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Analyst Predicts Electrics Will Swallow Gas

Analyst Predicts Electrics Will Swallow Gas

Anyone working for a gas company today won't be in a few years if a prediction of BT Alex Brown Managing Director Edward Tirello Jr. comes true. "On convergence, I believe that the electric companies will buy up all of the gas companies over the next five years, and that will be the end of it."

The transition from regulated monopolies to competition in the energy industry will bring with it fundamental changes in the way business is done, he told attendees at Arthur Andersen's 19th annual Energy Symposium last week in Houston. "It's a pure and simple marketing story. You can't afford to have someone else in the marketplace with just as good a brand franchise as yours and all the other things that go with it. Also, you're talking about huge electric companies that have market caps of $4 or $5 billion dollars up to $20 billion. And you're talking about gas companies who have $500 million, $600 million market caps."

Tirello predicts there will be about 100 companies providing energy or energy services at the end of the day. He envisions 10 transmission companies spawned from the 10 regional electric reliability councils; 50 or so generating companies; and 30 or 40 super-regional or national distribution companies. In his view, the reliability councils clearly have to go.

"We will have the companies pool their assets. They'll own a percentage of what they put in. They will bring that public as the government prefers that these be public, and I think they will be investor-owned and operated as businesses.

"When you run a not-for-profit company in a business environment, you're not talking about the brightest lights. You're not talking about people who are out there to make a real dollar and get things moving. You're talking about bureaucrats. That's not what this business break-up is about. The break-up is all about getting these things to be more efficient, getting prices to come down. That does not happen with a government agency. So as such, we expect these to be investor-owned companies."

As for the current buy-up of generating assets, Tirello said he sees nothing surprising about the premiums being paid. "You're buying a site and a connection to the grid. The fact that there happens to be something sitting there that burns whatever fuel it burns is inconsequential to the story. You're going to knock down that coal plant that's 46 years old and what are you going to do? You're going to put up a gas plant three times as big. I see these people paying whatever they have to pay to get into the marketplace in order to knock down what's there in most cases and put something up three times as big and less polluting." Joe Fisher, Houston

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