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After the divestiture of the old AT&T in 1984, the Baby Bells (Bell Atlantic, Nynex, Southwestern Bell, Bell South, Ameritech, Pacific Telesis, and US West) became regional monopolies, and they could only offer local services. For long distance, they had to rely on inter-exchange carriers. Could the Baby Bells be compared to today’s electric utilities?
The old AT&T, MCI, and Sprint offered long distance or inter-exchange services. These networks may be roughly compared to the interstate transmission infrastructure of electric utilities. Some independents (e.g., GTE, Century Telephone, Rochester Telephone, and Citizens Utilities, often rural and smaller carriers) offered both local exchange and long distance services. There were notorious upstarts in the fray including WorldCom and Global Crossing. This regime did not last long when competition from digital cellular (Personal Communications Services) and new entrants, competitive local exchange carriers (CLECs), arrived. Could the new solar companies be compared to the competitive telecom entrants?
The result was telephone companies had to abandon their old organizational ways, as natural monopolies with geographically defined markets, and begin competing. The landline companies lost “minutes of use” and many customers to the wireless providers. The Baby Bells started buying each other and the long-distance carriers, eventually reconstituting themselves into the carriers of today. Verizon and the new AT&T are incarnations that have emerged in the aftermath of convoluted US telecom evolution. Will electric utilities of today undergo similar industrial restructuring – mergers and consolidation?
Admittedly, the comparisons are preliminary, and more nuanced parallels may be drawn; nevertheless, two lessons from the history of the telecommunications industry stand out. First, we cannot predict in advance who will lead the transformation in the electric utilities business. It is instructive that Southwestern Bell of San Antonio dominated the rollup leading to the new AT&T, not any major city telecom giant. A company’s assets, location, and prominence today are no predictors of tomorrow’s leadership.
Second, rather than competing with each other, incumbents are likely to merge so that only a few operators compete nationally. Forming fewer companies, say 3 to 5, with national scope and scale, might be a good survival strategy post mergers and consolidation.
Business strategy in the classical sense, as taught in business schools or purveyed by consulting companies, does not strictly apply to electric utilities. As regulated monopolies, they have unusual characteristics, including rate-of-return regulations, and must appease regulators as well as users and investors. They have attributes of both public sector enterprises and private companies. This mix has to change because, in the future, electricity prices will be set by markets through competition, as happens now with mobile telephone operators, rather than by regulators.
Utilities face the seemingly simple yet difficult strategy question: “What business are we in?” an issue they are unlikely to have previously confronted in their stable and predictable environment. Are utilities in the electricity, gas or energy business? Should they continue selling kilowatt hours, and should they also lease solar hardware, provide electricity storage, and provide grid electricity as insurance and back up?
Depending on the answers they choose, utilities may move inside homes, offices, and factories more than they ever have, and offer more services than kilowatt-hours. While futuristic, it is conceivable that they create service bundles that sell the benefits of electricity, for instance, illumination, comfort, refrigeration, heating, cooling, and motion, instead of kilo-watt hours. They could form partnerships with appliance makers, architects, and builders to craft new services, with “demand response,” energy efficiency, and information management solutions baked in. The unit of analysis might be a combination of the amount of electricity consumed and the performance attributes of the appliances. They may sell carbon-neutral services, e.g., a Zero Net Energy lifestyle. I believe there is scope for creative marketing.
Not all utilities will make the same choices. The need for competitive differentiation, as well as the threat to their revenue streams, makes fundamental business re-thinking critical. For if they do not define solutions, their competitors might; in fact, utilities may not lead the energy services revolution at all.
Which Companies Compete?
The entry of new firms specializing in distributed generation will, beyond a doubt, remake the electricity landscape. Yet the most transformative competition may be within the fraternity of existing utilities. Efforts to make competition manageable might result in a wave of partnerships, alliances, roll-ups, mergers and acquisitions. Unconstrained by geographically distinct service territories, existing utilities may seek customers everywhere, worldwide.
Lead image: Solar panel on roof via Shutterstock