In late October, Warren Buffett, legendary investor jumped into the utilities market with a $9 billion splash. The so-called "Oracle of Omaha," known for his stunning success as the CEO of Berkshire Hathaway, Omaha, Neb., has spoken. Utilities are poised to become hot investment opportunities.

Buffett leads an investor group that will pay $1.25 billion for a controlling interest in MidAmerican Energy Holdings Co., in Des Moines, Iowa, a $9 billion electric and gas utility that serves 2.2 million electric customers and 1.2 million gas customers in the United States and the United Kingdom.

Just a few months earlier, another private investment group announced its own billion-dollar utilities investment, this one for control of TNP Enterprises, Fort Worth, Texas, the parent company of Texas-New Mexico Power Co. This group was led by William J. Catacosinos, former chairman and CEO of Long Island Lighting Co. who left in 1998 under a cloud of controversy surrounding executive compensation after Long Island Lighting was sold to another utility.

Wealthy private investors are scrutinizing public utilities as never before. It signals the emergence of a new kind of utility industry player, coming from within and without traditional electric, gas, water and telecom environments. As a result, utility companies increasingly will be "in play" in the financial world.

"It's the $270 billion jump-ball," says George Levert, managing director of Kinetic Ventures, Atlanta, a venture capital company that concentrates on utilities and companies "strategically important" to utilities, such as firms engaged in power trading, Internet telephony and high-speed networking. Levert calls large-scale private investment in the utility sector and utility buyouts "a party that so far has not gotten up any speed," but should take off in the not-too-distant future. Once that happens, say Levert and others, you can expect Buffett and Catacosinos to be joined by others eager to invest in utilities.

"There is going to be a morphing in this country in the utility industry," says Levert. "We will end up with a dozen large energy companies and a bunch of small fry that don't matter as much." The dozen or so large winners, he adds, may look quite different than their large, regulated, monopoly predecessors. "Energy companies will have significant operations outside of BTUs and kilowatt-hours," Levert says. "They are going to lose kilowatt hours business, and among the ways they are going to try to make it up will be increased internal efficiency and better information technology. Once it starts catching fire, many other companies will start to come in."

Barry Abrahamson, senior utilities analyst for PaineWebber in New York, says Buffett's move alone is unlikely to spark a private investment conflagration in the utilities arena. He says other factors, though, will continue to fan the flames of investor interest. "I think there will be other private investors, primarily because the market valuations are very, very low," Abrahamson says. "That could include investment buyout groups like Buffett's, but we will also see foreign utilities continuing their interest in the United States."

Abrahamson says last year's purchase of PacifiCorp by ScottishPower and New England Electric by National Grid of the United Kingdom are likely just the leading edge of ongoing utility investment immigration. "We expect to see a lot more foreign deals," he says. "The scale of the U.S. market dwarfs all others," adds Levert, who says foreign utility companies are drawn not only to American market size and might, but also consider the U.S. economy a safer area for infrastructure investment than many other parts of the world.

Abrahamson notes that other new entrants include companies like independent power producer AES of Arlington, Va., which has formed a new branch to compete for electricity and natural gas customers in U.S. markets, and Calpine in San Jose, Calif., which focuses on the development and expansion of gas-fired power plants. Another company he mentions is Dynegy in Houston, a company that began 15 years ago as a gas trading company called Natural Gas Clearinghouse, Ltd. and is now moving into numerous energy markets. Just last year, Dynegy announced a $7.5 billion merger with Decatur, Illinois-based Illinova, a holding company that includes regional electric and gas utility Illinois Power, with more than 1 million customers.

Abrahamson says new entrants are the third phase in an ongoing three-step process that is transforming the utilities industry. The first step, he says, has been and continues to be deregulation, followed by disaggregation, which is in turn followed by consolidation. "We will have more power plants owned by fewer but larger companies," Abrahamson says. "We will see consolidation in the generation and the transmission and distribution sector."

Ranjan Pant, head of the worldwide utilities practice at Boston-based Bain & Co ., says Buffett's entry into utilities means, "the smart money and private equity people are starting to look at utilities." At the same time, Pant cautions not to expect a crush of private investor interest. "I don't see a huge rush because Buffett has done it," Pant says, "his purchase may just be a one-(shot) deal. But I expect the utilities themselves to grow in size and scope."

In order to succeed, Pant says, that growth in size and scope will require companies to "develop the right strategies around the right parts of the business." In the electric industry, he says, that means determining whether a utility wants to be in one of three general businesses: generation, transmission/distribution or retail. The first two, he says, hold some promise but the retail side is where companies will see the greatest opportunity. "There may be some opportunities around generation or transmission, but the most interesting growth platform is definitely the retail end of the business," Pant says. In the new deregulated environment, Pant says, gas, water and electric utilities need to follow the lead of their telecom counterparts regarding marketing and customer relationship management. "We haven't found any utilities that can compete with AT&T on this scale yet," says Pant.

Pant also sees changes in the water utilities business. For the next several years, he expects most new entrants to concentrate on the operations and maintenance side of the water business, offering services to municipal water companies that will outsource these functions while retaining municipal control of their facilities and assets. "There will be the creation of companies like EDS in water," Pant says, referring to Electronic Data Systems, the Texas information services giant launched in the late 1970s to provide managed services for IBM mainframe computers.

The water utilities industry has also caught the attention of Jim Garrick, president of market services company MarketPower in Denver. Garrick says many of the major new entrants in the U.S. water utilities market may be foreign companies that view the U.S. economy as a safe harbor for infrastructure investments. Another group that should be interested in water companies, he says, are U.S. and foreign electric utilities. Because companies are big users of municipal water systems and water companies require plenty of electricity to run treatment plants and pumping stations, Garrick says marriages between companies in these two industries makes a great deal of economic sense. Profits will also flow to the water investor and company, he says, who truly understands marketing.

"Marketing is a word that has never been in the forefront of the water industry," Garrick says. "Just as you have seen it become more important in telecom, and now in electric and gas, we'll see that also take place in the water business." Garrick predicts marketing giants like Procter & Gamble and General Electric will move into the water business, if not directly by purchasing or partnering with utilities, at least tangentially through initiatives such as filtration services, operations and management or customer relationship management for water utilities.

And while oil and water may not mix, Garrick says oil and energy almost certainly will. "There are not many companies as well positioned to move into the energy utility market as the big oil companies," he says. "They really understand marketing and they have the greatest traders in the world. They are really starting to move into market niches like green power, fuel cells and gas-fired distributed generation." As with the water industry, Garrick predicts that big companies external to the utilities industry will enter utilities through limited, niche-oriented initiatives. Examples might include Chevron and Shell Oil's tie-ins with Dynegy or the initiative of General Electric to work with Plug Power in Latham, New York, to promote residential fuel cells.

Plug Power may, in its own way, represent the utility company of the future. During groundbreaking ceremonies in 1997, New York Governor George Pataki called the company a potential "Microsoft of the New Millennium" if residential fuel cells prove to be as popular as the company hopes.

"There are those players whose strategy is to play in the market niche side in the short run," Garrick says. "Once they have learned what they need to know, they will move into the market share game."

Mike Kennelly, partner-in-charge of shareholder value services for Arthur Andersen, says that rather than a rash of new entrants in the utilities field, he sees "a juggling between current players, as well as some entrants from the e-commerce field." Companies will need to base business strategies on a "competency focus model." They will select a few businesses they want to be in and concentrate resources and effort on them. "Companies have to decide where they want to be on the value chain," Kennelly says, predicting that new utility entrants may come from the ranks of financial services firms, credit card companies and big oil companies. Firms from these industries, he says, often feature expertise in customer service, back office functions and marketing, all of which will be crucial to success in the deregulated utilities market.

Matthew Smith, partner and director of Andersen's North American utilities practice, says other entrants to utilities may be firms with trading experience. "If you are experienced in trading, no matter whether you are trading grains or bandwidth or anything else, you may decide this is a good time to come into the power trading business," Smith says.

A further pool of entrants, Smith says, may come from the darlings of Wall Street-Internet and technology companies. "I wouldn't underestimate the start-up or dot-com side," Smith says. "Not from an acquisitions standpoint, but more as the link to the customer. Already, if you go through America Online or Yahoo! you can select some of your utilities providers. Rather than try to create a Web presence of their own, I think some utilities may try to find a company that is already well established on the Internet and partner with them there."

Kennelly adds that the Internet may have a subtle but perhaps profound effect on the fortunes of new utilities entrants and the older, established util ities playing in a deregulated world.

"The other player that is going to make a big impact on this is the investor, the nameless investor," Kennelly says. "Since utilities have been regulated, they have historically traded like low-risk bonds. All of a sudden you have a boom market and investors who see huge returns and start pressuring the utilities to see better rates of return. Some of these investors are feeling that the market is leaving them behind." Utilities, Kennelly says, will be forced to respond to this type of investor pressure by elucidating their focus, competitive environment, profit potential and risk-reward ratio.

"Companies will have to determine what business model they want to pursue and then what investors they want to target," Kennelly says. "Investors have shaken up every other industry and have demanded world-class performance in every other industry. Utility companies have been operating to the beat of a different drummer. They have done well based on their old performance measures, but now with deregulation they have a whole new set of mandates."

New players like Warren Buffett, will increasingly shape those mandates.