Utilities foresee an era of cuts, consolidations and vying to survive Executives also expect continued push toward direct access, deregulation

January 16, 1996|By Kevin L. McQuaid | Kevin L. McQuaid,SUN STAFF

The utility industry of the future will be one of profound consolidation, where monopolies fade and companies undertake vicious cost-cutting programs to stay competitive, according to a recent survey of utility executives.

"Most executives are without a doubt convinced that the industry is moving much more rapidly toward deregulation, direct access and consolidation than anyone ever expected," said Roger W. Gale, president of the Washington International Energy Group (WIEG), a consulting firm that poled nearly 400 utility executives in conjunction with the Canadian Electrical Association.

Anticipated changes include consumers being able to choose their power company; significant deregulation brought about by the federal government; the erosion of earnings due to competition; the loss of large, lucrative industrial customers; and the emergence of hostile takeovers, the survey results noted.

"The trend is certainly toward major restructuring, consolidation

and divestiture," said Ronald S. Tanner, a Legg Mason Wood Walker Inc. utility analyst.

"But energy generation is the competitive side of the business. Transmission and distribution of power will remain a monopolistic business, but I think eventually they'll adopt a structure similar to the long-distance telephone service.

"Several companies offer long distance, but you still have to go through one entity, Bell Atlantic, to get it, even with the various players."

Perhaps most surprisingly, three-quarters of the executives surveyed conceded that not all utility costs have been prudently incurred.

"All utilities went through rate cases and procedures where they had to justify costs," Mr. Tanner said.

"To say now that they spent too much is just inconceivable, although hindsight is often 20-20."

The upshot of all the changes, said WIEG's president, is that once-secure utility companies will have to scramble to survive.

Winners and losers

"The industry is being divided into winners and losers," Mr. Gale said in remarks accompanying the release of the 1996 Electric Industry Outlook.

"Those utilities that have acted swiftly and decisively are in a much better position to win. They have the ability to set the pace of change."

Although not specifically cited, almost certainly included on that list would be Baltimore Gas and Electric Co., which many analysts consider to be in the vanguard.

"I think there's a greater realization of the changes," BGE Chairman and Chief Executive Christian H. Poindexter said yesterday.

"We saw that the growth rate of the industry in the future was limited, and so we realized 10 years ago that we had to find nonutility subsidiaries to increase earnings, knowing that we needed to sell more than gas and electricity to be competitive."

In recent years, for instance, BGE has worked aggressively to diversify by providing appliance sales and repair and alternative heating and air conditioning. In 1994, the company trimmed $45 million from its operating expenses and locked Bethlehem Steel Corp. into a 10-year contract to lock competitors out.

And last September, the $8.1 billion utility announced plans to merge with the Potomac Electric Power Co. in Washington, a corporate marriage that would create the nation's ninth-largest power concern.

BGE and Pepco officials have said their primary motivation for the merger is to stave off competition and brace for future industry changes.

"If you can find a good fit through a merger, there are obvious cost savings," added Mr. Poindexter, who was among the 400 WIEG respondents. "People in the industry are looking at every possible option now to lower costs."

Between 1988 and last year, only 10 utility mergers had ever been completed.

In 1995 alone, however, seven additional mergers were announced. Mr. Tanner predicts that by 2000, the 160 utility companies of today will shrink to roughly 50.

Other survey highlights include:

* Ninety percent of those surveyed expect mergers and acquisitions to increase. In the past two years, only 67 percent and 72 percent, respectively, thought that way. Forty-eight percent believe that their company will eventually acquire another company or be acquired.

* Ninety-two percent said their company would conduct cost-cutting in the future. Forty-six percent said cost-cutting had already occurred, and 80 percent said downsizing had occurred.

* Forty-nine percent believe that company earnings will decrease.

* Eight percent believe that the loss of industrial customers will increase.

* Only 50 percent believe that their utility will be able to preserve its current monopoly service area.

* Fifty percent believe that most customers would take advantage of direct access if it were offered.

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