Don't be scared: Market demands utility diversification

The definition of "diversify" in relationship to commerce is to expand into new areas of business. Market

pressures toward diversification within the electric utility industry these days have dramatically decreased.

Instead, the media reports of retreats from ventures.

Alliant Energy Corp., for example, sold its ownership in a joint electricity-trading venture to Cargill Inc. to

keep company investments focused in three areas: Alliant's domestic utility, wholesale power plants and

international investments. Overall, diversification is being thwarted by the energy trading scandal. It began

with Enron irregularities, and, recently, Duke Energy Corp. admitted to 23 artificial energy trades used to

raise volume on the electronic trading platform.

So, we see both a retreat and a holding pattern, with the tendency being to "stick to our knitting" in the

current fluctuating market. With stock prices overall depressed, companies' options are limited as far as

expansion goes, but the market still demands action.

The regulated market is not a place to secure high returns, so the lure of higher return on investment (than

those offered by the regulated business) provides a compelling argument to expand into unregulated

businesses. Additionally, there are only two sides to the ledger, income and expenses.

An organization can cut expenses by downsizing, resizing or right-sizing only so far. The other side of the

ledger, income, must continually increase or organizations stagnate and wither. This is where diversification

comes into play.

Professor Aneel G. Karnani of the University of Michigan Business School stated that there are five "possible

growth directions" or methods of creating shareholder value.

Market penetration: expanding from the current business by gaining increased market share;

Globalization: expanding in the same business, but in a different geographic location;

Vertical integration: expanding either backwards or forwards;

Synergy: expanding into another related business; and,

Conglomerate: expanding into different unrelated businesses.

This begs the question, "Are you examining all your options, and how is that examination taking place?"

Market parameters are constantly changing, many of them lately in the downward direction. What role will

your organization be playing in this brave new world? The financial strategists can play a significant role in

setting direction, but are trigger points being created that will drive to tangible, actionable initiatives? The

chosen strategy needs to be based on your company's own resources and competitive position.

Consider briefly each of the five growth directions. First, consider market penetration, which requires

increasing market share or acquiring a larger piece of the pie (i.e., energy sales increase). This can be

accomplished by acquiring additional customer territory, by increasing customer saturation through economic

development efforts, or by enabling customers in the existing territory to consume more energy by customer

class. (Again, economic expansion being the key driver.) For the latter, there should be metrics in place that

track results of your economic development efforts. Ask penetrating question to determine whether they are

really producing results.

Also, what metrics are tracked in relation to globalization? How large do you need to be before expanding

beyond your local territory becomes a viable option? Organizations' valuations are changing dramatically

today and will move (either up or down) in the near future. What are the drivers for such migration and do

you feel that you have some knowledge of the direction?

Third, vertical integration has its own value as a contribution to growth. While moving the transmission,

generation and regulated distribution into different segments, it does not mean a divestiture at the holding

company level. Greater control over the resource supply chain to the customer premise has its merits. What

metrics are established that will value further vertical integration? Where are the opportunities that have

surfaced due to the action, or lack of action, in the energy marketing realm?

Additionally, synergy between the electric industry and the gas industry has historically occurred. Many

savings result when one utility supplies both electric and gas energy to a geographic area. Savings can be

derived from areas other than acquisitions; consider creating agreements with cable, fiber and telephone

companies to jointly install or own new facilities. Some have experimented with power quality services,

security services or specialty lighting and engineering functions.

Finally, conglomerates are always an option. This path to growth assumes that the investor desires company

management to make diversification decisions rather than themselves. This is a risk-laden path to growth

and seldom achieves the desired outcome.

Utilities are finding themselves between a rock and hard place. It's a good time to do what you do best, keep

the lights on and make solid plans for the future, but don't neglect developing action plans that include

monitoring established metrics. These metrics must be created to trigger action when target set points are

met. Only then can your organization move at a speed that ensures future success.