Dan Jentz knows more than a little about contracting. As director of contracting at ComEd (Chicago, Illinois, U.S.), Jentz contracted out underground residential construction and cable replacement. Next to go was overhead construction work. Most recently, Jentz outsourced pole inspections, transformer inspections and cable locating.

After taking early retirement from ComEd, Jentz now puts his 29 years of utility experience to work as operations director for Trench-It Inc., a woman-owned specialty contracting firm (Fig. 1). Trench-It got its start providing underground construction work for ComEd, but now offers services to the fiber-optic, telecom and gas utility sectors (Fig 2.).

Electric utilities including ComEd increasingly turn to contracting companies in an effort to hold down costs while maintaining existing service levels. Just as utilities are consolidating, there is a major consolidation of outside line contractors.

“Large diversified contractors working with flexible, cross-trained work crews providing services in telecom, gas and water are better positioned than electric-only contractors,” states Greg Haas, an energy analyst for Raymond James. For example, contractors are losing work in the slumping telecom industry but gaining it back in the booming electrical industry.

Emerging Opportunities

Super contractors also see opportunities to offer a set of packaged services to regional for-profit transmission companies. In Wisconsin, five electric utilities have combined transmission assets into one company, the American Transmission Co. (ATC).

ATC CEO José Delgado is building a transmission-only utility that is focusing on essential functions. Delgado believes control-room operations and load dispatch will always make up the core of any transmission company. “A tougher question is who will actually build and maintain the transmission system,” says Delgado.

ATC is under a three-year contract with contributing utilities to provide field operations and maintenance (O&M). Delgado is investigating options he might pursue when these contracts expire. He expects that taking maintenance and construction in-house would not be a good business decision. Emerging super contractors are vying to provide this work, but they must convince Delgado they can deliver services reliably and cost effectively.

In New York, Long Island Power Authority (LIPA) is facing the same concerns in both T&D services. LIPA outsourced operating and construction functions to Keyspan, the services arm of Long Island Lighting Co. (LILCO), created when LILCO disbanded in 1998. Michael Hervey, director of T&D, is also looking into the future and considering what options LIPA might pursue when the present Keyspan contract expires.

Customer Choice

In contrast, most distribution companies have maintained sufficient staff to perform the bulk of O&M, although utilities increasingly outsource a certain level of engineering, construction and maintenance work.

Today's gigantic utility reshuffling is being driven by those regulators and legislators who are committed to opening up the industry in an effort to provide customer choice.

Tom Myers, a partner in Andersen's national energy practice, states, “As the industry unbundles, customers see the true charges for transmission and distribution on their bills. Interested parties quickly recognize the work force makes up a significant portion of the bill.” Myers acknowledges that contractors can typically operate with lower costs, partially because of the inherent structural inefficiencies of regulated utilities. Myers is unwilling to predict a time frame for utilities to outsource major portions of existing work, stating, “Like everything else in this industry, it is uncertain because we are dealing with regulators and legislators. If success is proven in a couple of cases, the floodgates will open.” Myers recognizes that cross-subsidies hide the true cost of providing T&D services in regulated states.

Movers and Shakers

Whether utilities are outsourcing on a project-by-project basis or signing partnering agreements with services providers, they can locate appropriate contractors through national line contracting organizations (Table 1). Super contractors including Exelon Infrastructures Services (EIS) of Morton, Pennsylvania, U.S., and Quanta Services (Houston, Texas, U.S.) are not content to focus solely on construction services. Instead, they are moving into engineering and O&M.

EIS, a subsidiary of electric and gas utility Exelon, had plans from the start to become an infrastructure services behemoth. In October 1999, EIS acquired five leading utility contracting companies active in 37 states with a combined work force of 4400 and annual revenues of nearly US$300 million. The company continues to expand with revenues in excess of US$1 billion, and a work force of more than 7000.

Today, EIS' contractors include Electric Services, Inc., Dashiell Corp., Dacon Corp., Fischbach and Moore, Inc., M.J. Electric, Inc., and Syracuse Merit Electric. In Texas, EIS' Dashiell is busy hooking up independent power producers (IPPs) to the grid. President Henry Jackson states, “We are building most of the switchyards for TXU and Reliant. We are building substations for IPPs as well. We just finished the Reliant/Calpine 345-kV connection (Fig. 3). With TXU, we are providing installations where we design, build and test prior to the facility going live.”

EIS made strategic acquisitions that enabled it to offer turnkey services to a variety of markets nationwide. By combining the competencies of the acquired companies with EIS' utility process expertise, it can provide comprehensive T&D O&M services.

EIS CEO Greg Cucchi states, “We are presently engaged in negotiations with several utilities who are considering entering into long-term agreements for comprehensive infrastructure services.”

Ben Bosco, EIS vice president of sales, anticipates utilities that outsource infrastructure functions, including engineering, O&M, construction and supply-chain, will typically see cost reductions in the order of 10% to 20%. But Bosco believes that even greater savings could be obtained if a utility were to embrace the asset owner model already tested in New Zealand and Australia, where the utility would enter into a comprehensive outsourcing agreement that would include back office as well as field operations. Bosco predicts that EIS, with a strong utility process expertise and the ability to execute work in the field could deliver savings in the order of 25% to 35%.

Competing with Exelon is Quanta Services, a company backed by utility heavyweights UtiliCorp United and Enron. Quanta first opened its doors in 1997, providing infrastructure services to the electric and telecom industries. The company has expanded to provide services to gas, water and cable companies. With an annual growth rate of 22%, Quanta now has annual revenues in excess of US$1 billion per year with a significant presence in 37 states.

Quanta expects the trend toward outsourcing will gain momentum as utilities work to repair and enhance their infrastructure, better manage resources and reduce costs to remain competitive in a deregulated market.

Probably the most aggressive infrastructure agreement in the industry was signed between Puget Sound Energy (PSE) and Quanta Services. Today, Quanta Services manages all construction needed to provide new electric and gas services to residences and businesses throughout PSE's Washington state service area (Fig 4). This includes necessary line upgrades, as well as direct installation and hook up of services. Quanta also manages all inventory and materials for this gas and electric work.

Quanta has 45 gas crews and 45 electric crews dedicated to PSE's new customer construction. When combined with other activities including administrative and management work, a total of 350 to 400 people are currently assigned to PSE work, compared to 80 prior to the outsourcing contract award.

Quanta Services CEO John Colson is pleased with the progress, stating, “Our partnership with Puget Sound is progressing incredibly well, and we are very pleased with the relationship.”

Although maybe not on the same scale as Exelon and Quanta, other major contractors are vying for utility dollars. Henkels & McCoy (Blue Bell, Pennsylvania, U.S.) remains one of the few major U.S. independent engineering and construction companies still active. With 5000 full-time personnel and 12 division offices located throughout the country, Henkels & McCoy provides infrastructure services in the electric, gas and telecom space.

In April 2000, utility GPU (Morristown, New Jersey, U.S.) purchased another major player, MYR Group (Rolling Meadows, Illinois, U.S.). The purchase provided GPU with an outsourcing partner for its regulated utility businesses and also enabled MYR to tap into parent company GPUs sources of capital. MYR Group includes L.E. Myers, Harlan Electric, Great Southwestern Construction, Hawkeye Electric and Sturgeon Electric.

Table 1. Outside Line Contracting Associations

Organization	Contact Person	Telephone	Web site
Association of Builders and Contractors (ABC)	John Strock	703-812-2007	www.abc.org
Independent Electrical Contractors (IEC)	Clark Mulligan	703-549-7351	www.ieci.org
National Electrical Contractors Association (NECA)	Robert Colgan	301-215-4525	www.necanet.org www.necaconnection.com

Another player, Mastec (Miami, Florida, U.S.) has its roots in telecom but is branching out to provide services to electric and gas utilities. Mastec performs routine tasks including plowing, trenching, directional boring, conduit construction, right-of-way surveying and emergency restoration, cable siting and substation construction. The energy-services division employing 2000 people is presently working with Dominion/Virginia Power, SCE&G, Southern Co. and soon with CP&L.

Utility holding company Puget Energy has decided to go both ways. As mentioned earlier, operating utility PSE is outsourcing infrastructure work to Quanta. At the same time, parent company Puget Energy is creating an infrastructure services subsidiary, InfrastruX, which “will be a US$1 billion company in five years,” states CEO John Dursbin. InfrastruX purchased underground construction company UTILX, and has since added Keen, Keystone, Lineal Industries, Intercon Construction and Trafford Corp.

Utilities today have their choice of contractors to do business with, but at the same time, many have operating units that do much of the same work. Why don't utilities go on the offensive and allow their operating divisions to compete for business on the open market? Utilities should have a strong incentive to move in this direction. As states deregulate, utility executives know they will lose significant portions of their retail and generation businesses and are looking for new sources of revenue. Why not offer infrastructure capabilities to neighboring utilities while expanding into telecom, cable, water and gas? States Andersen's Myers, “It is extremely difficult to put a hat on utility personnel and have them become entrepreneurs.” Myers anticipates it would be difficult to change the mindset and culture of those individuals that have spent a career with one utility.

Duke Energy (Charlotte, North Carolina, U.S.) is one utility that has transitioned successfully into infrastructure services. The energy delivery services business unit of Duke Engineering and Services now provides competitive transmission, substation and distribution construction and maintenance services.

Vice President Johnny Priest has seen the business grow to employ 284 people, with the majority working in the southeast United States. “I can't put into words the pain we went through to develop a competitive culture, but now we get pumped competing every minute of every day, knowing we can hold our own with anyone,” says Priest.

Joe Messick, a consultant with the utility division of Accenture, predicts the utility infrastructure services business will grow at a minimum of 16% per year over the next five years. Messick acknowledges that major equipment vendors could move in to provide infrastructure services but acknowledges that vendor resources are already stretched pretty thin. Engineering as well as design/build firms — including Power Engineers, Burns and McDonnell, and Black & Veatch — are already running at 110%, particularly in the power-delivery divisions.

History shows that the contracting business has proven to be difficult during a downturn, as contractors bid for work just to keep crews working. If contractors can tap into routine maintenance and operations work, they can levelize work-flow assuring a steady revenue stream.

Will we soon see a significant number of U.S. utilities embrace the network owner model? Raymond James' Haas predicts “utilities will first focus on restoring reliability to existing grids, with the rationalizing of operations including the outsourcing of facilities management to be an emerging trend.” Continues Haas, “Uncertainty kills the desire to invest. With events in California and elsewhere, we have a lot of uncertainty in the electric industry right now.”

In the electric-utility industry, it is again the Wild West. While national contractors vie to become one-stop infrastructure shops, niche contractors like Trench-It are nibbling away at the fringes. At the same time, utility subsidiaries, vendors and engineering firms are invading each other's turf. Those companies that correctly divine the future and position themselves to provide reliable, low-cost infrastructure services will determine the form of the electric-utility industry for years to come.