Some Get Burned by Electricity’s Bright Future
Nothing seemed more like a sure bet for the 1990s than growth in the electric power industry. Developing countries everywhere needed power plants to raise their standards of living. And in the United States, deregulation was coming to the utility industry, promising that electric companies would order new equipment and contract for services to make themselves competitive and efficient.
That’s how it looked to General Electric Co. and other global power equipment suppliers, including Siemens of Germany and Asea Brown Boveri of Switzerland.
And that’s especially how it looked to Westinghouse Electric Corp., the 110-year old Pittsburgh-based company, as a new chairman, Michael H. Jordan, took the reins in 1993.
Jordan’s initial vision was that Westinghouse, which needed focus after losing its way in diverse businesses, would become a global supplier of basic services, led by its highly regarded power generation division.
Westinghouse turbines provide electricity all over the world, with 60% of the company’s $2 billion in annual sales of power equipment coming from outside the United States. Its technology and expertise have given it joint ventures with Mitsubishi Heavy Industries of Japan and Rolls-Royce of Britain. And Westinghouse is a partner of Shanghai Electric and Harbin Turbines in China, where the government has ambitions to add scores of power plants a year for the next decade.
But power generation has become the business bust of the 1990s, an object lesson that predictions are perilous in today’s rapidly changing world and that you must count on more competitors, not fewer.
There is serious overcapacity among power plant producers, and prices for turbine generators have fallen by 50%--from roughly $1 billion for a typical power plant to $500 million. Westinghouse barely made a dime in the business last year and lost money in this year’s first quarter.
The company, which last year changed direction again by purchasing CBS Inc., is widely reported among industry executives and analysts to be thinking about spinning off the power generation business to its shareholders or selling or merging it with another firm.
Or it could do something else. Westinghouse plans to clarify its intentions in the coming week and may indicate that it has found a way to stick with power generation because of its still-bright promise.
But Westinghouse and other companies have been sobered by the rapid shift of fortunes in a major industry.
What happened? Orders and actual power plant construction in China, India and other countries have been slower than anticipated, mostly due to the difficulties of putting financing packages together.
Deals in such countries are frequently done by companies specializing in energy production that bring money and skills together to build and manage a power plant, in much the same way that a movie producer brings talents together to make a picture. AES Corp. of Arlington, Va., and Edison Mission Energy of Irvine are two of the largest firms in the business.
But competition and pricing are chaotic right now because there are 300 such energy production companies vying for perhaps 20 deals in any given year.
At the same time, the once regulated and predictable U.S. electric utility industry is undergoing profound changes as the federal government moves to deregulate it. Recent rulings by the Federal Energy Regulatory Commission separate the generation from the transmission of electricity to allow for competitive pricing of each function.
Within five years there will be open pricing, which means you’ll be able to choose an electricity supplier as you now choose a supplier of long-distance telephone service. There is already futures trading in electricity prices on the New York Mercantile Exchange and great anticipation of falling prices among customers in California’s huge electricity markets.
The problem for the power equipment industry, however, is that many utilities have reacted to deregulation’s beginnings like deer caught in headlights. They are frozen, wondering what to do next.
“Right now most companies are looking at their base-load power plants, deciding which will make it into the new competitive era and which will be closed,” says Randy Zwirn, chief operating officer of Westinghouse’s power generation division.
The consequences of deregulation will be lower profits for many utilities and a shakeout of excess capacity. But cash flows will increase as plants are retired, and Wall Street will pick winners and losers among the utilities as it did in the early-1990s downsizing of the defense industry.
Meanwhile, keep in mind that electric power is a vibrant industry, not a fading one. “In China’s relatively modern Fujian province, there are 30 million people and 4,000 megawatts of electric power,” says Edward R. Muller, president of Edison Mission Energy. “In California there are 30 million people and 70,000 to 80,000 megawatts of electric power, 20 times as much.”
As China, India and all of Asia move to lift living standards, electric power will be one of the world’s great long-term growth businesses. The present is but a pause before a boom.
But it’s a business that demands financial muscle. Power plant projects can take years of development, with returns coming in only when the plant pumps out electricity; equipment suppliers often must help finance their customers’ projects.
Such demands favor well-heeled companies such as General Electric and Siemens but frustrate Westinghouse, which still has a hangover of more than $3.5 billion in debt from the bad days.
Analyst Nicholas Heymann of NatWest Securities sees Westinghouse selling the power business to reduce that debt and free its hands for further development of CBS and media.
But the company that invented alternating current may want to hold on, to have one leg in a short-term, profit-producing business like television broadcasting and another in a long-term, global growth business like power generation. Westinghouse will tell more of that story this week.
And the late ‘90s will tell more of the fascinating story of the electric power industry, now changing and developing in the early years of its second century.
