A Link Between Bright Utilities and ‘Smart’ Toasters
The coming of “smart” appliances that can communicate with electric companies and respond to long-distance signals to turn on and off may strike you as interesting but not really a development to change your life.
But think again. Because the technology behind the energy network announced last week by Novell Inc., the software firm, and Utilicorp United, the Kansas City-based electric and gas company, reflects the transformation of the vast utility industry.
The next two to three years will see a full blossoming of deregulation in the utility industry, with local electric companies facing increased competition from suppliers in other states.
Industrial and residential customers will choose among many bidders for their electricity suppliers, as they now do with telephone service. Electricity prices will come down. Yet a range of prices for off-peak services and other differentials will conserve energy.
As in other industries, deregulation will lead to the fall and rise of many companies. Already utilities have begun preparing by cutting costs--reducing employee rolls and capital spending.
There’s less need to build giant power plants as there was in the industry of yesteryear. So many utilities are piling up cash these days. And that’s sparking a merger movement; one industry analyst predicts a major utility merger every month for the next year. All of which makes the formerly staid industry interesting for investors.
But change of this magnitude is not easily predictable. The electric and gas utility industry, at roughly $300 billion in annual revenues, dwarfs the television and cable businesses that receive so much ballyhoo.
Yet change in utilities is driven by the same information dynamics as multimedia. Indeed, John Malone, the savvy chairman of Tele-Communications Inc., says he will one day send programming into homes through electric power lines.
So if we analyze utilities, we may understand a lot that is going on in our economy and our world.
The digital home is coming. Novell and Utilicorp, which supplies electricity and gas to customers in eight states and four foreign countries, have launched a venture that next year will offer software for remote control of home appliances. If you’re going to be home late, suggests the company, “signal a Home Server which will turn on the porch light, instruct the thermostat not to turn up the heat just yet, set a new time on the oven” and so forth.
Even more advanced technology, from Echelon Inc. of Palo Alto, is working in experiments by several U.S. utilities. Central & Southwest has installed Echelon’s processor-network nodes, which allow electrical outlets and appliances to communicate with each other, in 2,500 homes in Laredo, Tex. The nodes seek the most economic and convenient operations--activating industrial machines, or home washing machines, at times of lowest rates.
The nodes can also be programmed to respond to specific individuals, not to mention rooms, climatic changes, etc. The implications for industry and for conserving energy are enormous. And on the horizon: home generating stations. “In 15 to 20 years, it is likely your energy will be supplied by stand-alone power devices in your back yard--solar cells or natural gas powered fuel cells,” says Richard Green Jr., chairman of Utilicorp United--which used to be called Missouri Public Service.
Green, 41, the fourth generation of his family to run Utilicorp, recognizes that the business has changed. Utilicorp has just signed to supply electricity for all 406 Service Merchandise catalogue showroom stores in 37 states. That reflects a trend of big customers trying to get a single standard of service and low rate from all the utilities serving their operations.
McDonalds in Britain has one electricity supplier, and gets one electric bill, for all its stores. Detroit Edison is striving to supply all General Motors U.S. facilities with similar service.
The principle behind the trend is increased customer control and lower rates. There’s a lesson for all business in how fast change has come to the electric utility industry. Only 25 years ago, utilities were legal local monopolies because no other kind of company could shoulder the enormous financing needed to build massive power plants. Industry experts argued that massive nuclear powered generating plants were necessary if U.S. industry were to prosper.
Then along came higher energy prices and a need to conserve, followed by semiconductors and other digital devices that use energy more efficiently. Those who said the massive nuclear plants were unnecessary had a more accurate vision of the future. “Today the economic size of electric power plants is getting smaller every year,” says Richard O’Neill, chief economist of the Federal Energy Regulatory Commission.
In the future, regional generating companies will run large main supply plants or power grids, and individual utilities will serve customers with flexible power supplies and innovations, predicts analyst Edward Tirello of NatWest Securities. He notes that San Diego Gas & Electric intends to give up generating electricity to concentrate on service and distribution.
Transmission lines, too, are becoming increasingly efficient. And an upcoming federal law will make big power lines common carriers, further enabling utilities to sell power across state lines.
So the business is on the verge of a competitive shakeout--not so much deregulation as a revolution in which regulators push companies to lower rates.
In Massachusetts, Raytheon, a large employer, threatened to leave the state unless it could buy lower priced electricity from suppliers in other states. So the Massachusetts Department of Public Utilities last month opened electric generation to competition. Michigan also is open to full competition.
And Southern California Edison last week signed an agreement with the state’s manufacturers calling for customers to have direct access to multiple power suppliers by 1998.
What lies ahead for utility investments? The high-cost companies will be separated from the low, predicts analyst Barry Abramson of Prudential Securities. He notes that the stock prices of efficient, agile companies such as CMS Energy (formerly Consumers Power), Duke Power, Illinova (formerly Illinois Power) Southern Co. and Pinnacle West are now about 10% higher than those of most utilities. And the spread between the swift and the slow will widen, Abramson predicts.
Like so many U.S. industries, the old utility business is becoming a meritocracy.
*
More James Flanigan
* For a collection of recent columns by James Flanigan, sign on to the TimesLink on-line service and “jump” to keyword “James Flanigan.”
For more information on TimesLink, call (800) 792-LINK
