Jim Wininger: Value in Scale for Utilities

As electricity consumption flattens due to rising energy efficiency, utilities are increasingly looking to mergers and acquisitions as a potential path to growth. But regulatory constraints in the industry prevent utilities from fully benefiting from some of the traditional M&A cost savings. Jim Wininger, a partner in the Utilities practice, discusses how utilities can maximize the benefits that come with scale.

Read the transcript below.

JIM WININGER: Utilities are now facing increased pressure to their earnings from flattening electrical consumption. And that flattening is being driven primarily by three factors. One is past investments in energy efficiency. Second is just the changing nature of the US economy to be less energy intensive. And third is from increased penetration of distributed resources.

And so as a result, utilities are increasingly examining M&A as a potential growth lever. However, M&A is problematic for electric utilities, and primarily because of the regulatory constraints. They may not be able to access all of the levers that are available to a traditional company for deal synergies as part of a transaction. They may be required to either return some of the synergies to rate payers in the form of lower prices or may not be able to access them at all. They may be required to keep two corporate headquarters, for example.

And so we think any utility thinking about M&A needs to look beyond traditional deal synergy levers and look to how are they really going to drive value out of that resulting scale. And we see three primary levers, the first of which is repeatable models. Having that broader platform enables them to drive some practice that they are best-in-class at across the full enterprise. That could be plan operations, it could be field force—there are lots of places, but be clear about what that is and drive it across.

Second, it enables them to place bets in higher growth sector portions of the sector that may be more about the company moves for a smaller player. And third, it gives them a better ability to access tax incentives for renewables, which require a large balance sheet to take full advantage of.

And of those three, we think the most promising is repeatable models. And so we would encourage any potential acquirer to first be clear about where they're going to drive value from scale—what that repeatable model is—and then second, develop a detailed plan to transfer that into the acquired company.

Read the Bain Brief: Scale Matters—Unlocking Value in Utilities