Virtual DisCos? Utilities might be stepping out,
but outsourcers could be cutting in.Wholesale competition and the prospect of competitive retailing are leading many electric utilities to turn...
was negative until it sold its cable business. Eleven of the 15 had a 10-year average ROE below 7 percent, and five of these posted negative returns.
The dismal record of past utility diversification efforts does not augur well for the success of current outside investments. Significantly, the outside investments of the 1970s, 1980s, and 1990s have been driven by a common denominator: strong cash flow, and management's desire to expand. They also share the same limiting factor: management inexperience in doing business outside of the regulatory framework. This inexperience prevented the diversification efforts of the 1970s and 1980s from succeeding, and it casts a shadow over the current round of expansion.
Current outside investments do differ from those of the 1970s and 1980s, however. First, whereas utilities used to invest in businesses unrelated to their core business in the 1970s and 1980s, they now generally confine themselves to investments close to the electric power business. Thus, utilities are bringing more expertise to their current outside ventures than they did in the past.
Second, since competition is invading the electric power industry, utilities can no longer retreat to the safety of their core business as they could in the 1970s and 1980s. Moreover, more and more of a utility's core business will be subject to the same competitive pressures that apply to their diversified operations. t
Charles M. Studness is a contributing editor of PUBLIC UTILITIES FORTNIGHTLY. Dr. Studness has a PhD in
economics from Columbia University, and specializes in economics and financial research on electric utilities.
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