Riding the wave: Utilities go shopping

Riding the wave: Utilities go shopping

Valkenburgh, Van

PP&L Resources Inc.’s recent acquisition of McClure Co., a Harrisburg-area mechanical contractor, is part of a larger trend: development of utility companies into one-stop shopping centers.

William F. Hecht, chairman, president and CEO of PP&L Resources, said in a press release the acquisition of McClure would “further expand PP&L Resources’ ability to offer energy-management, heating, ventilating and air-conditioning services … It also expands the company’s efforts to gain revenues outside the regulated side of its business.”

PP&L intends to acquire Penn Fuel Gas, a natural gas and propane company, as well, according to Hecht.

The trend for utilities to buy other companies comes at a time when a deregulated market opens the door for others to encroach on what had formerly been a utility monopoly.

“PP&L Resources has diversified substantially,” said Sonny Popowski, state consumer advocate. “It’s a way of strengthening them for competition through mergers and acquisitions.”

Ned Gibble, president and COO of McClure, said Pennsylvania is the first state to go through this kind of deregulation, although other states are in the process.

“Utilities have to sell from a different perspective. They have to become integrated energy-management services. That’s what our company brings to the table,” said Gibble.

Gibble said no changes would come to McClure’s management team or philosophy. “It’s a hands-off operation,” he said.

Gibble said McClure’s strong regional presence was attractive to PP&L. McClure’s has annual revenues of more than $75 million.

In the mechanical contracting and HVAC world, though, there are concerns about what can happen when large companies like PP&L enter the market.

Jim Craft, an owner of James Craft & Son Inc., a York heating contractor, said he thinks it’s important to “make sure a benefit a company has under the (Pennsylvania Public Utility Commission) does not filter into the private sector.”

Craft worries that utility money may be used to subsidize the contractor, allowing him to outbid his competitors. “I think there should be some legislation or PUC ruling,” he said.

Craft also worries about the effect on the consumer. “Ever tried calling a utility and talking to a real person?” he asked.

Popowski shared some of his concerns. “There is a potential down side,” he said. “You’re talking about a company that still basically has monopoly services. The thing you have to look out for is cross-subsidies and an unfair competitive advantage. If they were to overprice one portion of the business, then underprice the other, they could subsidize their competitive business.”

The Keystone Chapter of Associated Builders & Contractors Inc., Manheim, has been watching this issue closely.

Lori A. Snoberger, vice president of government affairs for ABC, said her group supports open competition, and there are many positives to deregulation, but there are things to watch out for.

“As a result of deregulation, competitive services such as private-contracting activities are now viewed as important revenue sources for utilities. The greater the customer list for utilities, obviously the more opportunities to supply electricity. By entering the construction market, the potential customer list greatly expands,” said Snoberger.

“However, cross-subsidization, using ratepayer dollars raised from the regulated side of the utility to promote activities of an affiliate, non-regulated entity, became a means to an end. Utilities provide contracting services as a way to generate more customers,” she said.

Snoberger said ABC has filed comments in response to PUC proposed regulations which would establish a code of conduct for utilities and require legal separation between regulated and nonregulated companies.

Snoberger also said regulated entities taking possession of nonregulated companies could lead to higher costs for consumers, because the larger utility companies could edge competition out of the market.

“For example, customer lists are everything, and utility companies probably have the most enormous marketing leads. Can the average contractor’s customer list compete with theirs? Absolutely not.

“Is it fair for a regulated entity to provide its nonregulated affiliate with this information? Maybe, if it’s available to everyone. But at this time, that is not the case,” she said.

But Dan McCarthy, a spokesman for PP&L Resources, said there is nothing to worry about with PP&L and cross-subsidies.

“The PUC prohibits cross-subsidies, and we’ve set up rigorous checks and balances,” McCarthy said.

He said McClure is a subsidiary of PP&L Resources, which is separate from PP&L Inc., the regulated company.

Furthermore, McCarthy said there is no sharing of customer lists between the regulated and unregulated companies. “The delivery business cannot share lists with anyone.”

McCarthy said the nonregulated companies can share, “but there’s not a competitive advantage. Everyone is starting out in the same place.

“We’re sensitive to the issue of cross-subsidizing. It’s been a major topic in the restructuring case, so we’re very aware of the concerns,” McCarthy said.

Copyright Journal Publications Inc. Jul 17, 1998

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