If Y2K doesn’t bring an end to the gas and power industries, itcertainly won’t do anything to stop them from hooking up. Judgingby what’s happened so far, gas and power will never stand alooffrom one another again.

From 1997 through September of this year, 20 convergence mergersinvolving companies with assets worth $500 million or more havebeen completed or have completion pending, according to an EnergyInformation Administration (EIA) report on consolidation.

“No one knows for certain how long this trend will continue, butmany industry observers agree that more convergence mergers willtake place as deregulation of the electric power industry continuesand electric and natural gas companies seek to diversify theirbusinesses,” says “The Changing Structure of the Electric PowerIndustry 1999: Mergers and Other Corporate Combinations,” releasedby the EIA last week.

The benefits of consolidation mergers fall into severalcategories, notes EIA. Some deals strengthen wholesale marketingand trading operations. “Many electric utilities and natural gascompanies realize that there are similar and related techniques forelectric and natural gas marketing and trading in spot markets andare merging to form larger organizations specializing inelectricity and natural gas.”

Convergence mergers also serve to diversify products and expandretail markets. “State-designed customer choice programs, whichallow retail customers to select their energy suppliers, motivateutilities to differentiate their products from their competitors’products. One strategy to accomplish this is to merger with a localgas distribution utility and offer both electricity and natural gasservices to customers.”

The abundance of merchant power plants on drawing boards alsoinspires convergence. “Electric utility mergers with upstream ormidstream natural gas companies position the new company to benefitfrom the growing demand for natural gas stimulated by the projectedgrowth in gas-fired power plants across the country.” According tothe EIA, in 1997, gas-fired power generators produced 15% of totalelectricity generation in the United States. By 2020 they areprojected to produce 33% of the total.

Since 1997, eight convergence mergers, either completed orannounced, create relatively large vertically integrated energycompanies that own power generation, transmission and distributionassets along with natural gas assets, which may include a combinationof production, gathering and processing, pipelines, and localdistribution facilities. Among the eight, however, the EIA includesEnron-Portland General Corp. Enron sold Portland General for $2.1billion, excluding debt, to Sierra Pacific Resources only two yearsafter acquisition, proving not all convergence is forever (see DailyGPI, Nov. 9).

Since 1997, 11 mergers of electric and gas distributioncompanies have been completed or announced. “Many of these mergershave been in the Northeast where most electric utilities havedivested or are in the process of divesting their power generationassets and are seeking to expand their energy delivery business.”

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