Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

Competition Lost

U.S. companies' international strategies turn sour, as Europe faces a future with an oligopoly of power companies.
Fortnightly Magazine - February 1 2003

leading to ever more consolidation in the market, with five or six major utilities establishing significant positions across Europe," CERA's Foster says.

The favorite way of "winning" customers in Europe is to buy them by snatching up municipal distribution companies, he says. Germany and Italy are the ripest markets for this. U.S. companies that leave the European scene are selling assets. In some cases, governments are requiring divestitures to encourage at least token competition. But for the most part, acquisition purchases in Europe are fairly limited. While the likes of E.ON and EDF have substantial war chests, they are discouraged by protectionism in one another's markets.

But certain European markets need more generation capacity. Italy and Spain need new plants. That could open up opportunities for new competitors.

The Finnish Energy Industries Association has reported that during the next 10 years an estimated 60,000 MW to 70,000 MW of additional electricity production capacity will be needed across much of the E.U. member states. The European Union has estimated its members will need 200,000 MW to 300,000 MW during the next 20 years to cover increased consumption and plant retirements.

How U.S. Companies Lost Out

Salomon Smith Barney's White says U.S. utilities overpaid for assets in a rush to enter the U.K. market and wrongly assumed that the revenue streams from the assets would pay for the financing of these acquisitions. "AES, Edison Mission, TXU, AEP, and others assumed that prices would not fall. Their horrendous mistake was to sign long-term off-take contracts, which came out of the money," White says.

Companies that bought distribution assets also made mistakes in the United Kingdom, White says. They paid high prices for distribution utilities, assuming that they would run the companies more efficiently and save money, and that regulators would let them pass on the premium cost to ratepayers. They assumed wrong. Every five years regulators in the United Kingdom set prices based on what they think will be a reasonable return on capital.

"The regulator sees what the cost savings are and passes them on to the customer," White says.

The major vertically integrated players of Europe have been more patient, and in so doing they have been able to take advantage of the "going out of business" sales afforded by U.S. departures. Vertically integrated utilities now dominate the U.K. market. Thus, while there has been a drop in wholesale prices due to surplus generation capacity, vertical integration allows the players to reap wider retail price margins.

Lazard's Jarman says that consolidation is occurring in the United Kingdom among power producers. "You are likely to see the remaining independent power producers consolidating or getting out of the market over time," Jarman says. "Some of the merchant players are disappearing, and the wholesale market is likely to consolidate to maybe six or seven players of size."

Jarman expressed the view that competition would continue, but perhaps in a more stable manner than has been seen recently.

Edward Tirello, managing director and senior power strategist for Berenson Minella & Co. of New York, points out that