Analysts predict U.S. utilities will shrink from 120 to 20

NEW YORK -- Eighty percent of U.S. electric utilities will be acquired or merged in the next five to 10 years as states force power companies to compete for the first time, a leading utility analyst predicts.

Dan Scotto, senior managing director at Bear Stearns & Co., said only 20 of the nation's approximately 120 electric utilities will survive. The pace of mergers and buyouts will increase this year, creating "significant" winners and losers, Scotto said, though he didn't predict who the winners would be.

"Momentum from industry deregulation and new economies of scale have made it impossible for traditional wire companies to maintain their independence," Scotto said. In many cases, the survivors will be either generation companies with power plants that sell electricity, or transmission companies that own power lines and charge generators fees for shipping electricity on their networks, he said. Many states are forcing utilities to sell all or some of their power plants as way of speeding up competition in what were once monopoly service areas. Forcing utilities to sell plants weakens their ability to control prices in a region, and gives new rivals sources of power to sell rather than making them take years to build new generators. Deregulation will generally be good for bond and stock investors, Scotto said, as consolidation forces companies to restructure debt and improve cash flow. "Expect to see a number of bond ratings upgraded," Scotto said. The most risky investments will be utilities with nuclear plants. Nuclear utilities are often burdened with high debt payments for construction and big expenses for meeting regulators' demands. Also, many nuclear plants are expected to shut down during the next 10 years, and Scotto said it's not clear yet who will pay the costs of shutting plants down. Shutting a plant can cost hundreds of millions of dollars.

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