Plugging Into The Power Surge AbroadDavid Woodruff
In 1992, when Argentina decided to sell state-owned electric generating plants to raise cash, U.S. utility executives rushed to Buenos Aires to get in on the deal. CMS Energy Corp. eventually nabbed part-ownership of a 1,320-megawatt hydroelectric operation on the Limay River for $65 million. The Dearborn (Mich.) utility also plans to begin building coal- and gas-fired plants in Argentina, India, and the Philippines by yearend. "The growth opportunities in these areas are phenomenal," says Chairman William T. McCormick Jr.
Faced with tougher competition and slow growth at home, CMS and other big U.S. utilities are suddenly investing billions of dollars in international markets. Electricity demand in North America will increase at a low-voltage 1% annually from now until 2020, predicts the World Energy Council (chart). By comparison, the appetite for electricity is surging in Asia, Latin America, and Eastern Europe. In parts of Asia and Latin America, it could grow 5% or more a year. And because competition is limited so far, investment returns can be double those in the U.S.
The drawback is that risks can be higher, too. For decades, U.S. utilities have operated in stable, heavily regulated markets. As they move overseas, they could get burned by political upheaval or economic crisis, warns Nathan I. Partain, director of equity research at Duff & Phelps in Chicago. "It's just a matter of time," he says.
Utilities won't abandon domestic markets, of course, but deregulation is making life tougher at home. Under a 1992 federal law, utilities must transmit power generated by other companies. Now, proposed rules in California and Michigan would let industrial customers buy the cheapest power and have it delivered to their factories. As a result, utilities are scurrying to cut costs--or find merger partners.
In stark contrast, many emerging nations can't build new plants fast enough to meet demand. India is routinely plagued by brownouts and blackouts. China also can't keep pace with its power needs: To do so would require adding the equivalent of the U.S.'s entire generating capacity every two years, says Thomas G. Boren, president of Southern Electric International, a subsidiary of Atlanta-based Southern Co. Southern Electric has invested $300 million in generating projects in Latin America and expects to spend nearly $1 billion more worldwide by the end of the decade.
DEEP POCKETS. As in Argentina, leaders in many developing countries are realizing that they can't afford to expand and run their own generating systems. So they're looking to deep-pocketed U.S., European, and Asian partners--and perhaps laying the groundwork for global competition in the utility business.
In July, Ohio-based American Electric Power Co. said it intended to form a joint venture with Northeast China Electric Power Group to build two 1,300-Mw coal-fired plants. Britain's PowerGen PLC and Hong Kong's Hopewell Holdings Ltd. are pursuing projects in China, the Philippines, and Pakistan. Overall, there are 578 generating projects under construction or planned in Latin America and Asia alone, estimates RCG/Hagler, Bailly Inc., an Arlington (Va.) consulting firm.
Investors are lining up to finance these plants. Scudder, Stevens & Clark Inc., a New York- and Boston-based investment firm, has set up a $400 million power-project investment fund bankrolled by utilities and the International Finance Corp. (IFC), a World Bank subsidiary. Similar funds have been launched by investor George Soros, GE Capital, and Hong Kong-based Peregrine Investment Holdings Ltd.
To lure foreign investors, government officials in such countries as India are negotiating contracts that guarantee returns on investment of 16%. Elsewhere, potential returns on riskier projects can reach 25%, say utility executives. That compares with rates below 10% on most independent power projects in the U.S. and about 11% from utilities' ongoing operations.
Still, at least one company has been burned by rushing into an international project. Mission Energy, a division of SCE Corp. in Los Angeles, last year wrote off $28 million after canceling plans to acquire from Mexico's national utility part of a coal-fired plant being built in Piedras Negras, Mexico. Mission did extensive engineering work before contract negotiations fell apart over environmental and other concerns. Concedes Mission President Edward R. Muller: "You can spill a lot of money fast and get nothing for it."
Such troubles may take a while to show up. Industry analysts say Houston-based Enron Development Corp. could stumble with a $2.5 billion gas-fired plant under construction south of Bombay. India's municipal utilities have contracted to pay more for Enron's power than they charge their customers. If local politicians--who traditionally curry favor by subsidizing electricity for farmers and residential customers--don't allow rates to rise, Enron could end up holding the bag. Rebecca P. Mark, chairman of Enron Development, says India's national and state government guarantees protect Enron.
To lower the risks, most projects are being done by consortiums that include prominent local investors and sometimes the IFC, which last year committed $300 million to a dozen generating plants. Companies hedge against inflation by negotiating contracts that allow them to pass along higher costs. CMS Energy also avoids what it perceives as very high-risk markets, such as China.
CHINESE CHILL. Indeed, China embodies all the hopes--and worries--of the rush to electrify the world's developing nations. Earlier this year, Beijing overruled a Goldman, Sachs & Co. scheme to sell investors stakes in power plants in the province of Shandong. The government took objection to the 20% to 40% returns investors could have made, and capped returns at 12%. That had a chilling effect. Hopewell Holding's Gordon Y.S. Wu, who is building his second plant on the mainland, warned Chinese officials that he will sharply scale back his plans to construct 12 more. "I can't jeopardize my investors' and bankers' money for 12%," he says.
Despite the pitfalls of developing-world investing, other U.S. utilities may have little choice but to join the fray. The once sleepy electricity business now seems to be rushing headlong toward freewheeling international competition. Companies that gain a headstart in distant markets now may become the powerhouses of an emerging worldwide utility industry.