for appliances (stoves, furnaces, boilers, turbines) and feedstock for chemicals. Whether it must now cede share in these markets as well to electricity and molecular engineering is an arresting challenge for gas industry strategists. Whether gas can package itself as a fuel for mobile appliances (e.g., cars) and a tool for environmental compliance over the next 10 years and give oil a fright is an intriguing marketing proposition for gas industry merchants. Perhaps gas can combine with electricity to create a hybrid gas/electric car. The second convergence is less obvious but technologically and strategically interesting. Until lowwattage satellite dishes and PCNs (personal communications networks) become cheap and dependable (and, hence, ubiquitous) and fiber optics systems become pervasive, telecommunications and cable will be delivered by wires, as are electrons. This is particularly true outside the great metropolitan areas. Since voice,

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text, data and image use electrons for transportation and sensing and control systems keep improving, it will occur to several companies that three-system network convergence of organizations and assets could provide a strategic advantage. Employing the same wire network company to deliver electricity, telecommunications and video services may well have overwhelming allure in marketing, cost of delivery; customer billing and collection, as well as geographic expansion. Cyberspace

tions, overcome objections from regulators, consumers and content merchants. Of course, if such network convergence does occur, it will force a convergence of state regulation, create regional regulatory compacts and efficiently centralize federal regulatory agencies.

II. Strategic Responses The responses of utilities to the strategic forces swirling around them will depend on their portfolio of assets and competencies, collection of liabilities, corporate culture and, uniquely, on the temper and talent of the CEO or heir apparent. There are no objective strategies, only those that fit the vision and personality of the chief. Art and science, psychology and reason blend to create the particular strategic response that is fashioned and implemented by a utility.

A. Reluctant Retreat

retailing of energy is not many years awa}a Such tri-network transporters of third-party content (content must be separate from the wire to allow vigorous competition for content services) could evolve through acquisitions. Electric utility wires, rights of wa~ and spectrum entitlements can be tempting assets. Aggressive cable and telecommunications companies could acquire electric utilities either when they become wire service-only companies or in advance of that development and, by shedding the supply and merchant func-

An emotional commitment to preserving the primacy of the utility, or a conviction that a political counteroffensive will blunt and reverse deregulation, or simply a lack of an alternative vision (or a combination of these views) may lead some utilities to respond by retreating--reluctantl3a This response will be manifested by companies agreeing in principle to wholesale but not retail competition, the creation of fortress transmission tariffs (which may be difficult under FERC's "golden rule" transmission service policy), imposing onerous data interchange and telemetering conditions, claiming extraordinarily high The Electricity Journal

stranded costs and transition cost adders, trying to induce federal preemption of state regulators, and raising a host of rather spurious jurisdictional and implementation issues. Accompanying this will be a campaign to persuade regulators and middle market and residential consumers that retail competition is neither necessary nor desirable in bringing down rates, that it could lead to substantial cost shifting, compromise reliability, ravage the environment and encourage profligate energy consuming practices. A third element to reluctant retreat will be providing discounted sales or limited transmission access to powerful and sophisticated bulk consumers on the system to cater to their demands, thus severing their economic interests from those of middle market and residential consumers. hether such a strategy can work for long depends on the policy predilections of a given state, the local price of electricity relative to other markets, the degree of awareness and participation in the regulatory debate by representatives of small users, the strength of special interest groups allied with the utility, and the ultimate open access objectives of bulk users, especially large industrial companies. It is also possible that in the midst of implementing this strategy a change in popular opinion or in the state legislature or regulatory commission could alter the political dynamics in ways unfavorable to the utility and lead to punitive measures. Nonetheless, this solu-

tion will prove tempting to some utility executives and directors and may well succeed in delaying the day of reckoning. Of course, if this approach turns out to be a miscalculation the cost to utility managers, employees and shareholders could be painfully high.

B. Preemptive Repositioning For all the usual reasons, e.g., corporate culture, lack of a shared vision among key officers and directors, and redefinition of business purpose and corporate iden-

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tity, repositioning is difficult. But, done proper136 it can be hugely profitable. Repositioning is a strategy that permits the orderly transfer of wealth from the utility rate base to a non-regulated or lightly regulated subsidiary or holding compan34 with the consent of regulators and ratepayers, while creating an energy services franchise composed of a set of new, smaller and quite profitable rate base activities. This response requires that a utility metamorphose voluntarily before compelled to do so by regulators and the market, and so be rewarded

for adapting to, rather than resisting, the strategic forces shaping the electric utility industry The repositioned company could find itself in up to five broad businesses: (1) tariff-based non-merchant electricity services in its traditional service area; (2) tariff-based non-electricity services (e.g., audio and video dialtone services with no control of content) in its traditional service area; (3) a limited set of rate-based electricity services projected into the service areas of adjoining utilities under the jurisdiction of a common state regulatory commission; (4) non-regulated products and services that are unrelated to the assets in its rate base in its traditional service area; and (5) nonregulated or unregulated enterprises active outside its service area, preferably outside the geographic ambit of its governing state regulatory commission or commissions. The most successful and enduring non-regulated businesses the repositioned utility can enter or expand are: • Related to the knowledge, abilities and relationships of its executive management and key directors; • Leveraged worldwide off the core competences of the utility or its parent; and • Based on global energy industry foresight, so market evolution and customer needs can be anticipated and first entry premiums captured, rather than on reactions to changes that have already occurred and been widely understood. 23

In contrast, slavish imitation of the diversification or corporate transformation strategies of other utilities is unlikely to be lucrative and investments in forays remote from energy (and environmental compliance) products, services, technologies and software are not destined for greatness. everal preconditions have to be satisfied for a successful repositioning. First, the company board and management must convince themselves that they have the corporate imagination, personal stamina, willingness to forget the hoary traditions of a vertically integrated monopol~ ability to create the right corporate culture and access to adequate financial resources to be successful in turbulent unregulated markets in the U.S. and abroad. Second, the utility must voluntarily make a phased exit from the regulated sales function and design reasonable logistical, system support and back-up service tariffs. This is not to imply that tariffs have to be uniformly cheap or that highvalue services should not be proportionately priced. It means that consumers must have reasonable access to choices and nondiscriminatory access to unregulated wholesalers and merchants, while being free of anticompetitive nonprice tariff conditions. Third, the regulatory arrangement must be redesigned so that: (1) portions of the rate base can be shed; (2) appropriate net transition costs can be recovered through wire services; (3) the social welfare burden on the rate base is greatly reduced; (4) rate de-

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sign permits the development of hundreds of customized logistical and information services to merchants and consumers alike without cross subsidies or violation comparability conditions (the more customized a tariff, the less likely other comparable service users will exist who could be injured); (5) hard-technology or intellectual-capital based products andservices created within the rate base can be spun off into unregulated affiliates or subsidiaries, provided rate payers are adequately compensated; and (6) regulators give the utility the freedom to diversify as rapidly as it wishes outside its service area and rate base if its shareholders are willing to bear all the risk and the diversification does not unduly leverage the regulated business. (A regulated wire business can sustain more leverage than a traditional utility because it will be in an inherently less risky and capital-consuming business permitting perhaps a one-time recapi-

talization and repatriation of liberated equity to non-regulated affiliates or the holding company.) Fourth, the employees and managers in the rate-based wire company must be ready to assimilate a quite different system of organizational values than in the past. These include: • Altering the driving cultural creed from an "obligation to serve" to an "obligation and privilege to be of service;" • Defining the customer not as the regulators and special interests but as the unregulated wholesalers and retail merchants, energy consumers and municipal and local agencies who buy wire services; • Turning rate design from a mechanism to collect tribute and narrowly limit choices to a tool for earning goodwill and marketing myriad non-commodity wire services to willing and satisfied users; and • Treating each customer as a collection of profit opportunities

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Restructuring, while beneficial,can be painful. The Electricity Journal

rather than as an anonymous account number in a broad sales tariff category.

C. Imperial Amalgamation This is the favored response of Wall Street bankers and lawyers to structural change in any industry for any reason. It meets with approving smiles from ambitious executives as well. Many large utilities with strong balance sheets and limited nuclear exposure will find this an appealing and elegant response, on the theory that giantism is both a shield against competition and a sword for increasing market share. It is undeniable that the prospect of becoming the immediate or designated master of an expanding rate-based empire has its charms for energetic and self-confident utility executives. The thrill of the chase, the accolades of colleagues, subordinates and industry peers on successfully acquiring rather than being acquired (or, if acquired, being anointed crown prince), and the heady toasts at the dosing dinner excite the imagination and stimulate the transactional juices. Yet, mergers and acquisitions are not a universal solution and the desire for imperium can lead to disaster. If amalgamation is a convenient substitute for facing fundamental and troublesome issues of competition, industry evolution, corporate culture, market imperatives and public policy shift, then it is no solution at all. For a year or two longer the real issues may be avoided. Soon enough, however, these issues will explode on the July 1995

merged enti~, which will have no response left other than surrender, write offs and possible dismemberment. If amalgamation is accompanied by a failure to recover the often-requisite premium over book, then the shareholders will be ill-served in the end. If a merger unites flaws and reinforces weaknesses rather than combining strengths and neutralizing disadvantages, then it too will be penalized by the stock and

repositioning. A utility combination that sheds both the merchant and generation functions may lead to a dominant regional transmission network, a set of valuable distribution wires and a combined non-regulated subsidiary with critical mass, promising management and complementary nonregulated businesses. There may be such large real gains in efficiency that the acquisition premium can be recovered and tariffs lowered as well, thus pleasing regulators, capital markets and consumers alike. The merged entity may attract more talented management that is better able to deal with the strategic trends in the industry than the separate utilities.

III. A Time to Choose

bond markets. If a merger is based on a faulty strategic premise or an erroneous view of competition, technological change and industry evolution, then it also will extinguish shareholder and bondholder wealth, not amplify it. Those cautions being observed, however, there are a few compelling reasons why amalgamations make sense. The united entity may be far more competent and empowered by greater resources to undertake a sound post-merger

There are those who, on being warned of impending flood, see only clouds and scoff. Some may hope that their past pieties will spare their house the force of the rushing waters when the deluge comes. Still others, accepting the reality of the flood, may opt to eat, drink and be merry tonight, for tomorrow the rate base dies. The best, however, will resist the temptation of delusion or despair and choose instead to calmly build solid business arks. The fate of utilities, their executives, employees and boards will be decided not when the waters finally rage two, four or six years hence, but by choices being made toda3a It will be too late to build arks when the distant white caps become visible and the lightning begins to flash. • 25