LEXISŽ-NEXISŽ Academic Universe

October 10, 1997

SECTION: Pg. 1

LENGTH: 1160 words

HEADLINE: CONVERGENCE IS HERE, MORE'S COMING, BUT IS IT THE RIGHT PATH? SOME ASK

BODY:
Before the gas and electric industries move farther down the convergence path, they should take a careful look at the recent frenzy of ''mediocre'' Hollywood mergers and acquisitions that has led to multibillion-dollar losses and other ''disasters,'' an economist advised a recent industry gathering.

''If you read the Hollywood trade press you will see the word convergence all over for the last several years. And every rationale that has driven Hollywood mergers for convergence is driving electric and gas mergers,'' asserted Robert Michaels, a consultant at Hagler Bailly Consulting Inc. and an economics professor at California State University.

''Overwhelmingly, quite bluntly, these mergers have been mediocre and a fair number of them have been disasters,'' he said during a panel discussion on convergence at the sixth annual gas conference sponsored by the Dept. of Energy and the National Assn. of Regulatory Utility Commissioners.

For example, the merger of Time Warner Inc. and Home Box Office has resulted in a culture clash that has engendered a ''rancor . . . that is going to be happening with electricity and gas companies'' as they attempt to unite disparate businesses, Michaels said. ''When are we likely to see efficiency and a competitive force coming from having a merger which puts two heterogeneous commodities under the same roof?'' he asked.

Michaels said the trends driving such mergers are that the two businesses are growing and the markets are becoming easier to transact in and easier to arbitrage between. ''There is a macro-convergence, no question,'' he said. ''The question for you is: Is there a micro-convergence that warrants putting gas and electricity under the same roof? My answer is that you are going to have to talk me into it,'' Michaels added.

Strategic alliances may make considerably more sense than mergers, he asserted, because ''they don't merge very divergent cultures. They don't need the stronger asset commitments which, if nothing else, take away a staggering amount of management's time when we are talking about mergers. And you can do them now a lot easier than you can get through 15 layers of regulatory approval,'' Michaels said.

But other participants on the panel were not impressed with Michaels' admonitions. ''I don't think it's trendy. I think it is logical. There are a lot of reasons for organizations to want to grow,'' said Michael Morris, chairman, president and chief executive officer of Northeast Utilities. ''I do believe it is a trend; I think we are in the middle of it, not the end of it,'' he said.

It is sensible that businesses would look to convergence as a way to grow in size, said Morris, a former president and CEO of Consumers Energy Co. who also held senior management positions at two interstate pipeline companies. This was a principal reason behind early convergence mergers, such as Texas Utilities Co.'s acquisition of ENSERCH Corp., which owned the gas company -- Lone Star Gas Co. -- in TU's electric service territory (GUR, 26 April '96, 11). ''There is some logic for that overlap because it does give an economy of scale that allows them to better serve those customers,'' he said.

To this initial trend in convergence, Morris added a few ''wrinkles.'' He cited the merger of Duke Power Co. and PanEnergy Corp., linking a big electric company with a big interstate gas company. That pairing is significant because ''for the first time, a single person is now responsible for the transmission of energy,'' whether high-pressure gas or high-voltage electricity, Morris said. In addition, there was the merger of Enron Corp. and Portland General Corp., with different industries ''rather than just local companies blending together.''

Another wrinkle is the proliferation of alliances that result from companies that can't work out a merger, Morris said. But unlike Michaels, he expressed doubt that these arrangements will prove beneficial. ''I can tell you from a lot of years in the interstate gas business that that kind of 'we'll get together and jointly share information and then jointly attack the market and then jointly share the revenues' really is a heck of a lot of effort with very little results,'' he said.

Yet another wrinkle lies ahead, Morris continued. ''In the not-too-distant future,'' the major oil companies are going to look to converge with the gas industry as a way to improve their revenue stream, he predicted.

Although generally positive about convergence, Morris downplayed the level of synergy said to stem from joining two companies together. ''Other than in the management ranks of the company, there are no synergies in converging a gas and electric activity,'' he said.

''Gas service workers are not electric line persons, never will be, never have been. Union contracts won't allow them to be. There is something to be gained in merging meter reading, but ultimately meter reading is going to be done by satellite,'' Morris said.

''The synergies are significant,'' countered Larry Brummet, chairman and CEO of ONEOK Inc., ''but I'm not one to believe they are specific to a combination of electric and gas. In fact, I would advocate more . . . consolidation [within each industry] before convergence.'' In that vein, ONEOK is in the process of acquiring the gas distribution assets of Western Resources Inc.

Brummet cited the inherent differences of the two industries as one reason why convergence is less desirable than consolidation. He said the gas industry is an amalgam of five discrete entities -- producing, transmission, distribution, gas marketing and gathering and processing. ''That is quite different from the electric industry in that the production phase of the generation, the transmission and distribution are all generally integrated within one company. Those are not separate industries with the electric industry,'' Brummet said.

''That is a significant difference between the two industries and something that has to be considered as we go through electric restructuring,'' he added. Moreover, Brummet believes that the traditional combination utility is a ''flawed strategy.'' He said very few combination utilities have been able to achieve excellence in both electric and gas operations.

In the ratemaking world, the emphasis is typically on larger, electric generating assets, he said. ''So, in [combination utilities] the management attention, the capital resources are focused on the large asset. In most cases that I'm aware of, the natural-gas business becomes a secondary, less important business unit,'' he said.

Finally, Brummet sees a benefit to customers in maintaining keen gas and electric competition. ''Gas-on-electric competition is necessary to really achieve pricing efficiencies over the long term. I don't believe that you can achieve true price efficiencies if you have the same companies offering the same products.''
URL: http://www.mhenergy.com/demos/gas/index.html

LANGUAGE: ENGLISH

LOAD-DATE: November 06, 1997

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