Deregulation of the electric power industry is forcing investor-owned utilities (IOUs), who once were regulated and more or less insulated from competitive pressures, to formulate strategies that will help them to compete in the changing industry. Many times the strategy is a merger, acquisition, or some other form of a corporate combination.

Recent mergers between IOU holding companies have created large vertically integrated regional electric utilities and, with 16 mergers now pending, more will be created. One affect of these mergers is that ownership of power generation capacity is becoming more concentrated. The 20 largest IOUs now own about 60 percent of the total investor-owned generation capacity. By 2000, the top 20 IOUs will own an estimated 73 percent.

Another affect is that mergers can result in operating efficiencies for the combined companies which translate into cost savings. Two case studies of mergers occurring a few years ago concluded that significant cost savings were achieved. However, cost savings do not necessarily translate into reduced rates to the customer. One of the studies showed lower rates after the merger than before the merger, while the other study showed no appreciable change in rates after the merger.

For the first time in the industry's history, a foreign company will acquire ownership of a U.S. electric utility. Presently, two acquisitions by foreign companies are pending approval. More may follow as some growth- minded foreign energy companies believe that the deregulated electricity industry is a good investment opportunity.

Independent power producers (IPPs) are a growing segment in the industry. Again, for the first time in the industry's history, an IPP has acquired an IOU, and another IPP acquisition of an electric utility is pending. As deregulation continues, more of the Nation's power generation capacity may be purchased by large independent power generation companies.

Induced by State government restructuring initiatives and emergence of competition, many IOUs have divested their power generation assets and will focus on operating their transmission and distribution business. From 1998 through September 1999, IOUs have either divested or are in the process of divesting approximately 133.0 gigawatts of power generation capacity. Most, if not all, of this capacity has been acquired by IPPs, furthering the growth of the IPP segment of the industry.

Divestiture has some tangible benefits to IOUs and potentially to electricity customers. In many cases the divested assets were sold substantially above book value. The IOU will use the proceeds from the sales to reduce its stranded costs, which in turn may help to lower electricity rates to customers. Some of the power plant buyers have indicated they will upgrade the power plants, which should improve operation of the plant and, in the long run, lower costs.

Over the past few years, IOUs have increasingly merged with natural gas production and gas pipeline companies, creating vertically integrated energy companies. These mergers are motivated primarily by the growth in gas-fired power plants and the opportunity to become a major fuel supplier for these power plants. Combined electricity and natural gas marketing and diversification of products and services are also reasons for these mergers.

Increasingly, IOUs are forming joint ventures and alliances to meet a specific requirement or to explore new business opportunities. Cost sharing and risk sharing are two reasons why these types of combinations are popular. Typical joint ventures include plant investment or forming a company to provide energy services such as billing, metering, or advertising.

Since passage of the Energy Policy Act of 1992, considered by some the beginning of competition in the industry, the types of corporate combinations outlined in this report have accelerated. Not only do these combinations strengthen a company's ability to compete, in the aggregate they have had a significant effect on the overall corporate structure of the industry.

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