Over the last 75 years, the promise of significant economies of scale has underpinned the business rationale of significant consolidation in the US electric utility industry. However, an analysis by Oliver Wyman of the cost structures of regulated electric utilities finds that these economies of scale have not materialized.
Larger utilities, both holding and operating companies, do not necessarily have lower costs than their smaller counterparts. The greatest scale economies, expected to be realized in centralized functions such as G&A and corporate/support, weren’t evident.
From the analysis, we believe at least $2 BN in scale efficiencies could still be unlocked from past mergers. Oliver Wyman’s latest insight, Are Utility Economies of Scale Real, or a Mirage?, discusses why scale promises haven’t materialized and outlines what management teams should do to capture these “elusive” scale economies to further increase shareholder returns.
