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Will PECO energy's bid for PP&L be the exception to the hostile takeover hex?
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Kilmarx also observed that there is another player in Rhode Island's restructuring, as the legislature passed a retail wheeling bill in the last session, only to have it vetoed by the governor, pending the filing of restructuring plans by the state's utilities that are to include provision for retail competition. Surprisingl34 industrial customers held with the collaborative position and urged the bill's veto on the last go-around, but the bill passed the legislature anywa~ only to be vetoed by the governor. But with the House majority leader still keenly interested in retail wheeling, it's much too soon to rule that out as an option. Hearings on legislative proposals to deal with competition and restructuring are likely in both Massachusetts and Rhode Island in the next session of the legislature.
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over specialists on Wall Street are not at all sure that there isn't room for a deal here one that could melt a shareholder's heart. And no one will bet that a white knight won't yet come tiding out over the hill toward PP&L headquarters in Allentown. In early September, the PP&L board of directors, citing high risks and high costs, unanimously rejected the hostile takeover bid by Philadelphia-based PECO Energ3a In a tartly worded letter to
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October 1995
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PECO's rate structure, Hecht said, "is the highest in Pennsylvania and its residential rates are the ninth highest in the c o u n t , , " according to National Association of Regulatory Utility Commissioners data. "We are convinced that, over time, an acquisition of PP&L Resources by PECO would lead inevitably to rates for PP&L customers higher than they would otherwise be." Hecht later told Reuters, without elaborating, "The acquisition wouldn't serve any of our constituents .. shareholders, customers, employees or the communities we serve. We can grow shareholder value without this merger. We are considering other options." ECO's Paquette responded that he was "extremely disappointed at PP&L's rejection," and said PECO would "evaluate our options for effecting this merger, induding taking our proposal directly to PP&L shareholders." Analysts and takeover specialists said PECO might eventually overcome PP&L management's resistance to a takeover with a higher bid, but may still have to fend off a white knightmpossibly General Public Utilities or Public Service Enterprise Group. "I don't think [PECO's offer of $24 per share] is a fair price for PP&L and I expect to see something higher,'" opined one analyst. Others suggested that PECO might reasonably bid as high as $30 per share for PP&L, although a onefor-one stock swap that values
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Will PECO Energy's Bid for PP&L Be the Exception to The Hostile Takeover Hex ? ven with the electricity industry's accelerating pace of mergers and takeovers--one fact stands out clearly: While many friendly mergers have been accomplished, there has been no successful hostile takeover of an electric utility of any size. Not one. So, as of now, PECO Energy's unwanted bid for PP&L Resources looks to be headed down the same path as Kansas City Power & Light's fruitless campaign to acquire Kansas Gas & Electric. But financial and take-
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PECO Chairman Joseph Paquette, PP&L Chairman, President and CEO William Hecht said that the PECO proposal would threaten PP&L shareholders, customers and employees by loading on to them the risks that PECO, with its costly nuclear program, faces in a competitive environment. Hecht's letter noted, "In this regard, analysis shows that PECO's unrecoverable costs may be as much as twice those of PP&L. In a deregulated environment, much of these costs would have to be absorbed by shareowners."
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PP&L at about $26, some suggested, would be a more likely price. Ed ~llrello, NatWest utilities analyst, said that the two utilities are unique because most officers and upper management own no stock in the companies, creating anxiety about job loss through inevitable consolidation. "They are protecting their fiefdom," ~rello said.
Regional AccordBreaksDown
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electricity that the 1980 law was meant to avoid. The IOUs are furious about their most numerous customer class---residentials getting a major cost hit, while costs to public agencies and the industries are going down. But others in the region say the result was entirely predictable under the section 7(b)(2) "rate test" of the 1980 act and that the companies should have expected it. Two things are clear: (1) BPA's proposal to reduce its residential
BPA Customers Pick Sides In Battle over BPA's Rate Proposal, Equity, Survival ~ s t re Bonneville Power Adminiation is on the hot seat with the commencement of seven field hearings on a rate proposal which BPA admits "may be the most controversial [In its] 58-year histor3a" The principal feature of the proposal, BPA says, is its plan to cut rates sharply--by 8.2 and 12.7 percent, respectively--to preference (public power and rural co-op systems) and direct service industrial customers (mostly aluminum companies). The controversy comes from its companion proposal to reduce benefits to residential and small farm customers of Northwest investor-owned utilities in its "residential exchange" program under the 1980 Northwest Power Act. Bottom line, it appears that regional interests are gearing up for exactly the kind of holy war over
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exchange payments to IOUs by about 70 percent would boost the companies' rates to those customers; and (2) the residential exchange and rate test were key features of the congressionally legislated "peace treaty" in the 1980 act. The exchange calls for residential and small farm customers of IOUs to receive electricity at the same rates as BPA's preference customers except, under the complicated rate test formula, when the exchange causes preference customers' rates to be higher than they would have been with-
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out the law. The rate test was a sine qua non for public power's support of the bill. "We're not permitted to debate or comment on the merits of the rate proposal under ex parte rules," said Bonneville spokeswoman Lynn Baker, "but I can talk about the procedure we've followed. In 1984 we established the 7(b)(2) methodology with full participation by all parties and we have followed it in every rate case since then. Everyone felt very strongly that the methodology had to be very clear and very precise. The difference in this rate case comes from several things. The rate test has five parts that are driven by certain assumptions: the level of load that BPA serves, BPA costs and the level of resources it acquires--both of which have fallen--and other factors." The new numbers caused the different result this time, says Baker. umbers or no, Northwest IOUs are in high dudgeon about the outcome and have taken their case to statehouses, congressional offices and the public in full page newspaper ads (at least in Oregon, where the IOUs predominate). Portland General Electric spokeswoman Erin MacLellan said of BPA's proposal, "We're totally opposed to it. It's not fair to pass on costs solely to private utilities while public utilities get a price break. And it was insulting that Bonneville's unveiled its rate proposal as something that would benefit Northwest consumers,
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The Electricity Journal
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E
Kilmarx also observed that there is another player in Rhode Island's restructuring, as the legislature passed a retail wheeling bill in the last session, only to have it vetoed by the governor, pending the filing of restructuring plans by the state's utilities that are to include provision for retail competition. Surprisingl34 industrial customers held with the collaborative position and urged the bill's veto on the last go-around, but the bill passed the legislature anywa~ only to be vetoed by the governor. But with the House majority leader still keenly interested in retail wheeling, it's much too soon to rule that out as an option. Hearings on legislative proposals to deal with competition and restructuring are likely in both Massachusetts and Rhode Island in the next session of the legislature.
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E
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S
I
N
F
over specialists on Wall Street are not at all sure that there isn't room for a deal here one that could melt a shareholder's heart. And no one will bet that a white knight won't yet come tiding out over the hill toward PP&L headquarters in Allentown. In early September, the PP&L board of directors, citing high risks and high costs, unanimously rejected the hostile takeover bid by Philadelphia-based PECO Energ3a In a tartly worded letter to
E
October 1995
C
U
S
PECO's rate structure, Hecht said, "is the highest in Pennsylvania and its residential rates are the ninth highest in the c o u n t , , " according to National Association of Regulatory Utility Commissioners data. "We are convinced that, over time, an acquisition of PP&L Resources by PECO would lead inevitably to rates for PP&L customers higher than they would otherwise be." Hecht later told Reuters, without elaborating, "The acquisition wouldn't serve any of our constituents .. shareholders, customers, employees or the communities we serve. We can grow shareholder value without this merger. We are considering other options." ECO's Paquette responded that he was "extremely disappointed at PP&L's rejection," and said PECO would "evaluate our options for effecting this merger, induding taking our proposal directly to PP&L shareholders." Analysts and takeover specialists said PECO might eventually overcome PP&L management's resistance to a takeover with a higher bid, but may still have to fend off a white knightmpossibly General Public Utilities or Public Service Enterprise Group. "I don't think [PECO's offer of $24 per share] is a fair price for PP&L and I expect to see something higher,'" opined one analyst. Others suggested that PECO might reasonably bid as high as $30 per share for PP&L, although a onefor-one stock swap that values
p
Will PECO Energy's Bid for PP&L Be the Exception to The Hostile Takeover Hex ? ven with the electricity industry's accelerating pace of mergers and takeovers--one fact stands out clearly: While many friendly mergers have been accomplished, there has been no successful hostile takeover of an electric utility of any size. Not one. So, as of now, PECO Energy's unwanted bid for PP&L Resources looks to be headed down the same path as Kansas City Power & Light's fruitless campaign to acquire Kansas Gas & Electric. But financial and take-
0
PECO Chairman Joseph Paquette, PP&L Chairman, President and CEO William Hecht said that the PECO proposal would threaten PP&L shareholders, customers and employees by loading on to them the risks that PECO, with its costly nuclear program, faces in a competitive environment. Hecht's letter noted, "In this regard, analysis shows that PECO's unrecoverable costs may be as much as twice those of PP&L. In a deregulated environment, much of these costs would have to be absorbed by shareowners."
7
T
H
E
PP&L at about $26, some suggested, would be a more likely price. Ed ~llrello, NatWest utilities analyst, said that the two utilities are unique because most officers and upper management own no stock in the companies, creating anxiety about job loss through inevitable consolidation. "They are protecting their fiefdom," ~rello said.
Regional AccordBreaksDown
N
E
W
S
I
N
F
electricity that the 1980 law was meant to avoid. The IOUs are furious about their most numerous customer class---residentials getting a major cost hit, while costs to public agencies and the industries are going down. But others in the region say the result was entirely predictable under the section 7(b)(2) "rate test" of the 1980 act and that the companies should have expected it. Two things are clear: (1) BPA's proposal to reduce its residential
BPA Customers Pick Sides In Battle over BPA's Rate Proposal, Equity, Survival ~ s t re Bonneville Power Adminiation is on the hot seat with the commencement of seven field hearings on a rate proposal which BPA admits "may be the most controversial [In its] 58-year histor3a" The principal feature of the proposal, BPA says, is its plan to cut rates sharply--by 8.2 and 12.7 percent, respectively--to preference (public power and rural co-op systems) and direct service industrial customers (mostly aluminum companies). The controversy comes from its companion proposal to reduce benefits to residential and small farm customers of Northwest investor-owned utilities in its "residential exchange" program under the 1980 Northwest Power Act. Bottom line, it appears that regional interests are gearing up for exactly the kind of holy war over
8
i
%
exchange payments to IOUs by about 70 percent would boost the companies' rates to those customers; and (2) the residential exchange and rate test were key features of the congressionally legislated "peace treaty" in the 1980 act. The exchange calls for residential and small farm customers of IOUs to receive electricity at the same rates as BPA's preference customers except, under the complicated rate test formula, when the exchange causes preference customers' rates to be higher than they would have been with-
O
C
U
S
out the law. The rate test was a sine qua non for public power's support of the bill. "We're not permitted to debate or comment on the merits of the rate proposal under ex parte rules," said Bonneville spokeswoman Lynn Baker, "but I can talk about the procedure we've followed. In 1984 we established the 7(b)(2) methodology with full participation by all parties and we have followed it in every rate case since then. Everyone felt very strongly that the methodology had to be very clear and very precise. The difference in this rate case comes from several things. The rate test has five parts that are driven by certain assumptions: the level of load that BPA serves, BPA costs and the level of resources it acquires--both of which have fallen--and other factors." The new numbers caused the different result this time, says Baker. umbers or no, Northwest IOUs are in high dudgeon about the outcome and have taken their case to statehouses, congressional offices and the public in full page newspaper ads (at least in Oregon, where the IOUs predominate). Portland General Electric spokeswoman Erin MacLellan said of BPA's proposal, "We're totally opposed to it. It's not fair to pass on costs solely to private utilities while public utilities get a price break. And it was insulting that Bonneville's unveiled its rate proposal as something that would benefit Northwest consumers,
N
The Electricity Journal