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************************************************************************ Read SCIENTECH's free SourceBook Weekly article: "Re-Regulation? Many States Pushing for a Turnaround Toward Regulation" at: http://www.consultrci.com/web/rciweb.nsf/Web+Pages/SBEntrance.html ************************************************************************ Now your company can sponsor SCIENTECH'S daily IssueAlerts. Contact Chris Vigil at 505-244-7605 or at cvigil@scientech.com. =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH IssueAlert, September 26, 2000 The Wires Business as a Cash (Strapped) Cow By: Jon T. Brock, Director, Strategic and Competitive Intelligence =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D Victoria's Office of the Regulator-General in Australia ruled last Thursda= y that the state's five electricity distribution companies must reduce averag= e network charges by between 12 and 22 percent starting January 2001. ANALYSIS: There used to be a time not long ago when utilities were=20 strategically addressing electric deregulation by diversifying into new "growth" business= es, and in most cases many still are. Concerned about the impact competition will have on the industry, utilities have conducted studies and research to try and make themselves more appealing to consumers. The result is a flurry of activity to diversify. Some companies diversify their services in an attempt to be a "one-stop shopping" utility. Utilities across the U.S. are offering home security systems, mobile phones and other=20 telecommunications services. Then there are the "rational" utilities who decide to stay in the business that they know best =01) the wires business. This is due to the fact that the wires business still remains regulated at a decent return for the typic= al shareholder of what was the regulated utility and will become the regulated wires company. Let's take a look at some other countries that have=20 deregulated before the U.S. and see how their wires companies have fared. First, after the massive U.S. takeover of the British utilities (RECs) in 1996-1997, the British government enacted a new law in July 1997 that imposed a one-time windfall tax on the revised privatization value which originally had been computed in 1990 on privatized utilities. OK, so this is an anomaly. It is not usually a cost of doing business in the wires-onl= y environment. Second, in December of 1999, the Office of Gas and Electricity Markets (OFGEM), the U.K. gas and electric regulatory body, published final proposa= ls for new rates in the distribution business and for price caps in the supply business. The final proposals reduced distribution rates beginning on April 1 of 2000 (and it was not an April's Fool joke). Third, Australia's state of Victoria appears to be helping set the trend of making the wires business more efficient by mandating a reduction in their rates. They also ruled to set targets for different companies within the state to improve reliability by between 15 and 37 percent. It appears this "regulated" wires business is getting measured by a=20 "competitive" business standard. In any sense, lets bring it home. California has becom= e the summer poster child for examples in the electric industry. They have an unregulated wholesale market that is spiking while the retail market in one territory is open to feel the pain (price) of electricity while the other areas are "protected", at least at the end consumer level. But who eats the difference? The retailer of course. Well, the retailer in California just happens to be the wires company (incumbent service provider= ). So while PG&E is trying to figure out how to recover these astronomical gaps in what they pay for wholesale electricity and what they retail it for, they may end up eating it. This actually qualifies for that anomaly argument that the U.K. experienced because it should not be the norm. In a true deregulated market, wires should take care of getting electrons to customers while retailers should handle the commodity and value-added services. I know of only one state in the U.S. that is proposing this model for their opening date =01) Texas. Can wires survive on their own? You bet. But I believe there are trends forming that will have to be addressed by any company focusing on a wires strategy. The new wires companies will come under regulatory scrutiny to become more efficient. Their rates will be reduced and they will be expected to increase reliability. In other words, do more with less. This will mean two things: One, size is important. Scale always produces efficiency in one form or another. Second, these new companies will seek efficiencies in cost savings. This is one reason for the explosive growth in the supply chain and exchange areas of the utility industry. Do not expect your local regulator to stick to the cost-plus method of calculating rates for wires. This does raise an interesting question that I will save for another day. How does the wires company successfully raise investment capital for improv= ing its distribution system with such low rates of return? =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D Today's related article entitiled, "Lines of Argument: Can a "Wires-Only" Company Succeed in a Competitive Market" (January 2000), can be found in our SourceBook archive at: http://www.consultrci.com/web/infostore.nsf/Products/SourceBook Learn more about our Strategic and Competitive Intelligence products and services at: http://www.consultrci.com/web/rciweb.nsf/web/Depts-SI.html =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3DSCIENTECH is pleased to provide you with your free, daily IssueAlert. Let us know if we can help you with in-depth analyses or any other SCIENTECH informatio= n products including e-commerce and telecom in the electric utility industry. If you would like to refer a colleague to receive our free, daily IssueAler= ts, please reply to this email and include their full name and email address or register directly at: http://www.consultrci.com/web/infostore.nsf/Products/IssueAlert Sincerely, Jon T. Brock Director, Strategic and Competitive Intelligence jbrock@scientech.com =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D Feedback regarding SCIENTECH's IssueAlert should be sent to=20 jbrock@scientech.com =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH's IssueAlerts are compiled based on independent analysis by=20 SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAlerts are not intended to predict financial performance of companies discussed or to be the basis for investment decisions of any kind. SCIENTECH's sole purpos= e in publishing its IssueAlerts is to offer an independent perspective regard= ing the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy and telecommunications issues. Copyright 2000. SCIENTECH, Inc. If you do not wish to receive any further IssueAlerts from SCIENTECH, pleas= e reply to this message and in the body of the email type "remove."
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