Power Groups Seek Spark Of Difference
The latest example was last week when the Texas-based Houston Industries, one of the biggest US electricity companies, announced an agreement to buy NorAm Energy, a Texas-based gas company, for $2.4 billion.
This came only a month after Enron, a Houston-based energy company with extensive gas interests, had announced plans to buy Portland General, an Oregon-based electricity utility, for $2.1 billion.
As long as electricity utilities were merging with one another, the motivation was fairly clear. Creeping deregulation is opening the US electricity market to competition, and those companies that can deliver electricity at the lowest cost are the most likely to survive and prosper.
Yet analysts insist that cost-cutting is not the prime motivation for mergers between electricity and gas companies.
Phil Giudice, head of Mercer Management Consulting's energy practice in Boston, says that in a deregulated market, it will be open to all electricity distributors to obtain their electricity from whatever happens to be the cheapest source, so charges are unlikely to differ much from one company to another.
That means electricity companies will need to find other ways of setting themselves apart from the competition.
The underlying strategic drive is how companies can do something for their customers that is different from what other companies are doing,'' Giudice says. So all kinds of new behaviours and new suites of products and services are being considered.''
Ed Tirello, utilities industry analyst at NatWest Securities in New York, says mergers between electricity and gas utilities will enable the resulting companies to become total energy suppliers, offering their residential, commercial or industrial customers the best solution to their energy needs.
Tirello predicts a wave of takeover activity as electricity utilities snap up the available gas companies. The reason is that no electricity utility dare risk the possibility that a rival might acquire a gas company in its territory, because that would leave it facing potentially overwhelming competition from a total energy supplier.
The remaining gas companies are therefore likely to change hands at high prices, Tirello suggests. Typically, these are as much as two or three times book value.
It almost doesn't matter what you pay for them because you simply can't afford to have the other guy sitting there in your neighbourhood,'' he says.
Tirello predicts that the actual delivery of gas and electricity will eventually become a relatively minor part of utilities' overall business. I think utilities are going to offer basic electricity and basic gas slightly above break-even,'' he says.
The idea will be to catch the customer's bill so that they can offer 20 or 30 enhanced services where all the [profit] margins will be - for example, home security, appliance repair, and air conditioning services.''
Mercer's Giudice agrees, predicting a further revolution in which these total energy suppliers team up with other utilities such as telecommunications companies and cable television operators to offer even wider ranges of added-value services: for example, real-time diagnostics that would put out an alert if a furnace was working too hard because someone had left a window open.
At the very least, such alliances should yield savings by enabling companies to send out one bill for a whole range of utility services. And as Mr Giudice points out: