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Inventing a Business in Wires & Pipes
"Which is in the ballpark of other companies who have taken - or at least announced - different strategies, such as Florida Power & Light and PECO Energy."
Ford says a string of events have made it possible for GPU to come out ahead in its strategy. The debacle of Three Mile Island forced GPU to make TMI one of the best-run plants in the U.S., although it will have to tend to the downed TMI-2 reactor. That reactor could cost GPU $400 million through 2014, including decommissioning expenses, according to its 10K Form. After the TMI accident, the company simply didn't build much generation, Ford notes. It entered purchased power contracts for most of its supply with non-utility generators at fixed prices.
More recently GPU looked at its generation portfolio and saw little there that compared with neighboring utilities and the "Duke Powers" of the electricity world.
"So the decision was simple," Ford says. "There's also a very good sellers market for generation right now. So part of the attraction is, first of all, I don't have enough to be a critical size. Number two, by divesting it, it's probably going to help with my transition plan with my regulators because they'd probably like to see less market power as opposed to more¼ [I]t's probably worth more to someone else."
"Finally, if I can redeploy that cash in a strategy on a transmission-distribution side, or in just simply financial restructuring while lowering my risk profile, there's probably shareholder value in it."
Hooking the Customers
As GPU carries out its strategy, the question becomes: How will it leverage its brand name if wires services remain regulated? Can it parlay its links to customers (through a regulated distribution network) to sell unregulated revenue-cycle services to bolster its average ROE? Furthermore, how many links will be needed to make those sales profitable?
An answer to those questions may partially lie in GPU's branding campaign, in which it claims it's "Inventing the Future of Energy." The campaign is being carried out via major newspapers, cable TV and on the backs of transit buses.
Hafer believes there's benefit "at this stage of the evolution," to keeping the GPU name in front of the public. "Particularly as they are beginning to hear other, strange names that are coming into the area - such as an Enron, such as a Southern Company¼ we need to keep reminding them that GPU is their power company."
Ford says he suspects this tactic isn't done because GPU wants customers to feel good about the monopoly. "Eventually they want to sell them other 'stuff.' That's where the premium returns reside."
If regulators allow holding companies like GPU to use their "brand" names, it could change ROE tremendously.
Says Ford: "That's a question¼ You don't have to be under the same umbrella to do the cross-selling. You can have a non-regulated subsidiary that sells 'xyz' widget that you think would be useful."
"To date, the regulators in the two states we have our primary business in, Pennsylvania and New Jersey, have not indicated