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Regulated Utilities: Reinventing the Classic Business Strategy

Opportunities and limitations of five top strategies.

Fortnightly Magazine - December 2005

heating uses (predominately New England). The constraint may be the ability of the regulated gas company to obtain regulatory approvals for sufficient marketing, pricing and other incentives.

The “economies of scale” or “consolidation” approach is available. However, for systems of adjacent networks (electric) or overlapping networks (an electric distribution and gas distribution serving the same geography), the cost savings may not be as great as expected. The regulator also may transfer an excessive portion of the certain savings to the consumer through the ratemaking process.

Successful industry consolidation thus becomes dependent on favorable regulatory treatment of the initial set rates and requires continuing favorable treatment going forward. As utility systems consolidate across state lines they pick up more regulators, increasing the regulatory complexity. However, the consolidation also diminishes the effects of positive and negative regulatory impacts on the larger consolidated entity.

A consolidated utility operation may be able to take advantage of greater purchasing power, shared joint facilities, and financing leverage. However, as in the other approaches, the ability of utility management to successfully negotiate the necessary regulatory processes is a paramount condition for success.

In summary, while in theory all five approaches (Conglomerate, Vertical Integration, Synergy, Globalization, and Market Penetration) are available to the regulated firm, in practice each approach brings different regulatory risks associated with current policies of individual state regulatory commissions or FERC. Once again, the core managerial competency of “management under regulation” may be the decisive factor in whether any of the five approaches to value creation can be successfully implemented by the regulated firm. A management not successful in operating the core regulated business has little chance of success outside of regulation.

 

Endnotes:

1. “Five Ways To Grow the Market and Create Value,” published on Oct. 18, 1999, and part of the Financial Times ’ “Mastering Strategy” series.

2. Michael E. Porter “What Is Strategy,” Harvard Business Review , November – December 1996

3. Mark Sirower, The Synergy Trap .

4. Peter Drucker, “Six Rules of Successful Acquisition,” Frontiers of Management .

5. See Buffet’s 1981 Berkshire Hathaway Annual Report.

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