Published In May 2000
Companies with deep pockets and locally strong brand names are providing services traditionally provided by electrical contractors and, in some cases, buying electrical contractors. Will these activities dramatically reshape the electrical construction market? Chronicling the Industry's Changes: The Series Continues This is the third in a continuing series of articles on significant changes in the electrical contracting business. Part One (January, page 65) provided an overview; Part Two (March, page 63) delved into the "consolidators" or "roll-up" companies in contracting. Part Four, to print in the July issue, will deal with the revolution in the power line, outside plant, and "broadband" contracting market segments. In the movie "A Bronx Tale," the main character-a kid nicknamed "C"-asks his hero, the local mobster, whether he would rather be loved or feared. That's a question being posed to electric utilities by many kinds of contractors today. Many utilities are offering their customers-and companies that they've never done business with before-services formerly the sole purview of mechanical, air conditioning, plumbing, and electrical contractors. In some cases, the services are offered on a stand-alone basis; in others, they are bundled together under a "facilities services" banner, with or without energy sales included. As a result of such new business ventures, utilities are buying mechanical and electrical contractors in many parts of the United States. Where formerly you might have faced a serious, $50 million competitor, you now may have one that is owned by a newly deregulated power company. The owner, perhaps headquartered outside your local area, has billions of dollars in sales and assets, and a large cash hoard. No one can, as yet, draw specific conclusions as to where this is leading. That is why Electrical Contractor magazine commissioned a special research effort, reflected in the detailed Table Two that accompanies this article. How it happened Power companies are investigating various new avenues of business resulting from industry restructuring and deregulation. For some, the construction contracting market is an exciting new option. Many of these companies have established energy service companies (ESCOs) as nonregulated subsidiaries. In addition, non-utility ESCOs, which must now compete with these nonregulated utility units, are looking at the same strategies. Consider PECO Energy. This Philadelphia-area power company decided to get into the construction and services business, via a subsidiary, Exelon. In October, it purchased six construction and service companies-including Fischbach & Moore, an ancient name in the electrical contracting business-and Syracuse Merit Electric. The company's Exelon Infrastructure operation acquired 5,000 employees that month. What's more, indications from PECO are that it plans to buy even more contractors. A company executive was quoted in a local business newspaper as saying that the October activities were merely the first phase of Exelon's acquisition efforts. Just across the state line is the market area formerly served only by the entity known as General Public Utilities (GPU)-the owner of Three Mile Island! In late December, GPU acquired MYR Group, the 11th-largest subcontractor on Engineering News-Record's list for 1998 (published in the fall of 1999). MYR's operations include an industry name as revered as Fischbach - L.E. Myers. At just $215 million, GPU was accused of overpaying for MYR (according to a report in The New York Times). MYR netted only $8 million in profit in 1998, on sales of more than $400 million. Yet, consider this for perspective: That purchase price was actually less than half of GPU's annual net profit! See Table One for a rough estimate of large utility operations or investments in the contracting business. About Table Two Electrical Contractor presents, in Table Two, information not found anywhere else: the current and future activities in construction of more than 50 electric utilities. Researchers, working with EFJ Enterprises, contacted these companies for specific information, which is presented in the three pages of tables. At heart, the effort was designed to discover whether utilities were becoming "owners" of important work to electrical contractors-by capturing customers in one way or another. If a utility "controls" a lighting or electrical system retrofit, it becomes very important to local contractors: Even if the utility elects not to do the work itself, it might have a major say in which contractor is hired to do the job. Where your local utility is missing from Table Two, it's very likely that the company either didn't return telephone calls, refused comment, or was unable to respond by our deadline. In taking a look at the Xthree? pages in the table, don't just look for your local utility. Many of these companies and their subsidiaries will be competing in regional markets; some may well attempt to be national. Where's the fire? What's not obvious, perhaps, is why the "gold rush" mentality has developed. Were utilities really waiting for generations for the coming of industry restructuring, so they could get into the construction contracting business? No. Utilities apparently have gone into the contracting business for a variety of reasons, judging from on-the-record comments, off-the-record mumblings, anecdotal evidence, and reports from various sources. The major reasons are outlined in a "we'll outdo the contractors" thought process which, for some companies, evolved something like this: - They know the electrical business; - They know contractors; - They know that they are smarter than contractors; therefore; - Getting into the contractor business was a no-brainer. Yes, this is arrogant. According to a report from one source-unconfirmed as yet-at least one utility is reportedly contemplating selling the contracting companies they bought only a short time ago. One guess might be that any utility considering such an action belongs in this first category-buyers of contractors without a plan for integrating them. Save customers energy, create happier customers. Roughly a decade ago, many other companies had experience in demand-side management programs. They saw that customers were thrilled with saving money on their energy bill-without a kilowatt-hour rate cut. In the coming competitive environment, this seemed like a natural course of action for some utilities. The belief that mechanicals can save customers more energy than electricals.is one reason why most utility acquisitions (thus far) have been of mechanical, rather than electrical contractors. Bundle services with energy sales. Here's an idea that's hard to explain: Some utilities have "bundled" the sale of energy (kilowatts) with service contracts, with the goal of capturing "all" of a customer's energy uses and needs. One locus of such activity is Philadelphia, where such appeals to hospital customers have lured them away from their long-time electrical contractors. A key question here: If energy pricing is very tight in competitive markets (as it is said to be in Philadelphia), and if the utilities are coming in far below the contractor's prices on the services side: where are profits to come from in such bundled deals? Some observers believe the utilities will bleed real money as a result of such deals, and that contractors who are forced to compete with them will have to wait until the utilities get further up the learning curve to see the return of reasonable prices. Contracting is part of the facilities services business. Two large contracting companies-Encompass (formed by the merger of Group Maintenance America and Building One Services, two roll-ups) and EMCOR Group-are giving this answer: They're not in the contracting business; they're in the facilities services game. The same answer is coming from at least one major utility (First Energy of Ohio), and the big kahuna in the energy services business, Enron. The idea is to provide electrical, mechanical, and other facilities services to a customer . . . with or without the energy sales bundled in. Contracting is part of an infrastructure game. This is the answer that PECO Energy and its Exelon subsidiary are giving. They're not out to get on the other side of the meter and get into "inside" electrical (or mechanical) contracting, at least not necessarily. What they are interested in, they say, is providing all initial installation and maintenance services in power line, telephone, cable television, and broadband work, whether the wires are hung from poles or buried in the ground. What can an electrical contractor do? Your situation is very much like that of the bus-driver father of "C" in the movie referenced at this story's start. He worked hard, did his job day after day, and turned down an opportunity to join the mobster in his line of work. You're not glamorous like a utility company-not multibillions huge, not traded daily on the stock market, not a glittering local brand name. Your company just goes out and serves customers, day after day-as it has done, perhaps, for decades. "It's the guys who go to work day after day (and who are honest) who are the real heroes," the bus-driver father tells his unhearing son, or words to that effect. Perhaps the best strategy to combat utility competition is just that-a nose-to-the-grindstone approach. Perhaps it won't be all that easy for a utility subsidiary to pry your customers away, if you are providing them with the services they need, in just the way they need them, at just the right time. It's not dramatic, and it's not as sexy as forking over millions to buy MYR Group, but it's a strategy still open to every reader of this magazine. What's Next from the Utilities? There are certain basic conclusions that can be drawn about the utilities' involvement in the contracting business. Here are a select few: - Utilities with mechanical contracting subsidiaries will do electrical work (especially lighting retrofits) along with mechanical work, when they do work for customers. This seems to be a certainty. - GPU might have purchased MYR for its line expertise, but the company's subsidiaries do inside work as well, as does Fischbach & Moore and Syracuse Merit, among others. - Contractors who previously might have seen growth constrained by cash flow and funding do not have such problems when owned by a utility. It's not ridiculous to foresee an aggressive person getting the helm of a utility-owned company and running riot with it. - Some utilities will exit the contracting business; others will get into it. It is easy to envision more acquisitions of contractors by utilities, as most states are yet to deregulate the retail sale of electric power-even in states where deregulation laws have been passed. - Unlike the case with the publicly owned contractors (EMCOR and Encompass, along with Integrated Electrical Services and other companies), utilities can pay cash for such acquisitions-instead of cash-and-stock-and thus are not subject to market-price limitations on how much and what they can pay to buy a contracting firm. - Some companies will take to the contracting game. Exelon, for instance, has recently told a local newspaper that the October acquisition of six large contracting companies was really "Phase One" of several phases of acquisitions. - It's conceivable that a utility could buy a contracting company. Integrated Electrical Services, with its low stock price, is an attractive target as of early 2000. Consider: Quanta Services, the power line and broadband consolidator, is more than one-third-owned by Utilicorp. - One possibility worth thinking about: A local utility gets into the contracting business, doesn't know what it is doing, and wreaks havoc with the local contracting marketplace-both in terms of market prices for quality work, and also the availability of manpower. - Utilities buy materials direct, obtaining them more cheaply than you can. According to reports in the Washington, D.C., region, at least one local utility there is selling materials to electrical contractors at prices below those charged by local electrical distributors. Several members of NECA's area chapter claim they have purchased wire and cable at prices as high as 10 percent below distributors' quotes for the same item. -- J.S. SALIMANDO is a Vienna, Va.-based freelance writer based in Vienna, Va., specializing in electrical, voice/data/video, construction, and integrated technology issues. He can be reached by e-mail at JSALI@cris.com. Twice monthly he also writes the "Web Prowler" column on Electrical Contractor magazine's Web site: www.ecmag.com.