Utility Mergers for Bigger, Better Monopolies
By Rod Holt
There is an old saying that the rich get richer. It follows as a corollary that the big companies get bigger. Yet bigness is not a goal in itself although some Texans might disagree with that. Bigness is pursued for a reason that everyone knows about, and that is to increase profits.
With electricity rates shooting up at an astonishing pace, consumers are asking why did this happen now? In 2001, the price of a unit of electrical power (the kilowatt hour) will be twice what it was last year, and last year, consumers had already been hit with sharp increases in many parts of the country.
Gas rates jumped too. In some areas the increases forced poorer people to do without heat for parts of the winter and provoked angry demonstrations like that in Philadelphia (April 10, 2001). The utility company showed no remorse, announcing that gas would be shut off if consumers didnt pay. The prices that we pay have gone up as much as 400 percent, said a Philadelphia Gas and Water (PGW) spokesman, Kevin Boyle. We have to pass some of this on to customers in order to stay afloat. For those who think that local government ownership of the utilities will keep rates down, we note that PGW is owned by the city of Philadelphia. But the city does not own its sources of supply; it does not own the gas pipelines or the electric generators and it cannot even influence the rates it pays. The utility rates are set in mysterious ways by forces far from Philadelphia.
The Problem for the Capitalist
Under capitalism any industry must produce a rate of profit at least equal to that in other industries, for otherwise, capital will move from the low profit industry to the high profit industry. This movement of capital impoverishes the poorer industry and enriches the richer, the industry with the higher rate of profit. The utilities, sanitary, water, gas and electricity, play a special role in an industrial society. They are essential. Modern industrial society simply stops if they are not provided.
The conclusion is inescapable. If the rate of profit in the utility industry fails to keep up with the rates of profit elsewhere, if the integrity of the utility companies becomes shaky, then the health and welfare of capitalist society is in danger. The capitalist class as a whole does not like this, and so, bluntly put, they decided to let the utilities gouge their customers just like any other capitalist group.
The utility businesses are unique in ways other than their underlying importance. First, the amount of capital they employ is enormous compared to their annual revenues. The cost of that capital, that is, the amount of interest they pay out each year, has been their major expense fixed by long-term bonds. Second, their productivity of labor is very high, so high that will be difficult to improve. Last year annual profits came to $35,000 for each and every employee there. Again the conclusion is inescapable. They do not dare squeeze the bondholders, they have already squeezed their workers, so the utilities will increase their profits by stealing more from their customersor, to be honest, from their residential customers (not the industrial customers).
The Four-Part Scheme
Large pension funds, insurance companies and other institutions hold the vast majority of utility stocks. As one would expect they began to use their political power to boost their rate of profit. They made a plan.
The first part of the scheme was to transform the utility companies from being both the makers and distributors of gas and electric power into distributors only. The transmuted utilities would own just the local power lines and gas lines and not their sources of power. Electricity and gas was to be purchased wholesale and re-sold through the local power lines and gas pipes.
The next part was to allow the utility companies to be purchased by large uncontrolled corporationseven though the utilities themselves still had their rates and profits regulated by state agencies.
The third part required Congress to pass a law requiring the owners of power line systems (grids) and major gas lines to carry anyones gas or power at the same rates as anybody elses.
Finally, the Federal Energy Regulatory Commission ruled that even if a utility were regulated it could pass funds to its parent company without restrictions.
These relatively obscure government actions opened the doors for some of the wildest profiteering since WWII. All that was needed was an understanding among the various power and gas sources. That was not difficult. The companies that now owned the utilities went and bought outright a dominant position in the power-generating business.
New Monopolies for Old
The four-part scheme (above) did two things at once: it opened the door for unlimited profits for the utilitys owners and at the same time it made the utility monopolies formerly granted by the state now technically illegal.
To realize the benefit and skirt the potholes, the old legal monopolies are being replaced with new, de facto monopolies. The new ones are more powerful than the old, regulated ones. Today the utility companies buy power generating plants and gas fields through their parent companies. At the same time the utilities merge with one another to extend their control geographically. There is both vertical and horizontal integration taking place.
Take an example from California. The PG & E Company is the largest utility in the country. It created its parent company, PG & E Corporation in 1996 and immediately thereafter the utility sold the majority of its generating plants and sent the proceeds to the parent that then purchased power plants throughout the country. PG & E Corporation now takes in more money from its outside businesses than from the old regulated utility. With the four-part plan operating, the utilitys largest expense is for the gas and electricity it buys at extortionate rates from outside sources. Before 1997, it produced its own gas, generated its own electricity, and extracted profits all along the way.
More and More Mergers
The common way to build both horizontal and vertical monopolies is with mergers where two companies agree to reorganize themselves under one name, one management team, and one set of books. For a horizontal monopoly these mergers are geographical in nature. The idea is to extend the companys network of gas lines and power lines and to gather in the power producers of the combined area.
Typical is FirstEnergy, formed by the mergers of Ohio Edison, The Illuminating Company of Cleveland, Toledo Edison, and the Pennsylvania Power Company. It now sells electricity (unregulated) in Indiana, Michigan, Ohio, Kentucky, West Virginia, Virginia, New York, New Jersey, Pennsylvania, and Delaware. It has oil and gas drilling operations in half of those states and will soon dominate the gas supplies in three states. FirstEnergy is not large; it is fifteenth from the top among utilities.
In 2000, seven major mergers were made with the smallest company having over 4 billion in revenues. The total revenues were 58 billion.
In 2001, 10 major mergers occurred with revenues totaling 71 billion (almost 20% of the industry total).
Continuing at this rate, in 2002, about one-fourth of the consumers will be on the receiving end of a merger. The monopoly power of these octopus companies will soon be truly amazing.
And Where is it Going to End?
For utilities, the rates for consumers ultimately depend on the cost of capital since the total capital used in this industry is roughly 2 1/2 times the revenue. Therefore the rate increase (the increase in revenues as a percentage) has to be much larger than the increase in the rate of profit. It appears that a 2x rate increase will increase the rate of profit by 50%, an amount that will move the utilities up to the middle of the pack in the race for investment dollars.
This return to capitalist respectability for the utilities will be very costly and the heaviest burden will be borne by the less privileged half of the working class. For the poor, it will be a disaster.
There are ways to protest. Whenever the government or an unavoidable equivalent such as the neighborhood utility wants more money, we should remind ourselves of what our forefathers did 230 years ago. They refused to pay the taxes to the king of England. They organized. They printed leaflets. They formed political parties. Leaders came forward and they had themselves a nice revolutionand a tea party too. There is no reason why we cant do the same.
Our job is not the same as the colonists. Their enemy was Englands capitalist class and the colonies were already capitalist in social structure. The American Revolution was therefore a political revolution not a social revolution. For us the enemy is capitalism and the capitalists as a class, not as individuals. Since capitalism is a system that intrinsically cannot be reformed, the capitalists must give way to the working class and that will be a social revolution. It will be more difficult, but the more worth winning.