Utilities Look Beyond U.S. for Future Growth

Time was when utilities were the very personification of local industry--private-public entities whose reason for existence was to distribute power to local folks and businesses. Then they began to expand into powerful regional and even national forces.

Now, driven by deregulation and slow growth in power consumption at home, California’s huge utilities are moving overseas. And despite the risks, red tape and some costly miscues in foreign markets, they are making new offshore deals worth billions of dollars.

As recently announced projects in booming Baja California attest, Mexico is a primary focus of the utilities’ expansion plans. But projects from Europe to the Pacific Rim and the rest of Latin America have attracted California’s four largest investor-owned utilities: Edison International, parent of Southern California Edison; Enova Corp., holding company for San Diego Gas & Electric; Pacific Enterprises, parent of Southern California Gas; and Pacific Gas & Electric Co. of San Francisco.

Some current examples of their offshore deal making:

* Mission Energy, a subsidiary of Rosemead-based Edison, owns 40% of a 1,230-megawatt power plant under construction in Indonesia, a project that will bring power to 2 million households. Last December, the subsidiary paid $1 billion for a 2,000-megawatt hydroelectric pump-storage facility in Britain.

* A partnership including Pacific Enterprises and Enova has bid on a $25-million first-phase project to provide natural gas to Mexicali, the capital of Baja California. A winner will be named Monday. They are also part of a team that has proposed a $600-million power complex in Rosarito, south of Tijuana.

* PG&E; in June bought a 400-mile natural gas pipeline in Australia. With partners Bechtel, El Paso Energy and General Electric, it began construction in May on a $650-million power plant in Mexico’s Chihuahua state, about 40 miles south of El Paso.

Although U.S. utilities began investing overseas in the early 1990s, activity is accelerating largely because deregulation of the energy industry will probably force California utilities to sell off as much as half their fossil-fuels-generating capacity to lower-cost competitors to meet a state mandate for a more competitive energy market.

The sale of those assets will present utilities with a lot of cash and some big decisions on how to reinvest it to ensure profitable returns for shareholders. And since the power market in California and in many other Western states is growing at a snail’s pace--only 1% to 2% annually--many are answering siren calls beyond the U.S.

That’s because electric power and natural gas consumption is growing by as much as 15% and more in some Latin American and Asian countries where economies are expanding at warp speed. Plus, many governments are rolling out the red carpet to attract foreign power developers in efforts to privatize energy delivery or make it more efficient and available.

By contrast, power consumption in the United States has been flat since the first Arab oil embargo in the 1970s and is expected to remain so in coming years, said James Iaco, chief financial officer of Edison Mission Energy.

“There is no real additional power capacity need, short-term, in the United States,” Iaco said. “You couple that with the uncertainty of deregulation and it makes the development of power plants quite iffy here. Consequently, people such as ourselves are looking overseas.”

In fact, about two-thirds of all power capacity additions in the world will be made in Asia over the next six years, according to Leonard J. Kujawa, international director-electric industry for Arthur Andersen consultants in Atlanta.

For California utilities, opportunities lie mainly in two business categories: power plants and power delivery grids. Huge power plants are under construction in Indonesia, Mexico and Britain, all with California companies as part owners. The biggest prize, still relatively untapped, is China, where demand for power is growing by leaps and bounds.

“Estimates are that China will be adding 15,000 to 18,000 megawatts of power a year, statistics that boggle the mind,” said John Easton, vice president of Edison Electric Institute, a trade association of 100 utility holding companies. In the U.S., 1,000 megawatts would serve a million people.

But for companies interested in investing in foreign power distribution, Mexico is the hot spot. In addition to Mexicali, rights to develop natural gas for 11 of Mexico’s largest cities will soon be up for bid, deals that Enova and Pacific Enterprises are interested in.

Chile, Colombia and Brazil are also privatizing their natural gas grids, and Britain and Australia are selling off formerly state-owned electricity and gas systems.

Enova says it is hotly pursuing Baja California expansion as a “logical extension” of its San Diego power grid and because the Mexican state’s power needs are growing several times faster than its primary market, San Diego.

“Up to the [peso] devaluation shock, Baja California energy demand was growing 15% a year. Now it’s down in the 5% to 6% range, but that’s still a very much higher growth rate than in most of the United States,” said Enova President Stephen L. Baum. “So on that basis you see tremendous opportunities in making investments in other countries.”

Other CEOs would agree: The Edison Electric Institute estimates 40% of its members have made or are studying the possibility of making overseas energy investments.

There are plenty of risks, and U.S. power companies have already run into problems.

* Houston-based Enron and its partners, including PG&E;, were staring at huge losses in 1995 when construction on a $2.6-billion power plant in Dabhol, India, was halted by political opponents. The project has since resumed construction, but under new terms said to be less lucrative for U.S. investors.

* Mission Energy wrote off $18 million of its investment in the Carbon II power plant in the Mexican state of Chihuahua in 1993 after high levels of pollution created image problems for the parent company.

* In Argentina, a cutthroat competitive climate has developed because energy overcapacity has cut margins to the bone, making profits difficult for several U.S. companies with investments there, according to Arthur Andersen’s Kujawa.

And governments such as China recently have expressed reluctance to guarantee they will purchase power from plants built by foreigners, a requirement in many financing plans. But even with those guarantees, countries have been known to walk away from debt obligations as many Latin American countries did during the debt crisis of the late 1970s, said Jack Jenkins-Stark, a PG&E; senior vice president.

Yet the potential profits and growth from overseas opportunities continue to attract growing numbers of utilities whose services are in demand in countries where industry and consumers have long been at the mercy of inefficient state-owned power companies.

“If you try and grow domestically, you have to do it through acquisitions, and the kind of premiums we see being paid are the kind you cannot get back, so we’re looking international,” said John Peterson, vice president of Pacific Enterprises International, a subsidiary of Pacific Enterprises.

The overseas activity has broadened the U.S. power industry’s perspective, said Kujawa: “The electric industry has transformed itself into a global industry for the first time.”