COMPETITION, CONTROVERSY RIDE PIGGYBACK ON HVAC

Pam Boschee

Associate Editor

The HVAC industry consolidators are marching forward-and it looks like they are marching straight into increased revenues and healthy profit margins by serving the residential and light commercial marketplace. According to Ann Manix, partner, Ducker Research, “Three years ago there wasn`t a service consolidator market. By the year 2000 it will be a $7 billion a year business. Service consolidators are HVAC providers that average $400 million a year in revenues, have 30 to 40 locations around the country and are publicly traded on Wall Street.”

Observations of that type pique the interest of competitors-and of those planning to become competitors.

Electric utilities-or their unregulated affiliates-are, in many cases, the new competitors. Controversy regarding fair competition is riding piggyback with them into the market. Of particular concern to the Air Conditioning Contractors of America (ACCA) is the potential for cross-subsidization.

ACCA purports that utilities cross-subsidize their non-utility businesses by using truck fleets, advertising good will, customer lists, billing inserts, and suspect marketing arrangements to subsidize artificially their entrance into unrelated markets, like HVAC services. ACCA further contends that if ratepayers were aware of the full costs imposed by misuse of utility assets, they would consider these services no bargain. ACCA, therefore, advocates federal legislation to prohibit cross-subsidization.

The countering view is that allowing utility affiliates to offer advantages of economies of scale and scope to HVAC customers through resource sharing increases competition, and ultimately brings benefits to customers. The proponents of utility affiliate-HVAC hybrids point to regulatory controls already in place. State commissions, through their ratemaking authority over utilities` regulated services, protect ratepayers from unreasonable costs. Further oversight via federal legislation is unwarranted and burdensome.

Addressing these concerns, the National Association of Regulatory Utility Commissioners` white paper entitled, “Tools and Conditions Needed to Prevent Cost-Shifting and Cross-Subsidization between Regulated and Non-Regulated Affiliates,” presented the following guidelines:

– regulators need access to books and records of public utilities and all non-regulated affiliates;

– separation plan or operating agreement filed with and approved by the regulator-operations, resources and employees involved in the provision or marketing of non-regulated services, and the books of account associated with those services, are separate from those of the regulated activities;

– written guidelines for assigning costs for transactions between utilities and non-regulated affiliates, and for allocating costs common to both regulated and non-regulated functions;

– adequate audit authority; and

– codes of conduct needed to govern the sharing of information, databases and resources in the marketing or other provision of non-regulated services, and the provision of regulated services.

Illustrating another approach to dealing with disparate views, is Virginia Power`s agreement with the Virginia Coalition for Fair Competition.

After months of negotiations, Virginia Power in late 1997 agreed to support proposed standards of conduct that would apply to any unregulated subsidiary created by Virginia Power for activity within its service territory during the transition to competition concerning sale of fuel oil or propane, general contracting, consulting engineering or activities regarding HVAC equipment or appliances.

Virginia Power stated, “it is not the company`s intention within the company`s service territory to:

– buy or maintain an inventory of HVAC equipment or household appliances;

– install, service or warranty any such equipment or household appliances for customers;

– sell HVAC equipment or household appliances to customers metered and billed on residential rates;

– sell HVAC equipment to customers other than those metered and billed on residential rates except where such sale is an incidental part of providing other energy services or providing traditional Virginia Power activities.”

Cross-subsidization concerns will not be lain to rest any time soon. However, as utilities remain snagged by challenges in their attempts to offer this value-added service, HVAC consolidators keep doing what they do best-consolidate and build market share (see table).

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