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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

has been encouraged, U.S. companies have found it rough going in competing against dominant European utility companies.

American Electric Power, while sticking with its generation assets, sold Seeboard, its 2-million-customer retail electricity, gas supply, and distribution subsidiary in southeast England, to London Electricity Group, an EDF company.

Kansas City, Mo.-based Aquila and minority partner, Akron, Ohio-based FirstEnergy, put U.K. power distributor Midlands Electricity on the auction block.

Duke Energy announced Dec. 17 it would fold its United Kingdom and French power trading operations to focus on gas trading in the United Kingdom and Holland. In September, Duke announced it was pulling the plug on power trading in Germany and the Nordic region.

And in the United Kingdom and Europe there have been a series of other cutbacks and closings of trading operations. Dynegy, Aquila, AEP, El Paso Corp., Reliant Resources, and Williams Cos. have all retreated, while investment bankers have started trading deals with EDF, RWE, and others. The European Federation of Energy Traders continues to push for improvement of energy trading conditions in Europe and furtherance of international power and gas trading.

"Americans who came over to buy European assets have gotten clobbered because generally they bought at too high a price," CERA's Foster says. "The more patient European money is moving in the other direction [of buying rather than selling]."

Dan More, managing director of Morgan Stanley's Global Energy and Utility Group, says the financial deterioration of U.S.-based companies and unanticipated competition from European companies were major factors in decisions of American companies to withdraw.

"It's been about a 10-year round trip. These U.S. companies with excess cash flow in the early '90s went in search of higher returns, which appeared achievable in Western Europe," More says. "They had some successes and some not-so-successful ventures, but the bottom line was the higher returns were not easy to achieve or retain.

"As these companies have started facing challenges at home, it became apparent the capital could be better used in their base business, which is, as we see, a back-to-basics strategy," More says.

More adds that much of the competition came from very strong, entrenched incumbents. Further, pressure from shareholders has been an issue.

"The U.S. utility investors, institutional and retail, have tended to be nervous and skeptical about overseas ventures," especially in light of the downturn in investor confidence in the power markets, More says.

E.U.'s Attempts to Open Market May Be Too Little, Too Late

The E.U. Council of Energy Ministers finally reached agreement last Nov. 25 to completely open electricity and gas markets for all commercial and industrial customers by 2004, including the establishment of independent regulators and separation of transmission and distribution functions from generation and supply services. However, that decision does not in any way include unbundling of ownership in vertically integrated companies.

In the name of competitive, open markets, long-running debates continue to take place in the governments of European capitals where decisions will be made on how the E.U. council mandate should be implemented. Presumably, the energy ministers' deadline now gives those debates more