Utilities: Suddenly, A Supercharged ClimateMark Maremont
Dull. Predictable. Staid. If that's the way you would describe the electric utilities industry, take a closer look. Buffeted by the winds of competition, the utilities industry is one of the fastest-changing segments of the U.S. economy. Big customers are bellowing for lower prices. Regulators are rethinking decades-old monopoly structures. And utilities are scrambling to pare down costs and stimulate torpid cultures. "This is undoubtedly the greatest period of change our industry has ever gone through," says Joseph F. Paquette Jr., chairman and CEO of PECO Energy Co., a large utility based in Philadelphia.
Deregulation has been slowly coming to electricity for 15 years. But the pace of change has picked up markedly in the past two years and could accelerate in 1995. All eyes now are on California, where the Public Utilities Commission (PUC) last April proposed to deregulate almost totally the state's electric power industry by 2002. The most radical suggestion: allow businesses and then residential customers to shop around for electricity service.
BREATHING ROOM. After igniting a lightning storm of controversy, the California PUC postponed its decision and is now expected to make a final ruling in May. Most observers expect it will soften the original plan, perhaps by requiring far more vigorous wholesale competition among power generators as a first step. Once California acts, most other state regulators are likely to study the results before taking action. That could provide a few years of breathing room for hard-pressed utilities.
Even so, most utilities are hustling to prepare for "life after monopoly" by cutting costs and improving service. "Competition is going to come," says Stanley T. Skinner, CEO of Pacific Gas & Electric Co., the largest investor-owned utility. "It's not a question of whether but when." Skinner says he's "hell-bent" on getting ready. In 1995, PG&e plans to cut its costs by $285 million, partly by slashing 3,000 jobs from its payroll, on top of a 3,000 cut in 1994.
The biggest pressure for change is coming from large energy customers, many of whom are seeking lower-cost power any way they can get it. Some are threatening to build their own power plants. Others are linking up with local towns to create municipal-owned utilities that can get around the local monopoly utility by bringing in power from afar. Then there's Motorola Inc., which is building a big plant in Harvard, Ill., the territory of high-cost supplier Commonwealth Edison Co. Motorola recently got Com Ed to cut its rates by threatening to build a transmission line to bring in cheaper power from Wisconsin, just eight miles away.
To forestall such defections, utilities increasingly are offering steep discounts to keep major customers. One particularly innovative example: Western Resources Inc., based in Topeka, Kan., was concerned that low oil prices could force the closing of many small electric-powered oil wells in its territory. So now it's offering oil operators the option of linking their electricity rates to oil prices.
The newly competitive climate is having an impact on utility finances. Unwilling to raise rates for fear of being priced out of the market, utilities filed for a record low $1.1 billion worth of rate increases last year, down from $5.9 billion as recently as 1991, figures Daniel Scotto, analyst at Bear, Stearns & Co. And for all the industry's cost-cutting, Scotto calculates that margins will remain flat or falling in 1995. Despite demand rising at a healthy 2% annual clip, "the industry's financial profile is as weak as it has been in a decade," he says.
Investors have already taken notice. The Dow Jones utility index dropped 20% in 1994, partly because of rising interest rates but also due to industry uncertainty and cuts in dividends by several utilities.
Although more competition seems inevitable, the precise path to get there remains uncertain. Regulators are still wrestling with huge issues, such as what to do about the billions of dollars worth of high-cost power plants that would be rendered uneconomical if electricity suddenly became a free-for-all. But one thing's for sure: The electricity industry will never be dull again.