Wheeler on HVACR: The heat is on
Utilities getting into the HVAC business are certainly nothing new. It has been going on for years. The typical scenario is this: A local utility - usually a gas company - decides to open up an HVAC service branch since it already has a full staff of service technicians to assist customers with fall startups, to fix gas leaks, etc. So why not make a little money while promoting the sale of gas products and making itself look friendlier by selling economically priced whole-house service contracts?
Gas companies getting into the HVAC service and installation business have been the bane of independent HVAC service contractors all over North America for several years now.
But wait a minute! Now something new is happening. Every day we're reading and hearing about electric utilities buying out established HVAC service companies. The recent list of service-contractor buyouts reads like the who's-who of our industry. Over the past several months some of our industry's best and most respected companies have been gobbled up by utilities. Why? What's going on here? What are they up to?
Money to investI have asked these questions of some of the utility representatives and some of the brightest folks I know, and I keep hearing the same answer. To quote Warren Healey of the Heating, Refrigerating and Air Conditioning Institute of Canada: "Most of the utilities' managers tell me that they really aren't sure yet [what the outcome will be]. There is a lot of money to invest right now, and buying out service companies seems the most logical way to spend it."
Does that make sense to you? It should. The meteoric rise in the value of stocks in the United States over the past couple of years has certainly brought huge amounts of money into utility coffers. And since their markets and customer bases are so stable, they have to figure out logical ways to invest that income in a way that will expand their base and ensure a future stable income. So what better and more natural business expansion is there than buying out established, profitable, well-run HVAC contracting businesses?
Does this mean that utilities have absolutely nothing else in mind other than opening up associated branch companies? No, there's often a long-range goal in sight that some utilities have already started to exploit successfully, especially when it comes to the commercial/industrial HVAC business.
Old and new marketsSince they have been deregulated, many electric companies have looked longingly at neighboring and even far-off markets while keeping a wary eye on what competitors are trying to do in theirs. Their intent is to go in and tie up the electric needs of large, power-consuming companies both near and far by leasing and servicing their HVAC equipment as part of a very attractive overall energy package.
And that's not all. Especially in areas where power generation capacity is difficult to expand, some utilities have used their HVAC contracting companies to promote the sales and installation of energy-peak-shaving devices such as motor speed controllers, building-management systems, more efficient heating and cooling systems, and the like.
Of course, utilities aren't just buying out commercial/industrial contractors. Some are also gobbling up residential companies. The reasoning depends on the type of utility and its needs. However, for electric companies, promoting more sales of electric devices - such as water or air-source heat pumps - is a prime goal where these systems are currently finding a weak market. Also, getting into the lucrative and largely unexploited appliance-service contract business is often a long-range goal of these utilities.
And what better or safer way is there of getting into a new business than by buying out an established, respected, profitable company ... and with someone else's money? This is what is currently happening in our industry; you can expect to see a lot more of it as long as the stock markets stay strong.
The futureWhat will be the long-range effects of utilities getting into our business? Well, once they get entrenched in our industry, they usually stay. That's the bad news for contractors.
On the other hand, buying out a well-run and profitable company doesn't ensure it will stay that way. As former owners and top management drift away from these companies, the challenge for utilities will be that of finding motivated, highly qualified people to replace them while resisting the temptation to move "political" appointees and troublemakers into open slots in the smaller subsidiary. In the long run, continued profitability will be a utility's biggest challenge in the HVAC service business. And despite contractors' claims to the contrary, company stockholders will never stand for "write-off" losses from unprofitable divisions. Utilities will be held accountable for any substantial losses.
So, believe it or not, utility-run HVAC contracting companies - while they may be around for the long run - will never run independent contractors out of business. Despite the fact that such buyouts are now the rage in the industry press, they are only a small part of the total HVACR contracting picture.