NOTE NUMBER 227 22378 viewpoint MARCH 2001 Multi-Utilities: Trends Dirk Sommer Dirk Sommer is a Private Blurring Industry Boundaries Sector Development Specialist at the World The prospect of cost savings, increased market share, and other Bank. He has worked competitive advantages is prompting more and more utilities to cross primarily in the water sector in countries such traditional industr y lines and offer ser vices in several sectors. The jur y T H E W O R L D B A N K G R O U P PRIVATE SECTOR AND INFRASTRUCTURE NETWORK as Cambodia, India, is still out on whether the cross-sectoral strategies pursued by “multi- Nepal, Nigeria, and South Africa. utilities� will increase shareholder value. Even if cross-sector strategies make sense for individual firms, what are the long-term implications for consumers? This Note offers an over view of recent trends—with par ticular focus on horizontal integration. The question of how gover nments—par ticular ly in developing countries—should respond to to the emergence of private sector multi-utilities is explored in a companion Note. In most countries, electrical power, natural gas, mation and communications technology—is water and sewerage, telephone service, and leading many firms in both industrialized and other utilities have traditionally been regarded developing countries to move from supplying a as distinct industries, with separate firms pro- single service to a “multi-utility� strategy in viding each service. Exceptions to that rule are which they offer two or more traditionally dis- not unknown, however. Cape Verde, Colombia, tinct services. Argentina’s SEMPRA, for exam- Costa Rica, Gabon, and Morocco, for example, ple, offers electricity and gas services (figure 1). have long provided multiple utility services M�V integrates transport and telecommunica- through integrated state-owned enterprises. tions services in Hungary. In Chile, Metrogas Over the last two decades, governments offers gas and telecommunications services. around the world have sought to raise the qual- Some of the large infrastructure companies in ity and expand the reach of utility services the European market, including Endesa, through deregulation and private sector Iberdrola, RWE, Scottish Power, Suez participation. The opportunity offered by Lyonnaise des Eaux, and Vivendi have diversi- deregulation—coupled with technological fied more broadly into an even wider range of developments, particularly in the field of infor- sectors and services. M U L T I - U T I L I T I E S : T R E N D S BLURRING INDUSTRY BOUNDARIES Levels of integration access railroads. While these vertical strategies Horizontal integration of infrastructure services raise important policy issues (such as when a util- has occurred both at the wholesale and the ity acquires upstream gas assets and tries to block retail (distribution) levels. At the wholesale entry to the generation sector by limiting access level energy companies are seeking to leverage to gas supplies), they are generally well under- trading skills between the gas and electricity sec- stood by regulators and are not discussed here. tors. Some companies, notably Enron Corp- oration and Williams Corporation in the United Strategic combinations States, have started to apply these skills for the Most of the current momentum in multisector 2 development of bandwidth trading. integration involves telecommunications in one At the retail level, multi-utility strategies have form or another, but momentum is growing in taken the form of either leveraging the physical energy as well. infrastructure as a conduit for a range of ser- vices, integrating retail services and customer The blurring of cable, TV, and telephone relations, or integrating separate utilities under The momentum in telecommunications is the same corporate umbrella. driven by the convergence of voice and data ▪ Integration of physical networks. Technological services. Until recently, public voice telephony advances allow companies to supply cus- and cable television were distinct industry seg- tomers with more than one service over a ments that used separate physical communica- single backbone. Many operators offer cable tion conduits. Advances in technology and the television, voice telephony, data services, rise of the Internet over the last decade have and remote applications for other utility made it possible to offer services independent facilities over a single communications net- of specific network platforms and to provide work. Where distinct delivery conduits must data, voice, and video applications over be maintained for technical or other rea- telecommunications and broadcast networks. sons, firms may exploit existing rights of way As a result, Internet service providers and and save on installation and maintenance by cable television companies are now able to laying and maintaining parallel physical upgrade their networks to offer “voice over networks. Internet� services that are a competitive alterna- ▪ Service integration. Two or more services may tive to conventional telephone services. Voice- be marketed to customers in a bundle. Firms over-Internet technology makes it possible to that integrate their services at the marketing route telephone connections over networks tra- level may seek to leverage an existing brand ditionally licensed only for data services. or set of customer relationships and cut costs At the same time, telecommunications by servicing customers who subscribe to a providers are rushing to deploy technologies package of services. that will enable them to provide data services ▪ Corporate integration. Even if services are not with multimedia features over their existing delivered as a service bundle and are not dis- copper networks. At the service level, con- tributed through a common channel, inte- sumers may choose from a variety of integrated gration at the corporate level may offer communication packages that often do not dif- synergies. Firms may benefit from the assets ferentiate between voice and data applications. of acquired companies—in government rela- tions, business development, financing The rush into telecoms capacity, buildings and equipment, or The liberalization of retail telecommunications administrative services. around the world has encouraged a rush of new Infrastructure companies have also diversi- entrants to the industry. Energy utilities, rail- fied into related sectors as part of a vertical inte- ways, and highway and mass-transit authorities gration strategy, for example, by combining gas often are well placed to move into telecommu- pipelines and power generation assets or by nications by exploiting rights of way, existing combining management of port facilities and networks, and other assets previously used only Figure Multisector utilities—service bundling and parent-subsidiary examples by country 1 Legend: Country, Parent company: Subsidiaries Brazil, Companhía Força e Luz Cataguazes-Leopoldina: Energipe, Teleserv, Telecabo Poland, United Pan-Europe Communications: United Kingdom, United Utilities: North West Water, Norweb UPC Telewizja Kablowa France, Suez Lyonnaise des Eaux: Lyonnaise des Eaux, Tractebel Hungary, Matáv: Matáv Kabel TV Germany, E.ON: E.ON Energie, Gelsenwasser Hungary, M�V: PanTel Chile, Enersis: Chilektra, Agua Potable de Lo Castilloa Czech Republic, Ceske Drahy (Czech Railways): CD Telekomunikace 3 Slovenia, Slovene Railways: Electricity T&Db Cable Telemach Communications Services television Russia, St. Petersburg Metropolitan: MetroCom Water Transport Gas Telecom- T&Db munications Australia, TXU Australia Holdings: Eastern Energy, Westar-Kinetik Energy Brazil, Eletropaulo Metropolitana Eletricidade de São Paulo: Argentina, SEMPRA Energy: Empresa Eletropaulo Telecomunicações Distribuidora de Energía Atlántica, India, BSES, BSES TeleCom: Orissa Camuzzi Gas Pampeana, Camuzzi Gas del Sur Estonia, Eesti Energia: Eesti Energia Televirk Spain, Endesa: AUNA United Kingdom, Dee Valley Group: Republic of Korea, Korea Electric Power Company: Powercom Dee Valley Water, North Wales Gas Malaysia, Tenaga Nasional Berhad: Fibrecomm United States, NiSource: IWC Resources United Kingdom, Centrica: British Gas Trading France, Vivendi: Compagnie Générale des Eaux, Cegetel United States, Williams: Williams Communications Group United States, Enron: Enron Communications, Enron Broadband Services Chile, Metrogas: Manquehue Net a. Enersis entered the water sector in 1996 with the acquisition of Lo Castillo, but sold its interests in water utilities, including Aguas Cordillera and Aguas Puerto in 2000, following a takeover by Spanish utility Endesa. b. T&D is transmission and distribution. Note: Most multi-utilities currently offer services in no more than two sectors. A handful have multisector operations, however (for example, Vivendi and Suez Lyonnaise des Eaux cover four sectors). Where there are more than two sectors only the two main ones are shown in the figure. to meet internal operating requirements. By By the end of last year about a third of the leveraging existing assets, companies cut some 200 investor-owned electric utilities in the of the costs and delays of rolling out a new net- United States were offering telecommunica- work. The telecommunications services offered tions services under a variety of business mod- by the new multi-utilities can range from fee- els, usually jointly with an internet service based wholesale access (“the carrier’s carrier�) provider or local telephone company.1 In to retail telecommunications services bundled Europe, alternative communication infrastruc- with other utility services. Several electric utili- ture has played a crucial role in fostering ties around the world are field testing technolo- competition.2 Throughout Latin America, elec- gies that will allow voice and data to be tric utilities already control large segments of transmitted directly over the electric power grid. existing fiber optic networks. In Brazil, for M U L T I - U T I L I T I E S : T R E N D S BLURRING INDUSTRY BOUNDARIES example, utilities and transport infrastructure Conclusions operators are cooperating in the development The traditional sectoral boundaries that have of long-distance backbones and new metropoli- defined utility industries are eroding. Although tan communication networks—in competition new patterns of integration have not yet clearly with the existing telephone companies. emerged, firms are racing to capture the poten- tial advantages of offering two or more utility serv- viewpoint The rise of “energy companies� ices. Newly formed multi-utilities have promised In retail markets being opened to competition, cost savings and other benefits to their share- is an open forum to utilities are betting that bundled services—or holders and customers, but the jury is still out on encourage dissemination of “one-stop shopping�—will build customer loy- the question of whether integration will deliver as public policy innovations for alty and stimulate demand for value-added serv- promised. Even if integration makes sense for private sector–led and ices such as energy-saving and safety-enhancing individual firms, it is certain to have unforeseen market-based solutions for products and services, as well as dual-fuel heat- policy and regulatory implications, particularly in development. The views ing and cooling devices. Customers who are able developing countries. How then should policy- published are those of the to choose to receive combined deliveries of nat- makers respond to new approaches to the deliv- authors and should not be ural gas and electricity can often save money. ery of utilities services so as to safeguard public attributed to the World A recent review of competition in Britain’s interests without stifling innovation through Bank or any other affiliated liberalized residential gas and electricity restrictive regulatory controls? This question is organizations. Nor do any of markets—where the gas company offers dual- explored in a companion Note. the conclusions represent fuel services to 1.9 million customers—found official policy of the World that consumers’ primary motive in switching Bank or of its Executive from one supplier to another is to save money, Directors or the countries and that they are more likely to switch if they can Notes they represent. save 15–20 percent off their fuel bills.3 Only 1. Edison Electric Institute (EEI). 2000. “Leaders of firms that provide both gas and electricity serv- the Pack: Shareholder-Owned Electric Utilities in To order additional copies ices can hope to reduce prices by that margin. Telecommunications.� [www.eei.org/issues/news/b%2D contact Suzanne Smith, The study also found that many customers val- matter/telebak.pdf]. managing editor, Room I9-017, ued the convenience of dealing with a single 2. For details on alternative networks in the European The World Bank, provider, even without discounts. In the first Union and Eastern and Central Europe, see European 1818 H Street, NW, three years after the phasing in of competition Commission, “European Survey of Information Society Washington, DC 20433. (in April 1996) about 60 percent (or 3 million) Projects and Actions, Synthesis of Master Reports, Central of all customers who had switched their gas sup- and Eastern European Countries,� 2000. [europa.eu.int/ Telephone: plier were dual-fuel clients. Only about half ISPO/esis/default.htm]. 001 202 458 7281 received a discount for taking both fuels. 3. Office of Gas and Electricity Markets (Ofgem, Fax: United Kingdom). 1999. “A Review of the Development 001 202 522 3181 Add water and stir. . . of Competition in the Domestic Gas Market.� Email: Combining water with other utility services is a [www.ofgem.gov.uk/docs/dcmdec.pdf]. Ofgem. 1999. ssmith7@worldbank.org more recent phenomenon, with prominent “Electricity & Gas Competition Review: Research Study examples in Australia, Europe, and the United Conducted for Ofgem.� [www.ofgem.gov.uk/public/ States. Although evidence of actual cost savings pub01.htm]. Printed on recycled paper is difficult to obtain, the first British utilities to adopt a multi-utility strategy—United Utilities Dirk Sommer (dsommer@worldbank.org). and Hyder—announced before their merger that they projected savings of between 3 and 5 percent of operating costs, mainly in overhead. If experience in the British energy markets is any indication, customers may indeed benefit from the resulting cost savings, and from the convenience of relying on a single supplier for water and energy. This Note is available online: www.worldbank.org/html/fpd/notes/