In a decade, six electric generating companies will control 85% of the US electricity capacity. Distribution will be handled by 10 major players, and retailing of electricity will come from many companies of all stripes from the familiar incumbent to specialty retailers hawking baskets of energy services to specific consumers.
These are the major conclusions of a new report��CEO Challenges in a Competitive Power Industry��released by Andersen Consulting. It suggests detailed strategies large utilities can employ to survive the restructuring and industry consolidation now underway.
Andersen�s report looks at three broad segments of the industry in the US. Its findings include:
� Generation
The generation part of the business will develop along classic commodity lines where price transparency will increase and volatility and margins decrease. Companies can navigate through this transition to reduced volatility and slimmer margins by making up for them with greater scale, creative services and products. Even though there may be regional shortfalls in supply, new players and new capacity will increase capacity until there is overcapacity. The consultants say that latecomers to the generation side will not see high profits and will eventually exit the industry. Installing peaking capacity here and there won�t work in such an environment, and companies will have to build a balanced, diverse, and appropriately scaled portfolio of assets. The winners will be integrated merchants with the capacity to back up risk-management capabilities with the right generation assets.
� Distribution
Right now there are at least 3,000 electricity and gas distributors. Profitability in this capital intensive and fragmented business sector will rely heavily on scale, regulatory rules that set the rate of return, price caps, and revenue caps, according to Andersen�s report. Strategies for growth include expanding scale by buying more distribution utilities or increasing the scope of services provided. Expertise in pricing and regulatory affairs, service reliability, and cost and capital efficiency are required to make it in this area. The report suggests successful delivery companies will be those that focus in one area of the business and don't �dabble� in several areas at the same time. They forecast considerable consolidation in this sector.
� Retail
Retail is the most uncertain and possibly most unprofitable of the market segments. The rules differ from state to state, customers are indifferent, and customer acquisition costs can end up being more than a customer�s lifetime value, according to the report. Complicating the retail side, are the three distinct customer classes: residential, commercial, and industrial.
�One size fits all� won�t work for the retail segment. Retailers may want to offer energy and nonenergy services. Success with these services will require scale and that suggests that new powerful entrants will be attracted to the market. For now, the incumbent utilities that have the ability to leverage their brand and asset positions will have the edge in retail. For the longer term, other retailers will be successful if they target specific consumer groups such as Greenmountain.com which appeals to environmentalists.
As change continues to grip the industry, many vertically integrated investor-owned utilities will spin-off some of operations seeking higher valuations for their stock. This will, in turn, create a lot of change and restructuring in the industry and more multibillion dollar mergers among utilities, the report concludes.
