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Marketing & Competing

Fortnightly Magazine - December 1996

While they must demonstrate that capital investments will improve power quality and reliability, the magnitude and nature of such investments is left for the distribution companies to determine; there are no such things as "regulatory assets." Indeed, the rapidity and the extent to which specialized distribution businesses emerge in the United States will depend partly on the degree to which states adopt new means of inspiring local distribution franchise operators to become efficient.

The Shape of Business to Come

As there will be a variety of specialized distribution businesses, some leading competitors will likely come from outside the ranks of existing utility operators, and include current contractors, equipment suppliers, and service bureaus to other industries.

The new businesses may take shape earliest in those distribution functions that are experiencing rapid technological change or that must become more complex to accommodate retail competition. For example, utilities will need new customer information and billing systems, and new metering technology, so that retail electricity suppliers can offer a variety of pricing and service options, including real pricing and consumption measurement. But utilities remain uncertain as to how soon these new capabilities will be needed, whether local distribution companies will deploy them, and if so, how DisCos will charge for them. As a result, few utilities have committed to building such systems.

Utilities that do wish to leverage their own operations by competing in the emerging distribution businesses may face some disadvantages if they go it alone. First there is the problem of selling services to other utilities that may view them as competitors. Then there is absence of experience in, and a culture that is comfortable with, competition. A specific operation's excellent performance, capabilities, and cost-effectiveness do not automatically translate into competitive success or profits in obtaining or performing service contracts with outside customers. A first-mover whose capabilities may lie in the middle of the pack, but who uses the experience of bidding and performing early contracts to build a competitive service organization may enjoy a greater likelihood of success than the leaders in today's benchmarking comparisons.

Of course, not all of the new businesses that emerge will prove attractive. Utilities will likely want to be selective about which businesses they enter, and avoid those (em such as manual meter reading (em that involve little opportunity to leverage scale, technology, or geographic diversity.

Strategic Alternatives

To stake out a position in the looming, specialized distribution businesses, utilities can pursue several alternative strategies other than going it alone.

s Spin out functions as profit centers or business units. These businesses could start by serving the distribution franchise's internal needs, using outside contractor bids or prices to establish market prices for the service contract. Once the managers at these divisions had proven their ability to earn acceptable returns as stand-alone profit centers, they would be encouraged to compete in the market at large. Granting existing employees a share of equity in the new ventures would provide them and their unions with an incentive to support the restructuring and would ease the pain associated with downsizing.

s Pool