Although they are neither new nor unique to the electric power industry, the use of joint ventures and alliances is increasing as companies struggle to adjust and adapt to the rapidly changing conditions that regulatory restructuring is spreading through the electric power industry. In part, the popularity of corporate alliances arises from the nature and magnitude of the changes that have also fueled a general increase in corporate combinations in the industry. Their popularity also results from the flexibility and innovative nature typical of joint ventures and alliances.

Characteristics of Joint Ventures and Strategic Alliances

While mergers are the most widely recognized corporate combination, utilities are also forming deals or corporate alliances, which are distinctly different from mergers. Corporate alliances can range from general marketing agreements to joint ownership of a specific operation. Two types of corporate alliances are joint ventures and strategic alliances. They share many of the same characteristics, and each is created through the cooperation of two or more companies with a common goal in mind.

For the most part, the terms "alliance" and "strategic alliance" are synonymous. At times, company press releases and trade-press articles use the terms "joint venture," "alliance," and "strategic alliance" interchangeably. However, joint ventures can be differentiated from alliances in general. In joint ventures, the cooperating companies usually create a separate operation (or company) that carries out the daily operations of the project, and many develop new products and services or, in turn, acquire other entities on their own. Joint ventures may be open to others through selling of shares following the initial combination. They have become common among nonregulated subsidiaries and affiliates of utilities that have formed companies to market products and services.

In contrast to joint ventures, alliances between companies usually will not involve creating a separate company. A typical alliance in the energy sector involves the advertising and marketing of complimentary products and services of two or more companies.

Joint ventures and strategic alliances are used for many of the same reasons that companies employ mergers, acquisitions, or divestitures. Like participants in mergers and acquisitions, companies participating in joint ventures and strategic alliances seek to achieve the scale of enterprise seen as necessary for success. Joint ventures and strategic alliances are seldom developed in isolation. Rather, they are often part of a larger strategy that may involve a combination of approaches such as a merger, acquisition, restructuring, diversification, concentration on core business, or divestiture. Many companies see a need to establish leverage through a constellation of alliances as a key element to survival. Participants seek to gain economies of scale and knowledge and to increase geographic scope, reach critical mass, diversify the asset base, share development costs, increase operating efficiencies, penetrate new markets, or take advantage of an established brand name or corporate reputation.

Joint ventures and strategic alliances have become more common as the industry moves toward competition. In part, they have become increasingly popular as participants expand beyond the traditional boundaries of the regulated utility and move into less familiar territory. Joint ventures and especially strategic alliances typically have the advantage of ease of withdrawal. They are not only less costly to undertake than a merger, but all parties retain a separate identity outside the agreement. An unsuccessful venture can be dissolved, usually without significant penalty to the participants, whereas an unsuccessful merger, acquisition, or even the quest for an acquisition may leave a company so weakened that it becomes a takeover target, as in the case of PacifiCorp.⁽²⁷⁾ Centrus is an example of an unsuccessful joint venture. Formed by Cinergy, Florida Progress, and New Century Energies to develop long-distance telephone service, it was canceled when the participants determined that market conditions did not favor the venture. A joint venture may also be concluded through the purchaseof the interest of one partner by another participant, as in the case of Duke Energy/Louis Dreyfus. Duke Energy acquired the 50 percent held by Louis Dreyfus in the venture to market gas and electric energy and services. (Other examples of joint ventures and strategic alliances are described in the inset box.)

Advantages and Disadvantages

The perceived advantages of joint ventures and strategic alliances include cost savings, an end to duplication of services, consolidation of functions, and an increase in total customer base and/or revenues to reach the "critical mass" perceived as necessary for corporate survival as the industry restructures. Although they are subject to much the same review process, neither the financial burden nor the regulatory review process associated with joint ventures and alliances is as great or as costly as those of mergers or acquisitions. Perceived disadvantages, while similar to those in a merger, may well pose a greater problem in some cases. Because the participants retain their separate identities, joint ventures may be more susceptible to failure resulting from a clash of corporate cultures, a lack of clear direction, or the absence of clear lines of responsibility.

Joint ventures and strategic alliances in the electric power industry vary greatly in scope and purpose, but most have objectives that fit into one or more of four broad categories (Table 9): plant investment, energy marketing, purchasing, and energy services. In addition, many include some aspect of trading, risk management, or telecommunications. Although ventures that involve energy services are the most common, no single category dominates the list. In fact, more than one-third have more than one objective.

Factors in the Formation of Joint Ventures and Strategic Alliances

Corporate combinations, whether they entail the formality of a merger or the less structured joining-together of a joint venture or strategic alliance, involve issues that are neither simple nor confined to the question of whether or not to combine. Underlying the rhetoric of press releases, articles in the trade press, and statements to stockholders are a cluster of strategies and reasons for the undertaking. Joint ventures and strategic alliances may be preferred to a merger or acquisition because they do not typically involve the level of investment required for a merger or acquisition. A strategic alliance, because of its looser structure, may also reduce or eliminate the need for a regulatory review process.

Cost Management: Cost control issues are important in all corporate activities, and the desire for cost savings may be the principal reason for the formation of most joint ventures and strategic alliances. Cost savings in a joint venture or alliance may be achieved through the elimination of duplication and the pooling of resources, knowledge, labor, and/or other assets.

Growth: Mergers are often viewed as the means to achieve growth, especially rapid growth, and obtain the benefits from greater economies of scale. However, where funds are lacking, risk is high, and industry direction is uncertain, companies may well opt to form joint ventures rather than merge or acquire others as a means to grow. For example, in the natural gas industry, some local distribution companies (LDCs) are actively branching out, seeking to strengthen their traditional business by expanding into a different line of endeavor in the same geographic area or by seeking an ally in other markets and combining skills to develop new products. One example is the alliance formed by Columbia Energy and Amway, with Amway distributors marketing gas and electricity for Columbia door-to-door. The largest companies can take advantage of their resource base to engage in a number of different strategies at the same time.

Diversification Beyond the Utility Sector: Expansion and diversification into new lines of business or into new territory are endeavors ideally suited to joint ventures and strategic alliances. Joint ventures and strategic alliances may promote growth either outside the traditional scope of activities of a company or outside the industry itself. For example, General Public Utilities, an electric utility serving the Mid-Atlantic region, created GPU Solar, which is a joint venture with Astro Power Inc. Astro Power manufactures, markets, and sells a range of solar electric products. GPU Solar was formed to pursue the rapidly growing market for grid-connected solar electric power systems.

Energy Services and One-Stop Shopping: Joint ventures and alliances designed to enhance customer service through the marketing of energy, energy services, and other nontraditional services have become popular. The offerings tend to be flexible, giving customers the ability to choose from a varied menu. The goal of such programs may be to hold existing customers, capture new ones, avoid bypass, pool customers, and/or rebundle services. For example, the Allied Utility Network, a joint venture initially consisting of four LDCs but open to other companies, offers energy services to the residential market. At times, such service offerings tend to go well beyond the scope of those services provided by the regulated LDC. For example, Boston Edison and RCN Corporation (a telecommunication services company) established a joint venture to develop a network for one-stop energy services and telecommunications.⁽²⁸⁾ Similarly, Duke Energy formed a strategic alliance with Nisource (formerly NIPSCO) to market on-site generation at energy-intensive locations.

Brand Recognition: Joint ventures are often developed to take advantage of the existing reputation of a company or to develop a new name with the potential for recognition in a far wider territory, perhaps nationally. Examples of joint ventures with some form of brand identification include both Simple Choice and Enable of KN Energy, Energy Marketplace of SoCal Gas, and Home Vantage of the Allied Utility Network.

Regulatory Approval Process

The need to ensure fairness and to preserve open markets, although most often considered in the context of mergers and acquisitions, also leads to the examination of proposed joint ventures and alliances by agencies at the Federal, State, and sometimes local levels of government. The concerns of the agencies are no different in the case of a merger or a joint venture. Like mergers and acquisitions, strategic alliances and especially joint ventures may be subject to review by the Federal Energy Regulatory Commission (FERC), the Department of Justice (DOJ), the Federal Trade Commission (FTC), the Internal Revenue Service, the Nuclear Regulatory Commission, and State public utility commissions or their equivalent. The various agencies have the power to impose conditions that must be met in order to secure approval. In particular, DOJ and FTC examine proposed joint ventures for possible abuses of market power that could stem from the proposed combination. They have the authority to withhold approval and prevent the combination from taking place.

The oversight function of the various agencies is limited but often overlapping. When examining prospective corporate combinations, the regulators, the various agencies, and, at times, the courts typically focus on the possibility of unfair advantage in pricing, barriers to entry, and other problems resulting from the joint venture. Continued competition between the partners outside the joint operations is of particular concern to regulatory and judicial bodies. Divestiture of some assets may be required as a condition for the venture.

Endnotes

28. RCN subsequently became a subsidiary of Boston Edison.

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