ACHRNEWS

Utilities struggle with hvac profit

August 4, 2000


Utilities and their holding companies may be finding that they can’t run hvac contracting and service for profit, or to any other advantage.

In some cases, utilites are opting to sell off service and contracting businesses acquired over the past few years.

Events in recent months suggest that utilities may be moving away from consolidation strategies, but these developments may be too scattered to establish a definite trend.

Contractors' point of view

Any move by utilities or utility-owning holding companies to divest themselves of hvacr contracting and service activity is likely to be cheered by national trade organizations such as the Air Conditioning Contractors of America (ACCA).

A big concern of ACCA is cross-subsidization, using the utility’s identity, logo, and marketing power to compete with independent contractors at ratepayer expense.

The association’s “Fair Competition is Cool” campaign was initially launched to end “unfair competition in the industry and to level the playing field for all contractors.” But John Herzog, ACCA staff vice president, public policy, says the recent shifts by utility firms may have come about because “stockholders are not too happy about these low- or non-profit activities.”

One ACCA director, Skip Snyder (owner and president, Snyder Co., Inc., Upper Darby, PA), suggests that utilities — and consolidators, too — may have undermined many service contracting activities with bureaucracy or corporate hierarchy.

“The utilities should create the same synergistic value [as consolidators] out of their rollups,” he told The News in a recent interview. In other words, the larger purchasing power and other strengths of big organizations should have helped build profit in the contracting firms operating under a major corporate umbrella.

“When you bring these smaller businesses together, there’s got to be more attention paid to the entrepreneurial spirit,” Snyder said. “I know from talking to some of my peers who have been acquired by both utilities and consolidators that they were taken away from their highest and best use, which is in some cases interacting with customers, and they’ve been placed into doing reports.

“I think Conectiv and some of these other utilities realize there’s a wealth of knowledge out there that maybe got buried in the reporting systems they created to handle this larger entity they have.”

Snyder says he has spoken both at the state and national levels about how some utilities such as Conectiv might use their name and logo recognition to the disadvantage of independent contractors. “I don’t know whether that money [for name/logo recognition] is coming out of the utility ratepayers’ fund, or whether it’s being paid for by the hvac division.”

He says that if utilities allow their energy services companies to stand on their own, retain the company name and otherwise compete fairly with independents, he’s not against their ownership of hvac contracting firms.

Snyder also thinks “affiliated” or “approved” status of independent contractors with utilities through a referral service is fine. His own company participates in such programs with Philadelphia Electric (PECO), Philadelphia Gas Works (PGW), and the Philadel-phia Suburban Gas Association. Snyder Co. sells, installs, and services commercial and industrial heating and air conditioning equipment.

Qualified to serve?

“A utility, when it makes a referral to a contractor, has a fiduciary liability, so it should make sure that the contractor it’s recommending meets certain standards,” Snyder says. That means proper licensing, insurance, training, and certification of its employees to perform the services required, he explained.

Snyder predicts that the North American Technician Excellence (NATE) certification program will be more widely embraced as a standard of acceptance required by utilities referring their customers to contractors.

“I think we’ll see these consolidators and these energy service companies that are subsidiaries of utilities embracing the NATE certification program. From my vantage point I see the manufacturers and the wholesalers saying this is a good thing, and I’m seeing the consolidators saying we need a standard of excellence, some type of certification to bring this together.”

The result, he says, will be “raising the bar of professionalism” in the hvac service industry through such certification.

Sidebar: Bucking the consolidation trend

Allentown, PA — PPL Utilities, headquartered here, announced on June 1 that it will no longer provide sales and service of natural gas appliances or equipment for its PFG Gas and North Penn Gas customers, relying instead on a referral program. PPL is not alone, as other utilities have moved away from consolidation strategies, in many cases opting to sell off service and contracting businesses acquired over the past few years.

“We are expanding our successful Trade Ally program to provide alternatives for customers who need maintenance and repairs for natural gas equipment, including central heating systems, water heaters, and kitchen ranges,” said John Sipics, president of PPL Utilities’ gas business.

Through the Trade Ally program, PPL Utilities customers can find local businesses for sales and service of natural gas appliances and fuel lines that they own. “Customers can call PPL Utilities 24 hours a day for a list of Trade Allies that sell, service, and install natural gas appliances,” Sipics said. “And we will continue to respond around the clock to calls about gas leaks or other emergencies to make the situation safe.”

Nancy Bishop, a spokesperson for PPL Corp., told The News that sales and service of natural gas appliances and equipment were somewhat limited, not “across the board,” in the PFG Gas and North Penn Gas service areas. She added that the change was made “in order to drive more business into the local communities.”

PPL Utilities is a subsidiary of PPL Corp., which delivers electricity and natural gas to more than 1.3 million customers in Pennsylvania. The PPL Utilities move has no effect on activity in PPL Spectrum, Inc., another division of PPL Corp. which owns five mechanical contracting firms serving Pennsylvania and parts of Massachusetts, Connecticut, Ohio, West Virginia, New Jersey, Maryland, and Delaware.

Conectiv: Earlier this year, Conectiv, a Fortune 500 company with headquarters in Wilmington, DE, said it planned to sell two “non-core” businesses, Conectiv Services and Conectiv Thermal, as part of its “effort to concentrate on businesses with higher returns.”

On July 10, Conectiv announced the sale of the Mechanical Division of Conectiv Services back to its original owners, DelCard Associates, Inc., and Frey Lutz Corp.

Mechanical services included in the sale include design and construction of large mechanical systems, plumbing and piping, and sheet metal fabrication projects, the announcement said. The portion sold to DelCard employs 211 people and is located in Wilmington and Milford, DE. The Lancaster, PA office being sold to Frey Lutz Corp. employs 175.

The businesses, acquired in 1996 (DelCard) and 1999 (Frey Lutz), were two of 21 firms bought by Conectiv to build Conectiv Services into a full-service heating and cooling business.

The Services Division of Conectiv Services, which provides new construction, replacement, service, and maintenance of heating, cooling, and plumbing equipment for residential and commercial customers, will be sold separately. The sale is scheduled to be announced in the third quarter of 2000.

Howard E. Cosgrove, Conectiv chairman and ceo, said the corporation’s hvac and thermal businesses no longer fit the company’s strategic direction. “For a variety of reasons, these markets have evolved differently than expected,” he explained.

Conectiv provides regulated and natural gas utility services and is also engaged in telecommunications and other nonregulated activities. It serves more than 1 million customers in New Jersey, Delaware, Maryland, Virginia, and Pennsylvania.

PG&E Corp.: On the other side of the country, Chevron Corp. is buying part of the retail energy services business of PG&E Corp. The deal includes San Francisco, CA-based PG&E Energy Services’ energy management, energy efficiency, billing and information services, and other products and services for major commercial, industrial, and institutional customers.

PG&E Corp. decided to exit its retail energy services business to allow the company to focus more on the wholesale generating, energy commodities trading, and natural gas transmission activities of the PG&E National Energy Group, a joint announcement from Chevron and PG&E said.

A little less than two years ago, TNP Enterprises, the parent company for Texas-New Mexico Power Co. and Facility Works, Inc., announced it was discontinuing all operations at Facility Works. The company had previously ended FWI’s construction operations in late 1997 “due to lower-than-expected operating profits, and has been evaluating the remaining service operations since that time,” a report from TNP Enterprises, Inc. headquarters in Fort Worth said.

“We are disappointed that Facility Works failed to reach profitability,” TNP’s then-chairman, president, and ceo Kevern Joyce said. “We have learned a great deal from our venture into this nonregulated business.” TNP Enterprises has since been acquired by a private investment group.

Anticipating electric power competition in Texas in 2002, new laws in the Lone Star State say that utilities can’t provide sales and service of energy consuming customer-premise equipment. Any such activity must be by a separate company. Facility Works Inc. was a stand-alone company owned by the same holding company that owned the utility, a TNP spokesperson told The News.