ESCos, Round Two: Fighting for Market Share
How much will utilities invest
in energy service companies to boost earnings beyond the normal growth rate?Going on the "defensive-offensive."
In the early 1990s, flush with utility money from its corporate parent, Entergy Systems and Service, Inc. began expanding to provide competitive energy services.
Now called Entergy Integration Solutions, Inc., or EISI, the
Memphis, TN, company claims 815 employees and about 65 offices nationwide. The expansion appears extraordinary, considering that the company performs energy service contracting (em installing lighting, heating, and air conditioning and providing
maintenance services for small- to medium-sized commercial customers like convenience stores.
But there's more to the story.
In June last year, parent Entergy Corp., through a subsidiary, paid off $125 million in loans it provided to EISI's predecessor. Does that mean that the subsidiary actually grew the business by a like amount? It's hard to say, because EISI is an unregulated subsidiary, and releases limited financial information. Its executives, while helpful, won't discuss profits or losses.
But like other utilities and newcomers to the energy service company (ESCo) business, it appears that Entergy ate EISI's startup costs and still carries a healthy share of losses ... in hopes that red ink will someday turn black.
Hardly unique, this scenario will likely be repeated elsewhere en route to the new energy services world (em a world that bundles
supply- and demand-side services, and roots utility offshoots in what traditionally has been an independent ESCo market.
To get a feel for the trend, consider CSC Planmetrics, Inc., a Chicago management consulting firm that has seen its ESCo initiatives with utilities grow to a dozen during the past year. The utilities range in size from $700-million companies to those in the top 10. Some companies are defining what part, or how much, of the business they should enter. Others are drafting targeted business plans.
A war for market share lies ahead. The utilities see it as a price war for future payoff. The
independent ESCos have only their track records and faith in regulators to protect their place in the market.
The amount of money a utility can spend on an ESCo will depend on how comprehensive the startup offering is, says Jim Pardikes, CSC Planmetrics v.p. He adds: "If you make an acquisition, that will have an impact as well."
He says utilities can expect to invest $20 to $35 million a year for five years to maintain an earnings momentum that's five percentage points above their growth rate.
"If companies are not willing to make the necessary investments (em tens of millions of dollars (em and aggressively pursue the initiatives, then, based on what we've seen other utilities do, don't bother," Pardikes cautions.
Besides the prospect of bundling supply- and demand-side services, utilities find themselves propelled into this market by other factors.
"Utilities are faced with a shareholder-value gap (em in some cases very significant," says Pardikes. "The gap is being caused by discounting, lost volume in conjunction with increased wholesale competition, LDC [local distribution company] unbundling, and the prospect of retail wheeling. They're looking for new revenue