Deregulation of the California electric power industry: An analysis of electric and natural gas corporate mergers and their effect on the California electric power market

Deregulation of the electric utility industry in California is moving in a direction that places greater reliance on the market forces of competition. Investor owned utilities (IOU's) are using mergers and acquisitions to improve their ability to compete in this new environment. Two large mergers were proposed in 1996 that could affect the California market. The first is between Enron Corporation, a large power marketer and Portland General Corporation, owner of Portland General Electric. The second is between Pacific Enterprises Inc., owner of Southern California Gas Company, the largest natural gas utility in the U. S., and Enova Corporation, owner of San Diego Gas and Electric Company. Understanding the impact of these mergers on the California electric power market is the focus of this study.; This study examines hypotheses dealing with: (1) Merger Strategy, (2) Efficiency, and (3) Market Power. Using the Miles and Snow (1978) typology, I develop a strategic orientation model for the merger participants and their competitors. The results suggest a two-stage strategic orientation: (1) regulated core business stage, where the firms follow a Defender strategy, and (2) unregulated business stage, where the firms follow a Prospector strategy. Further, the results show the mergers are consistent with the strategy of Enron and Pacific Enterprises.; Event study methodology, dollar gains/losses and market value weighted returns are used to determine if the mergers support the efficiency hypothesis. The evidence suggests the mergers lead to increased competitive advantage through improved efficiency for the participants. The results also suggest the mergers do not harm the rivals.; The results of structural changes made by the California Public Utilities Commission (CPUC) in deregulation of the California market and analysis of the mergers by the CPUC and the Public Utility Commission of Oregon suggest that the exercise of market power is not a significant issue.; Finally, the likely winners in the deregulated environment in California are the broad-based IOU firms, which use a combination Defender/Prospector strategy and do not over-commit resources to mergers or acquisitions.