Madison Gas & Electric

There were some questions to other utility posts that I had written and rather than answer them in the “comment” area I decided that it deserved an entire post.  The first part of the post will be about MGE in general and the second will be about some of my personal experiences with the company.

Madison Gas and Electric (stock ticker: MGEE) is a utility company that serves (primarily) the city of Madison, Wisconsin.  They usually go by MG&E and I’ll refer to them that way for the rest of the post.

MG&E has a very small service territory.  There may be a utility with a smaller service territory listed on the NASDAQ or NYSE but I am not aware of it.  Per their 12/31/05 10K filed with the SEC they served 136,000 electric customers.  Their gas service territory is larger but the gas industry is less significant because there is no “generation” component and transmission is independent, so it is mainly a pass-through with some money for distribution and overhead.

MG&E doesn’t own much in the way of generation assets.  They have a plant in town called Blount which is very old and then they own a portion (investment) in plants run by other, larger, utilities.  Thus they technically own capacity from a financial perspective but they don’t run the facilities and it is an economic transaction.

Wisconsin passed some relatively unique laws regarding electric transmission and a for-profit company was formed for the whole state.  Thus the electric transmission assets of MG&E were transferred into this entity in exchange for an economic interest.

I am ignoring gas because gas isn’t as big an economic deal as electricity since there is no “generation” component and the gas transmission grid has been deregulated for a long time.  Their gas territory is a bit bigger than their electric territory but still one of the tiniest gas territories around.

Thus let’s sum the situation up – MG&E basically runs the distribution side (wires) and administration for electricity for the city of Madison.  They have an economic interest in some plants and transmission.  They have a small gas territory and some other assets.

My friends, this is a small, small entity.  The entire utility industry has been consolidating for years.  MG&E has revenues of $513M for 2005, vs. $15.3B for Exelon, the utility that serves Chicago and much of the Midwest, or even $3.8B for Wisconsin Energy Corporation.

In the industry, people have been talking about MG&E getting swallowed up for years.  Alliant Energy, a much larger utility that serves a territory to the East of Madison, even HAS THEIR HEADQUARTERS IN MADISON.  In the early 90’s when I was working at MG&E there was constant talk of them getting merged up, and this was before the transmission assets were co-mingled with the state.

From an economic perspective, it would be simple for an adjacent competitor to swallow up MG&E.  They would probably 1) fire the headquarters staff 2) change the names on the local distribution trucks 3) switch the customer calls over to their call centers.  As far as their generation, since they don’t “run” anything, they would likely merge with the actual operators of the facility, so the economics would be transparent.  If you look at a map of utility service territories (check here) you can see the logical companies that would swallow up MG&E and fix a hole in their service territory.

Why doesn’t this happen?  It happens in every other industry.  Can you think of industries where you wouldn’t just “roll up” a competitor if it was only a local distribution arm, didn’t have any pricing power, and was already adjacent to your service territory, and your headquarters existed in the middle of the service territory?  Obviously, you pay some sort of market premium at one point, but then over time you get the savings in reduced expenses for not having duplicate corporate and administrative staff.

In my opinion, there probably isn’t a utility in the entire US that would be a more logical takeover candidate.  People have been talking about them being taken over for 20+ years.  But why hasn’t this happened?

I don’t have direct knowledge of Madison since I haven’t worked up there in years.  The city of Madison probably figures they’d lose a bunch of utility jobs since Alliant would just close the HQ and wouldn’t need many of those people at their facility.  Also, MG&E is a nice local supporter of various causes (scratch my back, I’ll scratch yours).  Of course, people probably pay higher rates than they would if the industry was logically consolidated, but free market economics isn’t a big seller in Madison.

Note too that lots of the administrative staff are unionized.  You can read it in their 10-K.  When I was in Madison they were one of the few utilities where their accountants were unionized.  I don’t know if the accountants are still unionized but according to the 10-K, they had 746 employees as of 12-31-05 of which 261 were in the IBEW and 105 were in an office union, and 5 with some other union, for a total of 371 of their 746 employees in a union, or about 50% of their total staff.  I am certain that the state of Madison loves these sorts of unions, and it would be easy to say that a merger would be a “union busting” activity or some such nonsense if you wanted to delay a merger.

The State of Wisconsin also guards their utilities pretty well and creates barriers from outside forces.  Exelon, for example, dwarfs anything in Wisconsin and has a massive base of assets.  If there wasn’t a regulatory barrier, probably the whole state of Wisconsin would have to be rolled up to be remotely competitive with Illinois just to the south, or the primary industrial areas of Milwaukee and up to Madison would just be joined into the entity (after all, there aren’t many natural barriers between Illinois and Wisconsin on the state line).  To Wisconsin’s credit, closely regulating their utilities spared them from completely stupid “deregulation” initiatives (I use that term loosely because it was only called deregulation, it was actually regulation under a different guise without true market reforms) that are going to punish Illinois customers (and enrich Exelon).

I am not saying that MG&E is badly run.  I don’t know that because I am not there to make a judgment.  I will say that it would be HARD to run them badly, because they 1) don’t run much generation 2) don’t run the transmission 3) serve a tiny, compact service territory that doesn’t have hurricanes and similar types of issues.  Probably there isn’t a utility in the US that would be easier to run than MG&E, once you get used to the fact that ½ your employees are unionized and you need to deal with everything that entails.  I can also safely say that people in the industry have talked about MG&E getting taken over for more than 20 years, and this hasn’t happened, but it clearly isn’t because there isn’t an economic case that can conceptually be made to make this happen.  If there isn’t an economic case for MG&E being acquired, then there was no case for ANY of the mergers that have gone through the industry over the last 20 years or so, because MG&E has all the elements in spades.

I will briefly talk about my experiences at MG&E and Madison.

I worked up there in the early 90’s for an accounting company.  I was just a kid, and a green one at that.

It was my first time encountering unionized office staff.  On my first day I saw people lining up at 3:45pm (I think, it may have been 4:15pm) which was 15 minutes before “quitting time”.  They stood in a line in front of the “punch out” machine that read their time cards.  They were mostly silent.  I made some sort of stupid crack that I can’t believe they were standing their waiting to punch out so early in the day and I received daggers for stares back from them.  This was a mistake, since I had to work with these people, and they were NOT helpful after that.

I didn’t have the concept that people could leave early because we would routinely work until 8 or 9pm every night during audit season.  They would be gone for 5 or more hours and I would still be there working.

At the time they didn’t use computers very much.  Their fixed asset reconciliations were done on the big yellow accounting papers.  The fixed asset guy did it in pen and used liquid paper for his errors (there were many).  The whole sheet was white and cracked and impossible to read.  One time we were in the middle of working on something and he just got up and said “I’ve got to go take a sh1t”.  I honestly couldn’t believe the place.

It was also the first time I heard the term “FIB”, probably when I was taunting them for standing in line to check out 15 minutes in advance of their short work day.  For those who don’t know, that means “F**cking Illinois Bastard”.  I didn’t know what it meant right away but they were sure free about using it to my face.  The guy who was my boss on the engagement got his tires slashed in a parking garage across the street – he had Illinois plates.

People were talking about them getting taken over back then, and they had a bunch of issues with a nuclear plant that they had an economic stake in (they didn’t run anything back then, either) but they were able to escape all that and they are still around and independent today, which I find to be amazing and a testament to the non-economic factors that drive our US utility industry.