The proposed purchase of Calpine Corp. by NRG Energy Inc. would create the largest independent power company in the United States.
The nearly $11 billion takeover would double NRG’s capacity in the United States to more than 45,000 megawatts, enough to power 36 million homes. The merger would be the biggest development in the utility industry since the Public Utility Regulatory Policies Act of 1978 and the Energy Policy Act of 1992 authorized utility deregulation.
Calpine Corp. and NRG are deregulated utilities that operate outside the purview of state public utility commissions and the Federal Energy Regulatory Commission, meaning their rates are based on the marketplace rather than regulations.
In the interest of full disclosure, I own shares in Calpine through a managed account.
The utility industry’s dynamics are changing. Local utility companies are being merged into bigger companies, major national and international players are beginning to emerge, and deregulated companies compete actively against state-franchised utilities.
The survivors will strive to meet today’s challenges:
* High fuel costs.
* Greenhouse-gas restrictions.
* Energy market upheaval.
“The NRG-Calpine combination would be unparalleled. There is nothing like this in the competitive power generation industry,” NRG Chief Executive Officer David Crane said Thursday.
The two companies possess diverse energy sources — nuclear, coal, gas and geothermal. They operate throughout the United States as well as in Australia, Brazil and Germany.
The NRG proposal caps a remarkable comeback for Calpine, which has experienced a turbulent history.
Until the 2001 recession, Calpine was a high flier. In December 2005, after gas costs surged and a power glut held down electricity prices, it filed for bankruptcy protection, exiting on Jan. 31 this year.
Calpine is the largest U.S. producer of electricity from gas-fired plants. It controls more than 23,800 megawatts of generating capacity via interests in 60 gas-fired plants throughout the U.S. and 17 geothermal power plants in California.
NRG would benefit from Calpine’s focus on using cleaner-burning natural gas, especially given the proposed climate-change legislation sponsored by U.S. senators Joseph Lieberman and John Warner. Their legislation seeks to reduce emissions by 66 percent from 2005 levels by 2050. Carbon dioxide comes from burning fossil fuel and is blamed as the biggest contributor to global warming.
Traditionally, the electric utility industry has functioned as a regulated monopoly, providing essential electrical services under an exclusive franchise in exchange for having rates closely regulated by state public utility commissions and the Federal Energy Regulatory Commission.
This relationship changed after the state and federal commissions initiated actions that lead to the industry’s deregulation.
Utility deregulation has generated significant criticism, especially after the unprecedented spiraling of kilowatt rates in California and that state’s rolling blackouts.
Fraud on the part of several power providers and energy traders such as Enron contributed extensively to the California utility crisis.
Consumer discontent led to the recall of California Gov. Gray Davis on Oct. 7, 2003.
The demand for deregulation was driven by big users such as factories, school systems and retailers that spent huge amounts of money on energy.
They believed that a combination of their immense buying power and competition would lower their costs substantially.
Critics worried that competition could drive companies to scrimp on measures important to the reliability of the system — such as maintaining transmission lines and providing backup operating capacity to avoid outages.
Ironically, one of the biggest critics of utility deregulation is Alfred E. Kahn, the Cornell University economist who helped oversee the creation of free markets in the rail, trucking and airline industries.
“I am worried about the uniqueness of electricity markets,” Kahn said.
“I’ve always been uncertain about eliminating vertical integration,” he said, referring to the old ways of allowing a single, heavily regulated power company to produce, transmit and distribute electricity. “It may be one industry in which it works reasonably well.”
Most residential consumers prefer a regulated environment dominated by regional monopolies that establish their rates under the watchful eyes of state regulators.
In return for providing universal services, utilities are guaranteed a fixed rate of return.
NRG’s letter of intent to acquire Calpine should foment significantly more utility mergers, especially among deregulated utilities.
That is, the twin challenges of higher fuel bills and an economic recession will encourage utility executives to seek economic partnerships that will diversify their client base.
The fork in the road will lead to bigger, but not necessarily more service-sensitive, utility companies.
Originally published in the Sarasota Herald-Tribune
