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Revenge of the ’70s

A guide to the galaxy of low growth, high interest rates, and the dark side of the Force.

Fortnightly Magazine - June 2005

says that not all strategies will work for all utilities, and he admits that not all utilities may be seeking high growth.

Know Yourself, Know Your Enemy

Abbosh says that many of his utility clients primarily are concerned with asset information. It's very simple, he says:

"Historically we have not needed to capture information about these assets. Most organizations today cannot analyze their asset information data in a way that just gives them very obvious answers." (About whether to expand, for instance.)

"We do a lot of work and advise on these issues." He adds that utilities increasingly want to know how to use data to minimize costs or minimize volatility.

"Lack of information is costly in terms of reliability. In other cases it is an efficiency-driven thing. In other cases what is driving it is that companies see a doubling of [capital investment] in the next 10 years, with one-third less workforce than they used to have. The ability for us to plan, sanction, commission, and operate those schemes is going to be hard. They have a real bottleneck in terms of skills and workforce to actually do all of this in a world where all the forecasts say you are going to need a ton of investment," he says.

But even with having an ultra detailed knowledge of assets, and knowing a growth opportunity when seeing it, a study conducted by Accenture finds it is very difficult for utilities to sustain high performance. In fact, a study conducted by Accenture identifying high-performance European utilities may be instructive for U.S. utilities that are aspiring to the greater scope and scale of their counterparts across the Atlantic.

In his presentation of results to the conference, Abbosh said; "Only 43 percent of utilities examined were able to deliver profits over six years. It's hard to sustain high performance." He also notes that only one in 10 companies outperforms its peer group over more than 10 years. These top performers all pursued a strategy of deliberately planned unregulated growth while addressing regulated rate-base growth.

This European experience suggests that large company size doesn't guarantee profits. In fact, according to the report, high-performing companies profited from timing the launch of their takeover bids while paying the lowest price for assets.

Are U.S. utilities capable of achieving this paradigm of buying and selling assets in their portfolio in a way that is timed perfectly with acquisitions?

Abbosh says that utilities always will be defined by their own specific operational, geographic and regulatory environment. Some utilities will have more difficulty buying and selling assets than will others to maintain maximum growth.

Of course, some in the financial community say it is for this very reason, and because single-generation assets are beginning to sell at replacement value, that the best play may be to buy whole companies with a portfolio of assets in the region (if the acquisition is at the right price). But even large utility-to-utility mergers face significant regulatory and investor scrutiny. Exelon-PSEG and the Duke-Cinergy proposed mergers have introduced the prospect of more $40-billion market