Battle of Dunkirk
What's a Utility?
Never before have investors known less about what their company is up to.
How many different types of "utility" companies can you name? Which ones would you trust the most to double or triple your investment nest egg? Which ones make you nervous?
In their latest memo to clients and "friends of the firm," lawyers Dan Fessler, Doug Hawes, and the rest of the crew at LeBoeuf, Lamb, Greene & MacRae identify no less than a half a dozen. They see the industry trying out such strategies as:
- Distribution as a pure play (with GPU as a leading exponent),
- Merchant energy (Enron),
- Independent power generation (Calpine),
- A regional focus, serving all energy markets at all levels (Dominion Resources),
- A national focus in generation, combined with regional transmission and distribution (American Electric Power, Duke Energy, Southern Co., Unicom/ PECO), and
- Technology or e-commerce (Montana Power, Avista).
And you can slice and dice some of these six categories. The letter from LeBoeuf, Lamb explains that AES looks like a generation company, like Calpine, and enjoys a high price-earnings ratio (also like Calpine), but also claims some 14 million distribution customers overseas. According to the firm, "the p/e magic must be related to something other than pure play."
At the other end of the spectrum, as LeBoeuf sees it, are the pure distribution companies like GPU and Consolidated Edison of New York, but the firm thinks these companies may have trouble linking up anytime soon with synergistic partners, since the equity markets have turned sour on utility mergers.
"We do not expect pure utility M&A to pick up in the second half of the year to anywhere near a level that would equal last year's record activity," says the firm.
Meanwhile, the LeBoeuf lawyers now see some profit in straying from the knitting. "The almost uniform result of utility investment in some form of telecommunications has been a windfall," they say. "Montana Power is the extreme example of that phenomenonits success in telecom having prompted its current effort to dispose of its utility and related business."
So how many other utilities have now disposed of their utility business? Do their investors know?
FOR MY MONEY, THE ISO WILL BECOME THE TRUE "UTILITY." Or, if not the independent system operator, then it will be the transco, the RTO (regional transmission organization), the ISA (independent system operator) or whichever model wins the day.
After all, what is a utility? As I see it, the utility is the firm that faces the big questions: How to engineer the power grid and keep it running; how to balance construction programs with environmental concerns; how to evaluate resources and meet needs in the most efficient and cost-effective way; how to balance the conflicting interests of power producers, marketers, and consumersall of whom depend on the transmission network.
Utilities have always done this. The job hasn't disappeared. But now someone else will be doing it. That someone will be the ISO/ISA/RTO/transco. In my book, that someone will be the new "utility."
For evidence, consider the talk that