Diversification brings risk and questions of focus The Changing FACE of ... BGE

February 06, 1994|By Ross Hetrick | Ross Hetrick,Sun Staff Writer

Talk about a diversified business.

Baltimore Gas and Electric Co., America's oldest utility, has moved aggressively over the past decade into a broad range of unregulated businesses, many of which having nothing to do with supplying electricity and natural gas.

The company sells big-screen TVs, Nintendo video games, luxury housing and a kitchen remodeling service. For businesses, it offers office space and a fiber optics network. For tourists, it has Church Street Station, a complex of entertainment and fine dining in Orlando, Fla. For retirees, it has invested in nursing homes in Montgomery County, New Jersey and Virginia.

In all, BG&E, with $2.7 billion in annual sales, collects more than $200 million in revenues from this portfolio of disparate businesses.

But the company's expansion has raised questions about BG&E's focus -- and its possible impact on stockholders, ratepayers and employees.

Critics, including consumer advocates and competitors selling appliances and electric power, complain that BG&E has exceeded its purview. Unlike the predictable and regulated industry of energy generation, the merchandise business is prone to greater swings in sales, they said.

"I wonder whether they know what they are doing," said Michael Worms, a utility analyst for Brown Brothers Harriman, a New York stock brokerage firm.

Consumer advocates also fear that the accounting fire walls separating the subsidiaries from the utility business might not hold if disaster strikes. The major worry is that, should these ventures fail, ratepayers would be forced either to foot the bill or to accept a leaner company with fewer services. It has happened elsewhere.

Still, BG&E is forging ahead. Ready to launch a new logo next month, the company has ambitious expansion plans for its service, retail and power plant building businesses. At the same time, it is cutting $51 million in expenses in its core business and beginning the first layoffs in its 178-year history.

Chairman Christian H. Poindexter said his company has little choice -- competition is intensifying as major customers, such as Bethlehem Steel Corp., are courted by other utilities offering cheaper electricity.

Comparing BG&E to an isolated offshore drilling platform, Mr. Poindexter said he must act before the platform catches fire -- either leaving workers on a burning rig or forcing them into the flaming sea.

"If we did nothing to change our culture, our philosophy, our approach to things, sooner or later the platform would be burning," Mr. Poindexter, 55, said. "And I don't want it to ever get to that."

Whichever side of the debate prevails, one thing is certain: BG&E, a company known for lifetime employment and a stock stable enough for widows and orphans, has entered an era strewn with pitfalls and risks.

This difficult era, BG&E contends, was not the company's doing.

Dramatic changes in utility regulations, mandated by federal law, have left it no choice, the company said. Serving 1 million people throughout central Maryland, BG&E can no longer merely build power plants and distribute electricity and natural gas to a captive market of homes and businesses.

Since 1978, when federal law opened the door to independent power producers, these new nonutility companies have seized a growing portion of the nation's electricity production.

By 1992, when a federal law further eroded the utilities' monopoly, independent power companies built nearly two-thirds of all new plants in the country.

Virtually nonexistent in the late 1970s, independent producers supplied about 8 percent of the nation's electricity demand a year ago, according to RCG/Hagler Bailly Inc., an Arlington, Va., consulting firm. In Maryland, the independents provided 2 percent of the electricity.

"I think [deregulation is] coming and it's coming fast," said John A. Anderson, executive director of the Electricity Consumers Resource Council, a group that represents the nation's 22 largest industrial consumers of electricity. "It has the utilities across the country scared to death. They better become competitive and competitive fast."

The advancing competition has already sent BG&E scrambling to become more efficient in its electric and gas operations.

In its core utility business, the company last year moved to cut $51 million from its $665 million in annual operating expenses. Much of this reduction will come from eliminating an estimated 1,100 jobs from among its 9,000-person work force.

The company also has asked managers for recommendations that would further cut expenses.

And despite a 17 percent rise in net income last year to $310 million, thanks mainly to a hot summer and cold winter, Mr. Poindexter seemed resigned to the fact that the company's core business could possibly shrink, lowering BG&E's revenue as competitors strip away customers.

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