The utility business is unlike other core segments for distributors. That's because the customers, products, market traditions and knowledge needed to succeed in the utility market are much different from those required in the commercial, industrial and residential markets — which we covered earlier in this series on electrical distributors' key markets. Because of these differences, far fewer electrical distributors pursue the utility business.
All the same, it's still a surprisingly sizable market for many companies in the electrical wholesaling industry. This article is intended as a training guide or refresher course for salespeople, new employees or support staff at electrical distributors, manufacturers or reps for utility products.
According to the 2002 sales forecasts in Electrical Wholesaling's November 2001 issue, electrical distributors will sell about $5.8 billion in utility products this year — approximately 7.7 percent of all electrical products sold.
These products include, but are not limited to, pole-line hardware, high-voltage wire and cable, transformers, fuses, cutouts, panelboard equipment and safety supplies, as well as MRO supplies such as metering equipment, tools and replacement lamps for use at generating plants. For more information on electrical equipment and related supplies that distributors sell to utilities, check out “Key sales opportunities in the utility market” on the adjacent page.
As is the case in all markets, you're known by the lines you carry. One independent manufacturers' rep who has sold utility products for years says an electrical distributor is really not a player in the utility market if it does not carry a strong switchgear line such as S&C Electric Co., Chicago, Ill., which dominates the switchgear market; a good line of transformers; and one of the primary high-voltage wire and cable manufacturers, such as General Cable Corp., Highland Heights, Ky., or Southwire Co., Carrollton, Ga.
Distributors that have succeeded in supplying utilities with their emergency, MRO or general supply needs tend to be either full-line electrical distributors with a time-tested specialty in the business — some examples include Border States Electric Supply, Fargo, N.D.; Graybar Electric Co., St. Louis; Kriz-Davis, Grand Island, Neb.; and Stuart Irby Co., Jackson, Miss. — or they're one of the several dozen specialist utility distributors that devote their entire business lives to serving utilities' supply needs.
The full-line electrical distributors with well-developed utility businesses tend to be quite large. For instance, the utility arm of Stuart C. Irby Co. supplies more than 418 electric utilities. Those utilities, in turn, service 12,586,630 electric meters — 10 percent of all the meters in the United States. Some of the reasons electrical distributors get involved in the utility market are deeply rooted in the electrical wholesaling industry's history. Graybar, for instance, has been in the utility business since the turn of the century, when many of the first power distribution systems in the United States were being built. The only markets for electrical supplies back then were in towns and cities where power companies were beginning to provide electrical service. Graybar set up many of its first branch locations in those markets to supply companies doing construction and maintenance of the new power grids.
As power distribution systems grew in the United States, many markets continued to have only one or two distributors that served utilities. This trend holds true today; in many metropolitan areas, just a handful of players competes in the utility market.
Most of the action for utility distributors is in products for the construction and maintenance of local distribution systems. This mix of products depends on whether the distribution systems in a distributor's market are underground, overhead or a combination of both.
Overhead distribution systems, in which the power runs along poles to local customers, were for years the service of choice. Utilities sent the power over high-voltage lines to substations, where it was redistributed to local customers via power poles. At the point of service, the power is stepped down with transformers to a voltage (most often 120/240V) that customers can use in their electrical systems.
For some time now, most new utility distribution systems have used underground service, where conductors run underground to customers from utility distribution substations. The power is produced at the utility generating plant and sent along overhead transmission lines to utility distribution substations, where it goes underground for distribution. The underground service goes first to pad-mounted distribution transformers and then on to the local hook-ups at the appropriate voltage for use by the utility's customers.
Although the initial cost of installing underground distribution systems is higher than that of overhead distribution systems, underground systems tend to be more reliable. There's less maintenance and repair because underground systems are protected from many causes of outages that overhead distribution systems must contend with, such as lightning strikes; automobiles crashing into power poles and knocking out service; storm damage; ice build-up and wet or snow-laden tree limbs that fall into distribution lines.
Knowing the Players
Utilities are commonly divided into three types:
Investor-owned utilities — These are the largest utilities and — until fairly recently — tended to buy direct for most of their products. They serve thousands of customers.
Co-op utilities — These utilities, including the Rural Electric Associations (REAs,) tend to buy more frequently from distributors, and often serve smaller metropolitan markets or rural areas.
Municipally-owned utilities — These utilities service a small market area, often a town, city or county.
Utilities burn a mix of fuel to create power. According to the Edison Electric Institute, Washington, D.C., coal accounts for the lion's share of the generation mix at 50.8 percent, followed by nuclear (19.7 percent); natural gas (15.9 percent); hydroelectric power and other renewable power sources such as solar and wind (10.7 percent); and fuel oil (2.9 percent).
The Uncertain Future
All three groups of utilities face a tremendous amount of change because of utility deregulation. While deregulation has gotten a bad rap because of the Enron fiasco and last year's power crisis in California, it's not going away anytime soon. All the talk about utility deregulation started a few years ago. A new ruling, buried in the same Energy Policy Act (EPACT) that changed the lighting and motor markets, said electric utilities would no longer have a monopoly on the geographic market areas they served, and that utilities could compete for any customers they wanted and send them the power over the existing power grid, a maneuver called “retail wheeling.”
This is very similar to what happened to the telecommunications industry when the federal Justice Department deregulated the business in the early 1980s. AT&T lost the monopoly it had with local telephone and long-distance service. Local telephone service is now provided by the “Baby Bells” such as Bell Atlantic and Southwestern Bell. New competitors such as Sprint and MCI were also able to compete for the long-distance market, which for many years was AT&T's private domain.
Deregulation will mean truly revolutionary change for the electric power industry, too. Historically, things never changed too fast with electric utilities. Until deregulation, there wasn't much pressure on utilities to change. Most had a lock on the market area they served, a guaranteed customer base and regular rate increases. For years, most electric utilities grew at a slow-but-steady pace in the low single-digits. That's all changing fast because of utility deregulation.
Deregulation is putting pressure on utilities to streamline operations and cut costs, and some electrical distributors have seized on this need as a sales opportunity. For instance, Border States Electric Supply partners with utilities to provide them with customized supply-chain solutions aimed at delivering dramatic reductions in total cost, improved service levels and greater efficiency.
Here are some other key trends to keep your eye on as deregulation progresses and the utility market changes:
Large utilities are gobbling up smaller players. To create the critical mass that many observers of the utility industry believe utilities will need to provide adequate service in the future, mergers and acquisitions are sweeping through this business. According to the Edison Electric Institute, at least 66 mergers of utility companies have been completed since 1992. Some industry analysts believe utilities will need a customer base of at least 5 million meters to survive, a colossal number for even most of the larger utilities today. All of this churning can disrupt many business relationships that distributors have had in place for years. On the flip side, this change may create new sales opportunities, as the acquires look for the strongest distributors in markets new to them.
Electric utilities from outside your market area will try to sell more than just their power. The fact that your customers may buy their power from other utilities may not seem like much of a competitive threat to electrical distributors on the surface, but the services that they will offer will definitely compete with the service some of your customers now provide. Along with selling kilowatts, many utilities have always offered other services, such as the installation and maintenance of street lighting for towns, counties and states.
Look for utilities in your market area to offer much more extensive packages of services, such as the design, installation and maintenance of indoor lighting, power quality and power distribution systems for industrial facilities, and sophisticated metering packages that allow their customers to analyze their power usage. The idea of a utility fielding its own installation crew, whether made of its own employees or of electricians sub-contracted from contracting firms, presents several potential challenges for your customers. The installation, maintenance and design is obviously in direct competition with the services electrical contractors already provide. This practice raises another issue to watch because utility workers install electrical systems to specifications of a different safety code than do electrical contractors, which gives the utilities a price advantage.
MDU Resources Group Inc., Bismark, N.D., has quietly emerged as a force to be reckoned with in the electrical contracting business through the acquisition of three electrical contractors in 2001. Last year, the company, with $2.2 billion in sales from a diverse assortment of energy holdings, construction companies and related businesses bought Bell Electrical Contractors Inc., St. Louis; Capital Electric Construction Co. Inc., Leavenworth, Kan., and Oregon Electric Construction, Portland, Ore. Its stable of electrical contractors also includes Wagner and Smith, Dayton, Ohio; International Line Builders, Portland, Ore.; Harp Line Construction Co., Kalispell, Mont.; and Pouke and Steinle, Riverside, Calif. These companies are part of MDU's Utility Services Inc. (USI), which had 2001 revenues in the neighborhood of $400 million, and provides electric, natural gas and telecommunications utility construction, as well as interior industrial electrical services, exterior electrical work and traffic signaling.
Acquisitions and mergers are reshaping the utility market on the electrical supply side, too. Utiliserve, Corinth, Texas, which was incorporated in 1999 as a platform company and is now comprised of several regional electric utility distributors: Temple Inc. of Corinth; Vanyo Inc., of Somerset, Pa.; Power Supply Inc., Matthews, N.C.; and Rigby Electric, Kingstree, S.C. A fifth company, National PowerX, is a packaging company specializing in transmission and distribution lines, substation packaging, catenary and transit packaging. Two related divisions, metering and recloser/hydraulic tool repairs, round out the companies that formed the basis for Utiliserve Inc. Originally formed as electric distributors, all the Utiliserve companies are now expanding into other utility-related areas, such as gas, fiber optics, telecommunications, cable and security. These companies, which have a total of 210 employees, sold $214 million in utility supplies through 30 locations.
Distributors are banding together in consortia. In a cooperative effort, some distributors of utility products pool their inventories to help each other when storm damage exceeds a member's inventory capabilities. The 19-member National American Association of Utility Distributors (NAAUD), Lady Lake, Fla., is a group of distributors nationwide with $1.2 billion in combined utility product sales that stock $180 million of inventory from 30 manufacturers in 170 locations across North America to service storm emergency needs.
Competing for customers will motivate utilities to cut operating costs. Deregulation is forcing utilities to rethink how they purchase, stock and distribute electrical products that they use for their power systems, as well as MRO needs at their generating facilities. These are services distributors can provide.
Utilities are getting into the installation and design end of the energy conservation market. In search of logical market extensions from their core business of providing power, many utilities are purchasing energy service companies (ESCOs), which design, install and service energy-efficient electrical systems for many customers of electrical distributors. There are about 60 ESCOs in the United States, and they tend to focus on big installations with Fortune 1,000 corporations, schools, hospitals, universities and government offices. Many ESCOs are members of the National Association of Energy Service Companies (NAESCO), Washington, D.C., the largest association of ESCOs, and already operate as subsidiaries of utilities.
These changes in the market have affected what utilities expect from distributors of utility products. Stability is a key concern, as are product and market expertise. According to one utility specialist, electric utilities are looking for much more than just the lowest price when they shop for a distributor to service one of their coveted long-term contracts:
An effective inventory management system. Utilities, more than many other types of customers, want the distributors they do business with to have their inventory on computer. That's because utilities must be able to rely on a distributor's assessment of product availability. During emergency situations or power outages, utilities have to know the products they need will definitely be in stock, so they can repair damaged equipment as soon as possible.
Prior performance and experience. As mentioned earlier, the utility market is not a game for amateurs. Utilities expect distributors to know the products they need and the type of service they require. Utilities may also want to know which other utilities you are working with, so they can check these references.
Primary markets served. Utilities will evaluate electrical distributors based on the markets they serve because this will give them a good idea of what size of customer a distributor serves best. For instance, if an electrical distributor focuses on industrials and large-project work, it's less of a stretch to manage the volume and technical complexity of product that a utility often requires, than if that distributor's niche is light-commercial and residential work.
Brands carried and product mix. A distributor that carries heavy-commercial and industrial lines for manufacturers that also make utility products stands a better chance of making a smooth transition into the utility business than does a distributor that focuses on small commercial and residential jobs.
Geographic service area. Like any other customer, a utility needs reliable distributors that can deliver product on an on-call basis, 24 hours a day. Utilities outside an electrical distributor's primary service area lose the benefit of counter pickups, and run the risk that the deliveries may not be as dependable as that of a distributor with a branch nearby.
Financial stability. Utilities don't want to run the risk of partnering with an unstable electrical distributor because it can take so long for them to develop effective supply sources.
The utility market is changing more rapidly than any other part of the electrical industry. By focusing on the market basics that this article outlines, you will have a better idea of what it takes for electrical distributors to win in the utility business.
Key Sales Opportunities in the Utility Market
- GENERATING PLANT
- MRO supplies such as: replacement lamps, fuses, breakers, motors & relays
- Panelboard equipment
- Portable cords
- GFCI equipment
- Toolboxes, hand tools, power tools & multimeters
- Wire & cable
- Substation transformers
- Disconnect switches
- Panelboard equipment
- Transformers for residential & commercial applications
- Overhead distribution transformers & brackets
- Pad-mounted distribution transformers
- Ground sleeves & enclosures
- Fuses & surge arresters
- OUTDOOR LIGHTING
- Lighting fixtures
- Roadway lighting
- Parking lot lighting
- POLE-LINE HARDWARE
- Bolts, nuts, washers, guy hooks, pins & plates
- Insulators & brackets
- Connectors & splices
- Overhead distribution transformers & mounting brackets
- Clevises & anchors
- Fuse links
- Service grips & guy strands
- SERVICE ENTRANCE
- Service heads & service masts
- Split-bolt connectors
- Residential & commercial meter sockets
- Watt-hour meters (electronic & electromechanical)
- Conduit & entrance els
- Ground rods, clamps & fittings
IN THE TRUCK
- Telescoping disconnects, clamp sticks & hoists
- Termination & splicing kits
- Hot-line clamps
- Electrical contact liquid
- Insulating gloves & blankets
- Lineman's boots, body belts, rain suits & hard hats
- Tool bags, ladders, shovels, rope & warning signs