Utilities Powerless to Avoid Change
New England’s electric utilities have survived nuclear protests, complaints about high prices and occasional bankruptcy. But they might not survive competition.
“They’ve sunk my boat,” said John Rowe, president of New England Electric Systems, the region’s second-largest power company.
“If I really thought I could stop competition, it would be to my interest to stop it,” he said during an interview in his office on the outskirts of Boston. But momentum is against him; he has little choice but to try to adapt.
In California, New York and most of New England, where electricity prices approach twice the national average, residents are on the verge of being able to buy electricity from anyone willing to sell it.
“The whole business is being scrambled,” said Gary Simon of Cambridge Energy Research Associates. “What was once a steady, predictable business is becoming a fast-moving, competitive game of wheeling-dealing and battling for customers.”
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The signs of change are everywhere. Consider:
* In downtown Boston, the Atlanta-based Southern Co. is lighting the 60-story John Hancock building.
* In New Jersey, the state’s oldest electric utility recently unveiled a new marketing arm that will pursue business “from Maine to Maryland and beyond.”
* In Peoria, Ill., a Wisconsin utility is selling electricity to a J.C. Penney store.
When competition begins nationwide--and industry executives believe it is inevitable--economists predict some utilities will disappear as older, less-efficient plants shut down and companies merge to create energy conglomerates.
A new breed, energy brokers who have no plants, power lines or service trucks, will play a growing role. Five years ago, there were eight such companies; today, there are more than 250.
For Rowe and his company, which still generates much of its own electricity, competition means getting smaller and finding a niche. He has put his power plants up for sale and will concentrate on distribution and service.
“We don’t need to compete head to head with people who have 10 times as much generating capacity as we do,” he said.
For others, the answer is to get bigger, prompting a recent merger frenzy as large utilities find partners to compete better.
Last year, the industry announced 114 mergers or acquisitions worth $46 billion, according to Houlihan Lokey’s Mergerstat, which tracks industry mergers. That compares to only 30 deals, worth $633 million, as recently as 1992.
The push has continued, with 42 deals worth $8.9 billion in the first quarter of this year.
“Suddenly everybody’s looking at their cards,” said Steven Day, managing director of Barr Devlin Associates, which specializes in electricity industry mergers. “They’re discarding some cards, strengthening other parts of their hand.”
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Investment bankers, who once did little but arrange bond offerings for power plants, are now negotiating megamergers, such as the $7.7-billion marriage of Duke Power Co. to PanEnergy, a Houston-based natural-gas giant.
The deal made the two companies an instant force in the electricity marketplace. The same can be said of another Houston-based natural-gas company, Enron, which is extending its reach with the $2.1-billion purchase of Portland General, a low-cost Northwestern electric company.
In a bid to make its name known, Enron ran commercials during the Super Bowl and college basketball tournaments as part of a $20-million promotion of its entry into New Hampshire’s electricity market.
Likewise, American Electric Power, which serves nearly 3 million customers across the Midwest, developed one logo for its seven electric utilities.
With a string of low-cost generating plants, American Electric is viewed as a likely big-time player, once geographic barriers to competition are removed.
The same can be said of Atlanta-based Southern Co., which already produces more electricity than any other private utility in the country. In recent months, it has opened marketing offices in California and New England.
“It won’t be in five or 10 years, but in 20 years or so there probably will be five or six or seven major retail suppliers,” predicted A.W. Dahlberg, president of Southern. “I would like to think we’ve positioned [ourselves] as one of those players.”
Public power companies aren’t idle, either.
Los Angeles’ own municipal utility, the DWP, has hooked up with Enron to sell excess power outside its customer base. And in the Northwest, where power costs less than half what it does in California, the federally owned Bonneville Power Authority wants to send excess power south.
The massive Tennessee Valley Authority, with cheap power from federal dams and older coal plants, also is eyeing broader markets and wants Congress to remove barriers that prevent it from selling outside its current market area.
This upheaval worries utility shareholders, including pensioners who invested long ago because they saw their local electric company as a pillar of stability.
“The day when you could tell your grandmother to invest in utility stocks, put them away for 10 years and forget about them is gone,” said Rowe, the New England utility chief. “You’ve got to look at which utility, which part of the business they’re going for and how they deal with their problems.”
