Huge news on the utility front this morning, with the announcement that Ohio-based First Energy is buying Allegheny Energy.
The news release is posted here, and The Associated Press has the basic details of the deal:
Utility company FirstEnergy said Thursday that it is buying rival Allegheny Energy for about $4.7 billion in stock in a deal that will create one of the nation’s largest power companies with customers from Ohio to New York.
The combined company will have about $16 billion in annual revenue and $1.4 billion in profit and serve more than 6 million customers in Pennsylvania, Ohio, Maryland, New Jersey, New York, Virginia and West Virginia.
West Virginia readers are very familiar with Allegheny, which provides power to 1.5 million customers in West Virginia, Maryland, Pennsylvania and Virginia (see the map above). First Energy is a much bigger company, serving 4.5 million customers in Ohio, Pennsylvania, and New Jersey. (see below)
There’s more coverage of this story from The New York Times, The Wall Street Journal, Reuters, the Pittsburgh Post-Gazette and, well, pick your own news outlet. They’re covering it. This is a big business story.
And, if you’re following the PATH power line story, Bill Howley’s The Power Line blog has an item as well.
If you’re wondering, Allegheny gets about three-fourths of its generating capacity from coal plants, and First Energy about 58 percent. Allegheny has 7,600 megawatts of coal capacity, while First Energy has 7,900 megawatts of coal plants.
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The similarity between the former Soviet Union’s central planning and the collusion that occurs between CEO’s of large financial institutions and in this case utility CEO’s is palpable. A study of the evolution of “public utilities” is in order.
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A number of financial analysts have pointed out that we will be seeing a wave of mergers in the electrical utility industry in the coming year. The long term collapse of power demand which has started to show itself in the last five years is taking a toll on the cash flow of some companies. Allegheny Energy has carried a heavy debt load ever since it failed at energy trading in the early 2000s. That made it a good buyout target.
We are entering a period when an even smaller group of large consolidated electrical conglomerates will tighten their grip over the power industry in the US. With the blessing of the Federal Energy Regulatory Commission, they will be able to operate through regional cartels like PJM Interconnection to control prices and limit competition from new generation technologies. FirstEnergy will now become a major player in PJM to divide up the profits from obsolete coal-fired generating plants with AEP, PJM’s other 800 pound coal-burning gorilla (sorry for the goofy metphor). Is a coal-burning gorilla anything like a fire-breathing dragon?
Ken, Let me take back my remark about a backroom deal and look at the situation at hand with a few questions.
1 Had the stock holders of these companies been aware of an up coming merger?
2 Will this deal be a good for the consumers in the way of rates or are we to see ever increasing rates and poorer service?
3 What will become of the PATH power line and whats to become of all of us that are intervenors in that case?
4 How will maintaninence of the distrubution lines be effected?
5 What will become of the the work force in both of these companies?
These are just a few questions that the WVPSC will need to ask and get answers to for the public to feel protected.
Thanks, Tim
Tim -
Presumptuous of me, perhaps, but let me take a stab at your questions.
1. Of course the stockholders didn’t know in advance of the proposed acquisition; if they had, it would have pushed up Allegheny’s share price.
2. Of course it will be a BAD deal for ratepayers, both in terms of rate increases and poorer service – one way the new, bigger company will cut costs is by “eliminating duplicative and redundant assignments” (i.e., people, to address out of order your #s 4 and 5), and I predict that will mean fewer maintenance crews. As for rate increases, I predict that our rates will go up as the bigger company tries to increase profits over its entire territory.
3. Since the acquisition isn’t expected to take effect for a year, it’s unlikely to have an immediate impact on the PATH application. If anything, FirstEnergy probably is hungry to get hold of PATH’s guaranteed 14.3% returns (courtesy of FERC), so it will pursue it aggressively.
4. Just note that FirstEnergy has a lousy maintenance record! This company was responsible for the initial event triggering the blackout of 2003 – see the link in the PowerLine blog to the Wikipedia article – but it has had run-ins with regulators in several of the states it currently “serves.”
It would be nice to think that the WV PSC would evaluate the proposed acquisition in terms of impact on WV citizens, but that’s a naive expectation – especially since you can be sure Big Coal will weigh in on the side of approving the deal.
blondie, That’s a good stab with answers that where running around in my mind. One think that really needs an asnswer is will FERC allow the new combined company tokeep that profit return for the PATH power line project?
Tim, the one word answer to your question is … Absolutely!
FERC is absolutely backing the power companies in all their transmission line plans – it is the least citizen-friendly agency that I’ve ever had dealings with (and I’ve worked with or reported on a bunch of ‘em). We can’t even get them to revisit this absurd, almost usurious, “incentive rate of return,” approved in January 2008, before the bubble burst in front of everyones’ eyes. We’ll keep pounding on them, but I don’t think it’ll make a damn bit of difference to them.
Whodathunk that the “incentive rate” would become an incentive to buy the [bleeping] company …
Tim and Blondie,
FERC’s goal is to equalize/socialize the cost of electricity throughout the country and provide low cost electricity to everyone. FREC’s promotion and support for a 100 billion dollar National Grid System is partial evidence of its intent. Therefore, rates to residential, commercial, and industrial users of electricity will continue to increase even more dramatically than in the past. West Virginians currently have near the lowest electricity rates in the country. When did it become the Federal Government’s responsibility to socialize access to resources and commodities? FERC and DOE have supported monopolization of transmission and generation of electricity with their recent incentive programs and subsidies that by the way are funded by ratepayers. We must return to local control of the generation, transmission, and distribution of electricity.
I agree 100% but John where do those of us go to have a source of power.
Another question comes to mind:
Will First Energy BUY ENERGY that is produced by SINGLE GENERATORS such as myself? Will we get paid? or will it be a credit to be used in so many months?
I’m sorry but I feel like I am on a freight train that NO ONE can stop heading to the bridge out !
Good comments,
Tim