WWW.IBISWORLD.COM Utilities in the US November 2019 1

Watery power: Falling gas prices and stagnant demand have limited sector growth

IBISWorld Industry Report 22 Utilities in the US November 2019 Kush Patel

2 About this Industry 17 International Trade 31 Revenue Volatility 2 Industry Definition 18 Business Locations 32 Regulation and Policy 2 Main Activities 34 Industry Assistance 2 Similar Industries 20 Competitive Landscape 3 Additional Resources 20 Market Share Concentration 35 Key Statistics 20 Key Success Factors 35 Industry Data 4 Industry at a Glance 20 Cost Structure Benchmarks 35 Annual Change 22 Basis of Competition 35 Key Ratios 5 Industry Performance 23 Barriers to Entry 5 Executive Summary 23 Industry Globalization 36 Jargon & Glossary 5 Key External Drivers 7 Current Performance 25 Major Companies 10 Industry Outlook 25 Exelon Corporation 12 Industry Life Cycle 26 Duke Energy Corporation 27 NextEra Energy Inc. 14 Products and Markets 28 American Water Works Company Inc. 14 Supply Chain 14 Products and Services 30 Operating Conditions 15 Demand Determinants 30 Capital Intensity 16 Major Markets 31 Technology and Systems www.ibisworld.com | 1-800-330-3772 | [email protected] WWW.IBISWORLD.COM Utilities in the US November 2019 2 About this Sector

Sector Definition The Utilities sector comprises management services classified in establishments engaged in the provision Subsector 562, Waste Management and of the following utility services: electric Remediation Services. These power, natural gas, steam supply, water establishments also collect, treat and supply and sewage removal. Excluded dispose of waste materials; however, from this sector are establishments they do not use sewer systems or primarily engaged in waste sewage treatment facilities.

Main Activities The primary activities of this industry are Electric power generation Electric power transmission and distribution Natural gas distribution Water supply Steam supplyNatural gas distribution

The major products and services in this industry are Electric power generation Electric power transmission and distribution Other

Notable Industries 22112 Electric Power Transmission in the US This industry performs the sector’s electric power transmission and distribution services.

22121 Natural Gas Distribution in the US This industry performs the sector’s natural gas distribution services.

22131 Water Supply & Irrigation Systems in the US This industry performs the sector’s water supply services.

22111a Coal & Natural Gas Power in the US This industry generates power from coal and natural gas.

22111b Nuclear Power in the US This industry generates power from nuclear reactions.

22111c Hydroelectric Power in the US This industry generates power from hydroelectric dams.

22111d Wind Power in the US This industry generates power from wind turbines.

22111e Solar Power in the US This industry generates power from solar panels. WWW.IBISWORLD.COM Utilities in the US November 2019 3

About this Sector

Additional Resources For additional information on this sector www.awwa.org American Water Works Association www.epsa.org Electric Power Supply Association www.egsa.org Electrical Generating Systems Association www.ferc.gov The Federal Energy Regulatory Commission www.eia.gov US Energy Information AdministrationUS Energy Information Administration WWW.IBISWORLD.COM Utilities in the US November 2019 4 Sector at a Glance Utilities in 2019

Key Statistics Revenue Annual Growth 14–19 Annual Growth 19–24 Snapshot $908.3bn -0.3% 2.1% Profit Exports Businesses $211.6bn $1.7bn 71,324

Revenue vs. employment growth Electric power consumption Market Share Exelon Corporation 6 4050 3.8% 4 4000 Duke Energy 2 3950 Corporation  0 2.8% 3900 % change -2 NextEra Energy Inc. 3850

-4 Billion kilowatt hours 2.2% -6 3800 American Water Year 11 13 15 17 19 21 23 25 Year 12 14 16 18 20 22 24 26 Works Company Revenue Employment Inc.  SOURCE: WWW.IBISWORLD.COM 0.4% Products and services segmentation (2019)

p. 25 19.9% Key External Drivers Electric power generation Electric power consumption Price of natural gas 45.7% Price of electric power Electric power Housing starts transmission and distribution Industrial production index Regulation for the Utilities sector 34.4% Other p. 5

SOURCE: WWW.IBISWORLD.COM

Sector Structure Life Cycle Stage Mature Regulation Level Heavy Revenue Volatility Medium Technology Change Medium Capital Intensity High Barriers to Entry High Sector Assistance Medium Sector Globalization Low Concentration Level Low Competition Level Low

FOR ADDITIONAL STATISTICS AND TIME SERIES SEE THE APPENDIX ON PAGE 35 WWW.IBISWORLD.COM Utilities in the US November 2019 5 Sector Performance Executive Summary | Key External Drivers | Current Performance Sector Outlook | Life Cycle Stage

Executive Summary Operators in the Utilities sector in the benefited many operators in the United States engage in various utility electricity-generation industry cluster. services, including electric power Nevertheless, companies that generated generation and transmission, natural gas electricity from coal did suffer due to distribution, steam supply, water supply these trends. The Water Supply and and sewage removal. While many of these Irrigation Systems (22131), Steam and industries are markedly different and, in Air-Conditioning Supply (22133) and some cases, perform countervailing Sewage Treatment Facilities (22132) functions, the Utilities sector as a whole industries account for a small portion of is dominated by the performance of the sector revenue and grew slowly over the Electric Power Generation (IBISWorld past five years. Over the five years to reports 22111a-e) and Electric Power 2019, the overall Utilities sector is Transmission industries (22112). In 2019, forecast to decline slightly at an these industries are expected to generate annualized rate of 0.3% to $908.3 billion, with a growth of 0.6% in 2019 alone as electricity demand and natural gas prices Growth in renewable-energy generation is rebound with profit margins at 23.3%. expected to slow, as relevant tax credits are set Over the next five years, the Utilities sector is expected to pick up steam and to expire grow more quickly. General growth in electricity demand, increasing electricity 65.6% of overall sector revenue. prices and a rebound in the price of Additionally, the Natural Gas natural gas are expected to provide a Distribution industry (22121) is expected boon to operators in this sector. to generate 20.1% of revenue for the However, growth in renewable-energy Utilities sector in 2019. Trends in these generation is expected to slow, as the three industries are dependent on various Production Tax Credit (PTC) and factors, most notably electric power Investment Tax Credit (ITC) are set to demand and pricing trends of the various expire. Nevertheless, demand for resources used to generate electricity. natural gas from the electricity Over the five years to 2019, the sector distribution and generation industry has experienced stagnant growth due to group is expected to grow, to the paltry electricity demand and drastic detriment of coal-generated power. declines in the price of natural gas. Overall, sector revenue is forecast to Despite these negative trends, an grow an annualized 2.1% to total $1.0 emphasis on clean energy regulation trillion over the five years to 2024.

Key External Drivers Electric power consumption decrease in 2019, representing a threat All electricity must be transmitted for the sector. through this sector’s transmission and distribution networks to end- Price of natural gas customers. Therefore, electric power Natural gas utilities distribute natural gas consumption typically moves in line to consumers. As a result, revenue is with sector demand and revenue; highly driven by gas prices. Additionally, however, if it increases too slowly it companies that generate electricity from can harm sector revenue. Electric natural gas garner higher profits and power consumption is expected to generate more electricity from natural WWW.IBISWORLD.COM Utilities in the US November 2019 6

Sector Performance

Key External Drivers gas when the price falls. The price of staples in homes. Housing starts are continued natural gas is anticipated to decrease expected to increase in 2019. in 2019. Industrial production index Price of electric power Industrial activity trends actively set the Electricity prices are determined by overall level of demand for energy. public utility commissions. Although Therefore, as activity increases and demand for electricity typically contracts manufacturers increase production, when prices are high, electric demand for sector services increase. The transmission utilities can generate industrial production index is expected to more revenue from higher prices. The increase in 2019. price of electric power is expected to increase in 2019 representing an Regulation for the Utilities Sector opportunity for the industry. The Utilities sector is regulated at both the federal and state levels. Regulatory Housing starts agencies oversee the pricing, reliability Housing starts indicate the number of and safety of sector services. Rising new residential homes under regulation slows revenue growth for the construction. An increase in housing sector. Regulation is expected to remain starts heightens demand for sector high in 2019, posing a potential threat to services because all industry services are the sector.

Electric power consumption Price of natural gas

4050 4.5

4000 4.0

3950 3.5

3900 3.0

3850 2.5 Billion kilowatt hours $ per thousand cubic feet 3800 2.0 Year 12 14 16 18 20 22 24 26 Year 12 14 16 18 20 22 24 26

SOURCE: WWW.IBISWORLD.COM WWW.IBISWORLD.COM Utilities in the US November 2019 7

Sector Performance

Operators in the Utilities sector in the Current United States engage in various utility Sector revenue services, including electric power generation Performance 6 and transmission, natural gas distribution, steam supply, water supply and sewage 4

removal. According to the North American 2 Industry Classification System (NAICS), within this sector, the specific activities 0

associated with the utility services provided % change -2 vary by utility: electric power includes generation, transmission and distribution; -4 natural gas includes distribution; steam -6 supply includes provision and/or Year 11 13 15 17 19 21 23 25 distribution; water supply includes treatment and distribution; and sewage SOURCE: WWW.IBISWORLD.COM removal includes collection, treatment and disposal of waste through sewer systems which account for a combined 85.7% of total and sewage treatment facilities. While many sector revenue. Trends in these three of these industries are markedly different, industry clusters are dependent on various the Utilities sector as a whole is dominated factors, most notably electric power by the performance of the Electric Power demand, the price of electric power, pricing Generation (IBISWorld reports 22111a-e), trends of the various resources used to Electric Power Transmission (22112) and generate electricity and changes in the price Natural Gas Distribution (22121) industries, of natural gas.

Revenue performance Over the five years to 2019, the Utilities troublesome trends have led to an overall sector as whole has grown sluggishly due to decline in the Electric Power Transmission poor performance in the Electric Power industry over the past five years. Transmission and Natural Gas Distribution Furthermore, the Natural Gas Distribution industries. Lackluster performance in the industry has grown sluggishly during the Electric Power Transmission industry period. The drastic decline in natural gas stems from several factors. Electric power prices, which directly affect the price at consumption growth has slowed in recent which natural gas distributors are able to years as population growth has slowed. sell their products, negatively affected Additionally, according to the US Energy industry revenue during the period. For Information Administration (EIA), example, the over 40.0% decline in the households have shifted to using world price of natural gas in 2015 led to a increasingly energy-efficient appliances, 21.3% decline in revenue for the Natural lowering demand from this market. Gas Distribution industry that year. The Furthermore, as the Manufacturing sector Utilities sector as a whole experienced a (31-33) has stagnated, many production revenue decline of 4.0% in 2015 due to this. facilities have increasingly idled. These While these negative trends did drag the trends have led to a stagnant growth in Utilities sector downward over the past five electric power consumption over the past years, positive performance in the Electric five years. Compounding this issue, average Power Generation industry cluster did retail electricity prices have not risen at a partially mitigate the issues plaguing natural pace faster than inflation. These gas distributors. The Coal and Natural Gas WWW.IBISWORLD.COM Utilities in the US November 2019 8

Sector Performance

Revenue performance Power industry (22111a) grew over the past The Water Supply and Irrigation continued five years as falling gas prices and a major Systems (22131), Steam and Air- clean-energy initiative pushed many Conditioning Supply (22133) and operators to generate electricity from natural Sewage Treatment Facilities (22132) gas rather than coal. While this trend did industries account for a relatively drive sector revenue upward, it was unable to smaller share of total sector revenue. offset the losses of natural gas distributors Nevertheless, these industries played a and coal-power generators. Renewable- critical role in keeping sector revenue generation companies, especially those in the buoyed into positive growth over the Wind Power (22111d) and Solar Power past five years. Water supply and sewage (22111e) industries performed exceptionally treatment both grew at annualized rates well during the period as tax credits aimed at of just under 1.0% over the past five investment in and production of electricity years, while steam supply grew more from these resources pushed revenue upward quickly. The overall Utilities sector is for these minor industries. While solar and forecast to decline slightly at an wind power still account for a very minor annualized rate of 0.3% to $908.3 portion of overall sector and industry cluster billion during the current five-year levels, both industries have experienced period. In 2019, revenue for the sector is significant growth in their shares of capacity forecast to grow 0.6% as natural gas and revenue. prices begin to rebound.

Sector organization The largest number of operators and establishments in the Utilities sector A major clean-energy come from the Water Supply and Irrigation Systems and Sewage initiative pushed many Treatment Facilities industries, which operators to generate combine to account for over 95.0% of all electricity from natural gas enterprises and over 80.0% of all establishments within the industry. Despite this, the number of employees in To this end, growth in the three largest these industries account for a far smaller industries by revenue in this sector has portion of the total sector at just over been relatively lackluster, in line with 36.0% in 2019. This is because water overall sector trends. In fact, the Electric supply and sewage treatment operators Power Transmission industry actually employ far fewer people per enterprise experienced a decline in the number of than operators in electric power and operators and establishments over the natural gas. Furthermore, wages from past five years. Natural gas distributors these two industries account for just over encountered similar issues but are 25.0% of total sector wages, suggesting expected to increase in number as prices that employees in the other sectors and, in turn, revenue increase in 2017 garner significantly higher wages. These and 2018. Electric power generation has statistics indicate that the overall trend in experienced countervailing trends, as the number of operators in the sector as a generators of natural gas- and whole provides less worthwhile renewables-related electricity have information, and therefore, discussion flooded into the industry due to an should focus on trends within the major overall decline in prices and potential tax revenue-generating segments. incentives. Nevertheless, nuclear- and WWW.IBISWORLD.COM Utilities in the US November 2019 9

Sector Performance

Sector organization coal-power generators are expected to the five years to 2019. In line with this continued continue to endure performance issues. trend, the number of employees in the The two major industries in terms of sector is expected to grow an annualized enterprises and establishments, Water 0.2% to 933,039 people. Additionally, Supply and Irrigation Systems and with natural gas price rebounding in 2017 Sewage Treatment Facilities, are and growth in 2018 helped industry expected to experience slow, steady profit margins to increase as natural gas growth in line with revenue trends. distributors pull in higher margins. Due Overall, the number of operators in the to a drop in 2019, it negatively affected Utilities sector is expected to increase at some operators that generate electricity an annualized rate of 1.6% to 71,324 over from natural gas.

Regulation This sector is highly regulated at both the state and national level, and This sector is highly therefore, regulatory trends have a significant effect on performance. In regulated at both the state terms of the Electric Power and national level Transmission and Generation and Natural Gas Distribution industries, the Federal Energy Regulatory Commission amount of energy a given state generates (FERC) oversees and regulates any or procures from renewable resources by interstate activity within these industries a set date. Additionally, the Federal and is the final line in terms of approval Investment Tax Credit and Production of various utilities. Additionally, at the Tax Credit drastically increased state level, public utilities commission investment in and production of wind oversees utility companies and sets the and solar electricity over the past five exact price at which retail electricity is years. Furthermore, The Clean Power sold within a state. These agencies have Plan, pushed forth by the EPA during the a direct effect on the performance of the current period, set goals to reduce carbon utilities sector as a whole. emissions significantly over the coming Over the past five years, changing years. However, with the election of a perceptions concerning the impact of new presidential administration, the EPA carbon emissions have led the US chose to remove the Clean Power Plan. Environmental Protection Agency (EPA), Had the Clean Power Plan remained in in association with many states around place, more electric power operators the country, to focus more heavily on would have likely moved away from coal clean-energy initiatives. The goal of these production. Nevertheless, as natural gas initiatives is to reduce carbon emissions prices are forecast to remain low and the from within the United States. For cost of generating electricity from example, various states have renewable resources continues to fall, implemented Renewable Portfolio coal power-generation companies will Standards which set targets on the continue to endure challenges. WWW.IBISWORLD.COM Utilities in the US November 2019 10

Sector Performance

Over the next five years, the Utilities sector the previous period. Trends in electric Industry is expected to grow more quickly as its power demand, the price of electric power, Outlook component industries perform increasingly pricing trends of the various resources well. The three major industries within this used to generate electricity and changes in sector are all expected to experience the price of natural gas will determine significant growth increases compared with industry performance.

Revenue Growth in the Utilities sector will be determined by the synergies of the Electric power generation Electric Power Generation (IBISWorld and transmission are both report (22111a-e), Electric Power Transmission (22112) and Natural Gas estimated to grow more Distribution (22121) industries. Electric swiftly power generation and transmission are both estimated to grow more swiftly than during the previous period for various to data from the US Energy Information reasons. General economic growth and Administration (EIA) and IBISWorld business activity are expected to continue estimates, the price of natural gas in the increasing over the next five years. As United States is expected to grow at an this occurs, industrial and commercial annualized of 5.1% over the five years to demand is expected to pick up, leading to 2024. This, in association with an increases in electric power consumption increase in natural gas consumption from these markets. However, increased within the United States projected in the energy efficiency within households will EIA’s Annual Energy Outlook 2019 slow consumption from this market over report, will lead to strong revenue growth the coming years. Overall, electric power for operators in the Natural Gas consumption is expected to grow slowly Distribution industry. Furthermore, the over the five years to 2024, to the boon of Water Supply and Irrigation Systems both electric power generators and (22131), Steam and Air-Conditioning transmitters. Additionally, retail Supply (22133) and Sewage Treatment electricity prices are expected to grow Facilities (22132) industries are all quickly over the next five years as various expected to grow more quickly over the public utilities commission get next five years as the US population permission to grant price increases, increases and general demand for aiding both revenue and profit for business services rises. Overall, revenue operators within the electric power for the Utilities sector is estimated to industry group. Compounding this grow an annualized 2.1% to $1.0 trillion positive trend, natural gas distributors over the five years to 2024, with the most are expected to experience significant significant increases occurring during the growth over the coming years. According earlier portion of the period.

Sector organization Over the next five years, positive sector during the previous period, many states performance combined with general will continue to implement renewable macroeconomic growth will lead to portfolio standards (RPSes), leading to changes in the industry landscape. As transmission planning that will enable WWW.IBISWORLD.COM Utilities in the US November 2019 11

Sector Performance

Sector organization more electricity-generation from services picks up in line with economic continued renewable resources. This increase will growth. Nevertheless, the high capital drive growth in the number of operators costs associated with entering any of and employees that generate renewable these industries will likely lead to higher power. Additionally, despite increasing establishment and employment growth natural gas prices, state initiatives for when compared with enterprise growth clean energy will also lead to an increase in these industries. In line with in natural gas generation over the next macroeconomic trends, the Water Supply five years. This growth will increase the and Irrigation Systems, Steam and number of operators and employers Air-Conditioning Supply and Sewage within this industry as well. While the Treatment Facilities industries are also removal of the Clean Power Plan (CPP) slated for growth in the number of will provide a short-term boon for coal establishments and operators. Increasing providers early in the period, coal-related revenue, in combination with increasing generation is slated to fall significantly prices of both retail electricity and over the next five years, significantly natural gas, is expected to lead to a slight reducing coal’s importance in the sector increase in profit for operators in the compared to the previous period. Utilities sector over the next five years, Nevertheless, the expected exodus of coal though these increases will be offset by operators will not overshadow gains losses experienced by natural gas power made by other sector segments. Both generators. The number of sector electric power transmission and natural enterprises is expected to grow an gas distribution are slated to experience annualized 1.2% to 75,774 over the five increases in the numbers of operators, years to 2024. In line with this growth, establishments and employees over the employment is expected to grow an next five years as demand for these annualized 1.1% to total 985,732 people.

Regulatory change The removal of the CPP, in association and renewable power with the expiry of the Federal Investment Tax credit expiration will Tax Credit and Production Tax Credit, will slow some of the exponential growth slow some of renewables’ that the renewables segment of electric previous exponential power generation experienced during the growth previous period. Nevertheless, implementation of RPSes by many US states is expected to provide incentives from renewable sources. It is important to operators within those states to to point out, however, that despite the continue to procure electricity from significance of the various RPS goals and renewable resources. For example, New legislative actions taken by the York State’s Clean Energy Standard sets government in order to usher the growth goals for a 40.0% reduction in in renewables, the total combined greenhouse gas emissions from 1990 capacity of wind and solar power will levels and rules that 50.0% of all still be below 20.0% of total electricity- electricity within the state be procured generating capacity in 2024. WWW.IBISWORLD.COM Utilities in the US November 2019 12

Sector Performance Life Cycle Stage Demand for electricity reflects broad trends in economic growth Industry technology is focused on improving efficiency rather than comprehensive overhaul of services Products and services are well-established WWW.IBISWORLD.COM Utilities in the US November 2019 13

Sector Performance

Sector Life Cycle The Utilities sector is in the mature stage period as many primary resources used of its life cycle. Sector value added (SVA), by industry operators declined. For which measures the sector’s contribution example, the prices of coal, natural gas  This industry to the overall economy, is expected to and crude oil all fell significantly during is Mature  grow an annualized 1.6% over the 10 the five-year period to 2019, facilitating a years to 2024. During the same period, significant increase in profit for natural US GDP is expected to increase an gas distributors as well as companies that annualized 2.1%. Despite SVA growth generate electricity from natural gas or slightly outpacing the US economy as a coal. Additionally, rapid growth in whole, this sector is in the mature stage renewable power generation also slightly of its life cycle. This is characterized by shifted SVA growth upward, partially well-established products and services explaining the increases in employment and general demand that reflects the and enterprises as many new solar and broader trends of economic growth. SVA wind power companies entered the growth for this sector is slightly higher sector. Despite these factors, the sector is due to a large jump in profit early in the in the mature stage of its life cycle. WWW.IBISWORLD.COM Utilities in the US November 2019 14 Products & Markets Supply Chain | Products and Services | Demand Determinants Major Markets | International Trade | Business Locations

Supply Chain KEY BUYING INDUSTRIES 22112 Electric Power Transmission in the US This industry buys power from various electricity generators. 31-33 Manufacturing in the US This sector uses electric power.

KEY SELLING INDUSTRIES 22111a Coal & Natural Gas Power in the US This industry sells power to electric power transmitters and distributors. 22111b Nuclear Power in the US This industry sells power to electric power transmitters and distributors. 22111c Hydroelectric Power in the US This industry sells power to electric power transmitters and distributors. 22111d Wind Power in the US This industry sells power to electric power transmitters and distributors. 22111e Solar Power in the US This industry sells power to electric power transmitters and distributors. 22121 Natural Gas Distribution in the US This industry sells natural gas to companies that generate electric power.

Products and Services Products and services segmentation (2019)

19.9% Electric power generation 45.7% Electric power transmission and distribution

34.4% Other

Total $908.3bn SOURCE: WWW.IBISWORLD.COM

Electric power generation into electrical energy. In the United The Electric Power Generation industry States, this segment is dominated by cluster (IBISWorld reports 22111a-e) electric power generated from fossil fuels. comprises establishments primarily Historically, coal-generated electric engaged in operating electric power power was the largest source of revenue generation facilities. These facilities within this segment. However, in recent convert other forms of energy, such as years, due to a significant decline in the water power (i.e., hydroelectric), fossil price of natural gas and a change in fuels, nuclear power and solar power, perception concerning the use of high- WWW.IBISWORLD.COM Utilities in the US November 2019 15

Products & Markets

Products and Services carbon-emission fossil fuels, coal power years, this segment has performed poorly continued generators have lost a significant share of due to trends in electric power weight within this segment. Natural consumption and slow electricity price gas-generated power is now the largest growth. For example, increasing use of source of revenue within this segment energy-efficient appliances in the average due to the low price of natural gas and household has led to reduced electric low cost to generate power from this fuel. power consumption. Additionally, Additionally, natural gas emits less relatively slow US population growth has carbon than does coal. Nuclear power also contributed to stagnant electric generation is the next-largest source of power consumption growth. In terms of revenue within this segment but has not the price of electric power, rate hikes grown significantly in recent years. have been slightly lower than the rise of Renewable electric power generation has inflation within the United States, which been a recently growing source of has also contributed to poor performance revenue as the Production Tax Credit and from this segment. However, this sector Investment Tax Credit pushed many is expected to perform well over the next operators within this segment to five years. increasingly invest and produce from these sources. In fact, generating capacity Other for wind and solar is expected to exceed The Other segment comprises 15.0% of total US capacity by 2024, up establishments in the Natural Gas from less than 10.0% in 2019. Overall, Distribution (22121), Water Supply and this segment is expected account for Irrigation Systems (22131), Steam and 19.9% of total sector revenue in 2019. Air-Conditioning Supply (22133) and Sewage Treatment Facilities (22132) Electric power transmission industries. This segment is the second- The Electric Power Transmission largest in terms of revenue for this sector. industry (22112) comprises The largest piece of the Other segment establishments primarily engaged in comes from natural gas distribution. operating electric power-transmission Revenue from this segment has fallen in systems, controlling (i.e. regulating recent years due to drastic declines in the voltages during) the transmission of price of natural gas over the five years to electricity and/or distributing electricity. 2019. Additionally, the other three This industry is the largest in terms of industries included in this segment have revenue for this sector, accounting for grown in terms of their contribution to the 45.7% of revenue. Over the past five sector over the past five years to 34.4%.

Demand Demand for services provided by this sector services; in times of increased heat, Determinants sector is determined by various factors. the use of air-conditioning increases, For the majority of the sector, demand increasing demand for electric power stems from trends occurring in consumption, and when the weather residential, commercial and industrial becomes extremely cold, the need for heat markets. To this end, general increases, potentially increasing the use of macroeconomic trends and business electricity, gas or oil to heat the home. activity play a significant role in demand Households are a significant driver of for sector services. Change in climate also demand for sector services, as most US plays a significant role in demand for households use electricity, natural gas and WWW.IBISWORLD.COM Utilities in the US November 2019 16

Products & Markets

Demand water for lighting, heating and drinking. within the United States is in higher Determinants Therefore, as employment and disposable demand, this leads to increased demand continued income rises, the average household for industry services, including electricity becomes more relaxed with the use of transmission, natural gas and water. industry services. Nevertheless, the Business activity also has a direct effect increasing efficiency of most household on industry demand. As business activity appliances has led to a decrease in picks up, more retail stores and businesses demand from this driver. open, leading to greater demand for the Trends in industrial activity have a direct three major services provided within this effect on sector demand. As industry sector. When business activity slows, the production increases and manufacturing opposite occurs.

Major Markets Major market segmentation (2019)

0.5% 17.3% Transportation Industrial

45.2% Residential

37.0% Commercial

Total $908.3bn SOURCE: WWW.IBISWORLD.COM

The Utilities sector provides its various Nevertheless, the growing energy- services to all consumers and businesses. efficiency of household appliances has As a result, the major markets for this reduced overall electricity consumption sector are based on end-users. from households. Consumption of water and natural gas, however, has remained Residential relatively stable in households over the Residential households comprise the past five years. Overall, this market is largest market for services within the expected to generate 45.2% of revenue sector. Every household in the United for the sector in 2019. States needs electricity, water and natural gas for basic needs. Consumption of Commercial industry services per household is The commercial market accounts for relatively stable, as water, natural gas customers that operate businesses, and electricity are all considered including shops, malls and offices. As the necessities. This has become even more business environment picks up, sector significant in terms of electric power use services, especially electricity use, in recent years, as cell phone and internet increases. Additionally, the office rental usage has grown significantly. vacancy rate is expected to decline during WWW.IBISWORLD.COM Utilities in the US November 2019 17

Products & Markets

Major Markets the current period, leading to increased increased. Water supply, steam supply continued electricity use. Natural gas, water and and other industry services have been other sector services have increased relatively stagnant in terms of their slightly to this market during the period, share of revenue. Overall, this market is in line with a generally positive expected to generate 17.3% of revenue macroeconomic environment. Overall, for the sector in 2019. this segment is expected to generate 37.0% of revenue in 2019. Transportation The transportation market is expected to Industrial account for a relatively minute share of The industrial market accounts for all industry revenue versus the other sectors. industry services sold to manufacturers The majority of this revenue comes for and other industrial operators. The the use of natural gas or electricity to industrial market also includes natural power some automobiles, aircrafts and gas distributed to electric power trains. Even with the advent of electric generation companies that produce vehicles, this market segment is expected electricity from natural gas. This to remain a very small share of revenue segment has remained relatively for the time being. In 2018, the stagnant over the past five years, even transportation market is expected to though industrial production has generate 0.5%.

International Trade This sector provides electric power, natural gas, water supply, steam supply Industry trade balance and sewage treatment services in the Level & Trend 2.0 United States. Within the sector, trade Exports in the accounts for a very trace amount of 1.5 industry are Low  overall sector revenue or domestic and Steady  demand. Natural gas is traded with 1.0 Canada, as is generated electricity, albeit Imports in the 0.5 in trace amounts. $ billion industry are Low  and Decreasing  0.0 -0.5 Year 11 13 15 17 19 21 23 25 Exports Imports Balance SOURCE: WWW.IBISWORLD.COM WWW.IBISWORLD.COM Utilities in the US November 2019 18

Products & Markets

Business Locations 2019

est AK 0.6 e ad

ME reat Md 0.5 akes tatc 1 2 NY 3 WA ND 3.3 4 MT 0.8 5 1.7 1.2 MN 1.9 WI ock 1.7 MI PA 6 SDPas 2.1 4.6 OR 0.9 7 1.5 Moutas ID IA OH 9 8 1.1 WY 1.5 3.7 0.7 IN VA NE IL 3.0 WV 0.7 2.7 1.3 1.9 KY est NV 1.9 0.7 NC UT MO 3.2 1.2 CO KS 2.1 2.1 1.3 TN 0.8 SC CA 1.9 6.8 OK AR outeast 2.0 1.8 GA AL 3.4 AZ MS 2.4 1.4 NM 3.3 1.2 outest LA TX 2.8 FL 11.0 4.2

est Establishments (%) HI Less than 3% 0.3 Additional States (as marked on map) 3% to less than 10% 1 VT 2 NH 3 MA 4 RI 10% to less than 20% 0.3 0.7 1.5 0.2 20% or more 5 CT 6 NJ 7 DE 8 MD 9 DC 0.8 2.1 0.3 0.8 0.3

SOURCE: WWW.IBISWORLD.COM WWW.IBISWORLD.COM Utilities in the US November 2019 19

Products & Markets

Establishments in the Utilities sector are Business Locations Distribution of establishments vs. population largely distributed according to the population, as industry services are 30 generally accepted and used within all facets of the economy. However, in highly

concentrated areas, natural gas 20 distributors and electric power

transmission companies are able to % service a large number of people with 10 fewer plants. The largest region in terms of share of establishments is the Southeast, 0 accounting for 28.7% of establishments. West This region also accounts for the largest Plains Southeast population in the country at 25.7%. The Southwest Great Lakes Mid-Atlantic Southwest is the second-largest region in New England

terms of establishments at 15.7% but is Establishments Rocky Mountains not as large in terms of population at Population 12.6%. This reflects the fact that many SOURCE: WWW.IBISWORLD.COM natural gas distributors and electric power transmission companies in the oil relevance is driven up largely by and gas arena are centralized within this California, which is the second-largest area. Additionally, the Southwest is home state in terms of establishments at 6.8% to Texas, which has the most sector and is the largest state in terms of US establishments at 11.0%. Texas is also the population at 12.2%. The next-largest second-largest state in the country in region is the Mid-Atlantic, which terms of population. accounts for 11.3% of total The Great Lakes and West regions are establishments. The Mid-Atlantic the next-largest, accounting for 13.3% region is also home to Pennsylvania, and 11.6% of total establishments, which is the third-largest state in terms respectively. The Great Lakes region is of establishments at 4.6%. Other home to a large population but also a regions include the Plains, which significant manufacturing presence that accounts for 9.1% of establishments; increases demand for electricity, gas and the Rocky Mountains (6.4%); and New other industry services. The West’s sector England (4.0%). WWW.IBISWORLD.COM Utilities in the US November 2019 20 Competitive Landscape Market Share Concentration | Key Success Factors | Cost Structure Benchmarks Basis of Competition | Barriers to Entry | Sector Globalization

Market Share The majority of companies in the Utilities while sales prices for industry services Concentration sector are major players in their respective such as electricity increased slightly. regional and local markets. In 2019, the Within the electric power subsector and top five players account for less than the Natural Gas Distribution industry Level 15.0% of sector revenue combined. Profit (IBISWorld report 22121), large players Concentration in margins increased in the Utilities sector engage in merger and acquisition activity this industry is Low  over the past five years as the prices for to cut costs. Overall, industry various primary resources, including concentration is expected to remain low natural gas and coal, fell significantly, over the next five years.

Key Success Factors Ability to pass on cost increases Ability to negotiate successfully In about half of US states, with regulator regulatory policies have led to a Sector companies are regulated by several IBISWorld identifies competitive market for power government organizations, and operators’ 250 Key Success generation. Market forces set performance is contingent upon their ability Factors for a wholesale electricity prices. However, to receive favorable rulings from regulators. business. The most retail price caps limit the extent to important for which cost increases can be recovered. Successful adoption of smart grids and other efficient transmission technology this sector are: Ensure pricing policy is appropriate Utility operators take on large costs when In general, state governments set investing in capital and sourcing or maximum retail electricity prices. generating electricity or other industry Operators must adhere to these prices services, so adequate financial and debt or encounter fines and legal problems. management is of paramount importance.

Cost Structure In general, the largest swings in any of the Wages have trended upward slightly over Benchmarks cost components for operators in the the past five years, as the majority of Utilities sector stem from trends in electric sector employees work in high-skill power generation and transmission, as positions that are in demand. This is well as natural gas distribution. The Water evidenced by an increase in average Supply and Irrigation Systems (IBISWorld wages over the past five years, rising from report 22131), Steam and Air- $92,309 in 2014 to $97,182 in 2019. Conditioning Supply (22133) and Sewage Treatment Facilities (22132) industries do Purchases not experience major swings in cost Purchases are the most significant cost components; therefore, the majority of the for operators in the sector. In terms of discussion below will focus on changes in electric power generators, major costs are electric power and natural gas. the prices of the primary resources used to generate electricity. As the prices of Wages the various electricity-generating Wages are expected to account for 10.0% commodities fell over the past five years, of revenue for sector operators. This purchases have fallen for these operators. industry is very capital-intensive but still In line with this, falling costs also relies heavily on employees to provide transferred over to the Electric Power management of various utility services. Transmission industry (22112), as WWW.IBISWORLD.COM Utilities in the US November 2019 21

Competitive Landscape

Cost Structure stagnant electricity demand in association electric power generation and electric Benchmarks with low costs increased price competition power transmission companies. continued and provided for cheaper electricity for Additionally, natural gas distributors transmitters. Natural-gas distributors also generate profit by purchasing natural experienced purchase declines as the price gas from pipeline transportation of natural gas charged by natural gas companies at citygate prices and then pipeline transportation companies fell more selling them to customers at retail and quickly than retail prices. Overall, this wholesale prices. As the retail price of segment has fallen over the past five years to natural gas fell more slowly than the total 31.4% of sector revenue in 2019. citygate price, natural gas distributors experienced a slight increase in profit Profit during the period, though falling prices Profit, measured as earnings before did negatively affect sales volumes. In interest and taxes, is affected directly by terms of operators in electric power primary prices of energy resources and transmission, the cost to generate retail electricity prices set by public electricity fell over the past five years utilities commissions (PUCs) for electric due to falling commodity prices. This, in power transmission operators. Primary association with rate hikes granted by energy prices fell significantly over the PUCs at the state level, has led to an past five years due to global oversupply increase in margins for operators in of various commodities. The prices of electric power transmission. In 2019, natural gas and coal fell significantly, profit in the Utilities sector is expected leading to increased profit margins for to account for 23.3% of revenue.

Sector Costs

Sector Costs (2019) 100 n P r o fi t n Wages 23.3 n Purchases 80 n Depreciation n Marketing 10.0 n Rent & Utilities n Other 60 31.4

40 Percentage of revenue Percentage 10.1 0.2 0.8 20 24.2

0 SOURCE: WWW.IBISWORLD.COM WWW.IBISWORLD.COM Utilities in the US November 2019 22

Competitive Landscape

Cost Structure Depreciation Rent Benchmarks The Utilities sector is very capital-intensive, Rent accounts for 0.7% of the total continued as almost every associated industry requires revenue in 2019. This cost remains low significant capital investment. Water as operators tend to purchase assets pipelines, transmission lines, meters, rather than rent it. pipeline infrastructure, storage infrastructure, wind turbines, generation Utilities plants and solar panels may all contribute to Utilities account for 0.1% of the total the depreciation costs of a company in this revenue in 2019. Operators consume sector. Over the past five years, depreciation the energy produced from the plant for costs have increased due to significant day to day operations. Due to this infrastructure investments in both reason cost remains low. transmission and generation industries. Overall, depreciation is expected to account Other for 10.1% of revenue in 2019, up from 9.0% Other expenses include items such in 2019. as administrative costs, research and development and Marketing various other maintenance-related Marketing cost accounts for 0.2% of the costs. Other costs account for 24.2% total revenue in 2019. in 2019.

Basis of Competition External competition based upon price, convenience and The sector experiences marginal external individual preference. Additionally, Level & Trend competition, as there are not many electric power generation companies substitutes for the sector’s main services, compete with each other on the basis of Competition in this including electricity, water and natural gas price to generate and sell to transmission sector is Low and for heat. While Canada and Mexico do companies. The Electric Power the trend is Steady  engage in some marginal trade of electric Transmission and Water Supply and power, it is not enough to warrant real Irrigation Systems (22131) industries competition within the sector as a whole. encounter little to no internal sector competition, as there are no real Internal competition substitutes for water and electricity. Within the sector as a whole, competition Furthermore, other industries within this only exists between the Natural Gas sector, such as steam and air- Distribution industry (IBISWorld report conditioning supply and sewage 22121) and the Electric Power Generation treatment facilities, do not engage in any (22111a-e) and Electric Power real competition with other industries, as Transmission (22112) industries, as the products and services they offer are electric power is the only real substitute materially different than other operators for heating a home. This competition is within the sector. WWW.IBISWORLD.COM Utilities in the US November 2019 23

Competitive Landscape

Barriers to Entry The Utilities sector exhibits very high barriers to entry due to the significant Barriers to Entry checklist Level & Trend scrutiny and regulation under which Competition Low industries within this sector must operate. Barriers to Entry Concentration Low In terms of regulatory coverage, all sector in this sector are Life Cycle Stage Mature industries, electric power transmission, Capital Intensity High High and Steady  electric power generation, natural gas Technology Change Medium distribution, steam supply, water supply Regulation and Policy Heavy and sewage are heavily regulated. Electric Industry Assistance Medium

power transmitters must abide by regulations on electricity rates and fuel SOURCE: WWW.IBISWORLD.COM sources. Electric power generation companies must abide by various state- transmission, a large percentage of sector specific regulations on fuel sourcing. employees are highly skilled. Potential Natural gas distributors experience entrants into this industry will find it of significant regulatory requirements at paramount importance to hire the best both the state and national levels, workers possible in order to manage the including the need for expertise and efficiency of services provided. knowledge of industry structure. The Utilities sector as a whole is Operators in all Utilities industries generally concentrated most must also invest heavily in capital in significantly at the regional or local level order to gain entry. Most industries as a result of high capital costs and strict require heavy investment in various regulatory requirements. As a result of capital such as generation plants, solar this, many utilities throughout the sector panels, wind turbines, transmission lines, receive assistance from the government gas pipelines or water infrastructure. in the form of tax credits and rate hikes, This level of investment is a major leading to the formation of smaller deterrent to potential sector entrants. regional monopolies within a given area. Furthermore, due to the technical nature This operating environment makes it of the work within the sector, especially difficult for potential entrants in all in electricity generation and Utilities industries.

Sector Globalization The Utilities sector has a very low level only generate revenue within the United of globalization. States. Trade levels are well below 1.0% Level & Trend of revenue and domestic demand Electric power between Canada and Mexico. Globalization in this Operators in the Electric Power sector is Low and Generation, Transmission and Natural gas the trend is Steady  Distribution industry group are generally The Natural Gas Distribution industry focused in a specific regional or local group also exhibits a low level of area, especially in terms of electricity globalization, as the majority of generation. In terms of transmission, the companies within this group are located two major power grids in North America, within the United States. Information the Eastern and Western on the extraction and trade of natural interconnections, link the United States gas can be found in the Oil Drilling and to Mexico and Canada. The majority of Gas Extraction industry (IBISWorld operators are domestic companies that report 21111). WWW.IBISWORLD.COM Utilities in the US November 2019 24

Competitive Landscape

Sector Globalization Water supply and other localized to a single town or continued All other industries included in this municipality, which is also in line with sector exhibit an even-lower level of globalization trends for steam supply globalization. Most water utilities are and sewage.

International trade is a Trade Globalization Going Global: Utilities 2005–2019 major determinant of an industry’s level of 200 Export Global 200 Export Global globalization. Exports offer growth opportunities for fi rms. 150 150 However there are legal, economic and political risks 100 100 associated with dealing in foreign countries. Exports/Revenue Import competition can Exports/Revenue 50 Utilities 50 2019 bring a greater risk for companies as foreign 0 Local Import 0 Local 2005 Import producers satisfy domestic 0 40 80 120 160 0 40 80 120 160 demand that local fi rms Imports/Domestic Demand Imports/Domestic Demand would otherwise supply. SOURCE: WWW.IBISWORLD.COM WWW.IBISWORLD.COM Utilities in the US November 2019 25 Major Companies Exelon Corporation | Duke Energy Corporation NextEra Energy Inc. | American Water Works Company Inc. | Other Companies

Major Players American Water Works Company Inc. 0.4% Duke Energy Corporation 2.8% (Market Share) 90.8% Other

Exelon Corporation 3.8%

NextEra Energy Inc. 2.2% SOURCE: WWW.IBISWORLD.COM

Player Performance Founded in 1999, Exelon Corporation business unit provides energy- (Exelon) is a utility services holding management services for customers company operating in the electricity and throughout the United States. The Exelon Corporation natural gas markets. The Chicago-based company also participates in the Market Share: 3.8% company has 33,383 employees and wholesale electricity market through its operates in 47 states. Exelon is one of the extensive power-generation resources. largest electricity and natural gas suppliers The company also generates electricity in the United States, serving more than through its generation division. 10.0 million customers, 6.6 million of In March 2012, Exelon merged with which are located in Maryland, Illinois and Constellation Energy Group to become one Pennsylvania alone. Additionally, the of the largest energy providers in the company provides energy-management United States. The merger has significantly solutions to consumers and businesses. In expanded Exelon’s power-generation 2018, Exelon generated $35.9 billion in capacity, enabling it to gain market share in total revenue. wholesale electricity markets. The merger Exelon operates in this sector through also brought BGE under Exelon’s control, all of its segments and subsidiaries. Its further expanding the company’s electric transmission subsidiaries include and gas utility business. Baltimore Gas and Electric Company (BGE), Commonwealth Edison Company, Financial performance PECO and Exelon Transmission Exelon grew strongly over the past five Company. Exelon’s Constellation years, increasing an annualized 4.7% to

Exelon Corporation (US sector-specifi c operations) - fi nancial performance* Revenue Operating Income Year ($ million) (% change) ($ million) (% change) 2014 27,429.0 N/C 3,210.0 N/C 2015 29,447.0 7.4 4,554.0 41.9 2016 31,360.0 6.5 3,212.0 -29.5 2017 33,565.0 7.2 4,395.0 36.8 2018 35,985.0 7.2 3,898.0 -11.3 2019* 34,562.55 -4.0 4,170.6 7.0

* Estimates SOURCE: ANNUAL REPORT AND IBISWORLD WWW.IBISWORLD.COM Utilities in the US November 2019 26

Major Companies

Player Performance total $34.6 billion in total revenue. The transmission and distribution, it is able continued company has experienced significant to balance any major losses in a specific revenue growth over the past five years segment. Additionally, the company has due to favorable conditions resulting experienced significant growth in profit from economies of scale and significant margins over the past five years due to vertical integration. As Exelon provides falling commodity prices and increased services along the entire value chain for efficiency. Margins are expected to the Utilities sector, including generation, account for 12.1% of revenue in 2019.

Player Performance Headquartered in Charlotte, NC, Duke transmits and distributes power and gas Energy Corporation (Duke Energy) traces to customers in the Southeast and Duke Energy its roots back to the Catawba Power Midwest. The commercial power segment Company in the early 1900s. Since then, operates in unregulated wholesale power Corporation the company has expanded to become markets, supplying electricity and natural Market Share: 2.8% one of the largest electric power gas in bulk to downstream customers, companies in the United States, while the international energy division supplying 50,880 megawatts of manages generation facilities outside of electricity to 7.7 million customers across the United States. the country and abroad. Duke Energy has In July 2012, Duke Energy and a large workforce of 29,000 employees in Progress Energy merged through a generation, transmission and distribution $32.0-billion stock-swap deal. The facilities across the Carolinas, the merger has enabled the company to cut Midwest, Florida, Latin America and some redundant administrative Saudi Arabia. In 2018, Duke Energy positions, lowering overall labor generated nearly $24.5 billion in total expenses. Additionally, the merger has company revenue (latest data available). increased the company’s overall scale and Duke Energy operates primarily market share in its operating regions, through three business segments: especially North Carolina, which can regulated utilities, commercial power and potentially bolster long-term operating international energy. The company’s efficiency. However, the merger was regulated utility business generates, subject to extensive regulatory scrutiny.

Duke Energy Corporation (US sector-specifi c operations) - fi nancial performance* Revenue Operating Income Year ($ million) (% change) ($ million) (% change) 2014 22,509.0 N/C 4,795.0 N/C 2015 22,371.0 -0.6 4,974.0 3.7 2016 22,743.0 1.7 5,202.0 4.6 2017 23,565.0 3.6 5,625.0 8.1 2018 24,521.0 4.1 4,685.0 -16.7 2019* 25,058.1 2.2 5,598.9 19.5

*Estimates SOURCE: ANNUAL REPORT AND IBISWORLD WWW.IBISWORLD.COM Utilities in the US November 2019 27

Major Companies

Player Performance The Federal Energy Regulatory Additionally, the company is one of the continued Commission, part of the US Department of largest transmitters of electricity, Energy, has expressed concerns regarding providing 7.7 million customers over Duke Energy’s influence in its primary 277,100 miles of distribution lines and markets, which may lead to heightened 31,900 miles of transmission lines. The regulation over the coming years. company’s transmission business is also diversified among its customer base, with Financial performance a slightly more balanced variety of Over the past five years, Duke Energy’s customers that provide a more-consistent revenue is estimated to have grown an stream of incoming revenue. The annualized 2.2% to total $25.1 billion. company also provides natural gas to Duke has been able to outperform the over 1.5 million customers in the sector as a whole over the past five years southern United States, providing further due to its diversification within the revenue diversification. Duke Energy also sector. The company generates electricity earns consistent profits due to this from natural gas, coal, nuclear, hydro, diversification, with operating income solar and various wind generation assets. estimated at 22.3% of revenue in 2019.

Player Performance NextEra Energy Inc. (NextEra) is a major Florida Power and Light Company, an electric power company in North America electric utility company. In 2018, the that employs about 14,300 people. The company generated an estimated $16.7 NextEra Energy Inc. company is also the largest solar and billion in revenue. Market Share: 2.2% wind energy generator in the world based According to its 2018 annual report, upon 2016 capacity through its subsidiary the company operates 45,900 megawatts NextEra Energy Resources (NEER). The (MW) of generating capacity located in company has focused on the acquisition, 30 US states, four Canadian provinces development and operation of renewable and Spain. In addition to its significant energy, nuclear energy and natural gas in generating capacity, the company response to long-term federal policy accounts for approximately 16.0% of total trends toward reducing air pollution. In US wind power capacity, 11.0% of US addition to NEER, NextEra operates solar production capacity and 6.0% of

NextEra Energy (US sector-specifi c operations) - fi nancial performance* Revenue Operating Income Year ($ million) (% change) ($ million) (% change) 2014 17,021.0 N/C 4,384.0 N/C 2015 17,486.0 2.7 4,632.0 5.7 2016 16,138.0 -7.7 4,459.0 -3.7 2017 17,173.0 6.4 5,173.0 16.0 2018 16,727.0 -2.6 4,280.0 -17.3 2019 19,817.0 18.5 6,037.6 41.1

*Estimates SOURCE: ANNUAL REPORT AND IBISWORLD WWW.IBISWORLD.COM Utilities in the US November 2019 28

Major Companies

Player Performance nuclear power generating capacity, for green technologies, the company’s continued according to the 2016 annual report. sector-relevant revenue is expected to NextEra has significantly expanded its grow an annualized 3.1% to $19.8 billion renewable capacity over the past five years, in revenue. Growth was particularly with solar and wind generating capacity impressive in 2013 and 2014, when increasing exponentially year over year. The NextEra added about 400.0 MW and 1.0 company also provides 5.4 million retail and gigawatts (GW) of wind capacity, wholesale customers with electricity via 800 respectively, in the United States. The substations and 76,700 miles of company also added significant solar transmission and distribution lines. capacity in these years. Profit has proven to be more volatile based on the cost of Financial performance growth and the amount of time required NextEra has significantly expanded its to begin operations at new locations. generating capacity over the past five NextEra is in the process of increasing its years, primarily through growth in wind wind power production capability, with projects. With government support in the 1.6 GW of new wind-generation capacity form of tax credits and favorable policies implemented in 2017.

Player Performance Headquartered in Voorhees Township, active customers. The majority of revenue NJ, American Water Works Company from the regulated business comes from Inc. (American Water) provides water, water services provided to residential American Water wastewater and other related services to customers. This is followed by revenue Works Company about 15.0 million people in 46 US states generated from commercial, industrial, Inc. and two Canadian provinces. The public and other water services. Market Share: 0.4% company operates a regulated business Additionally, American Water also and a market-based business. The generates 5.0% of revenue from its company’s regulated utilities supply regulated wastewater services. about 1,600 communities in 16 states The company’s unregulated businesses with nearly 350.0 billion gallons of water provide contract management for per year and service around 3.4 million systems that serve another 5.0 million

American Water Works Company Inc. (US sector-specifi c operations) - fi nancial performance* Revenue Operating Income Year ($ million) (% change) ($ million) (% change) 2014 3,011.0 N/C 1,003.0 N/C 2015 3,159.0 4.9 1,075.0 7.2 2016 3,302.0 4.5 1,085.0 0.9 2017 3,357.0 1.7 1,253.0 15.5 2018 3,440.0 2.5 1,102.0 -12.1 2019* 3,596.7 4.6 1,220.7 10.8

*Estimates SOURCE: ANNUAL REPORT AND IBISWORLD WWW.IBISWORLD.COM Utilities in the US November 2019 29

Major Companies

Player Performance consumers in the United States and water supplied. The company has also continued Canada and also provide system design taken part in various strategic and homeowner services. Market-based acquisitions in order to bolster its activities typically comprise meter position within its industry and the reading, billing, leak detection, overall sector. As the majority of the engineering services, water treatment water and wastewater companies within services, water testing, recycled water the United States are government-owned, operations and wastewater operations. the company has focused on purchasing The company also engages in several smaller or medium-sized utilities that market-based businesses that provide a operate near the company’s businesses. range of water services. While the According to the company’s annual company is small in terms of the Utilities report, due to the stringent level of sector as a whole, it is one of the largest regulation and high levels of capital private names in water and wastewater. investment within the water and wastewater industries, an increasing Financial performance number of smaller municipally owned The company has grown an annualized utilities are willing to sell. This growth 3.6% over the past five years to total $3.6 strategy, along with efficient cost- billion in revenue. Growth in revenue has management, has driven company occurred as the average price of water has revenue and profit upward over the past increased in line with the amount of five years.

Other Companies Operators in the Utilities sector dominate regionally, but not at the national level. The sector is heavily fragmented due to regulatory restrictions. WWW.IBISWORLD.COM Utilities in the US November 2019 30 Operating Conditions Capital Intensity | Technology & Systems | Revenue Volatility Regulation & Policy | Sector Assistance

Capital Intensity The Utilities sector exhibits a very high level of capital intensity. Capital intensity Capital Intensity in high due to the major costs associated Capital units per labor unit Level with providing sector services. Electric 2.0 The level of capital power generation companies must invest intensity is High  in various generation infrastructure, such 1.5 as generation plants that source natural gas or coal, nuclear plants, hydroelectric 1.0 plants, wind turbines or solar panels. Additionally, Electric power transmission 0.5 companies must invest in poles, wires, 0.0 cables, power transformers, substations Economy Utilities Utilities and meters. Natural gas distributors and

water suppliers must invest heavily in the Dotted line shows a high level of capital intensity infrastructure necessary to provide these SOURCE: WWW.IBISWORLD.COM respective services. As infrastructure investment, especially in electric power intensity of the industry. Overall, in 2019, generation and submission, has picked the sector is expected to spend $1.01 for up in recent years, so too has the capital every dollar spent on wages. WWW.IBISWORLD.COM Utilities in the US November 2019 31

Operating Conditions

Technology and Each segment of the Utilities sector has advanced metering, implemented in Systems experienced a moderate level of smart grids. Smart grids provide real- technological change over the past time electricity usage data to consumers Level five years. and utilities, enabling both parties to better manage electricity consumption. The level of Electric power generation Natural gas distribution involves the technology change The major technological changes in laying of a substantial network of pipes is Medium  electric power generation relate to for reticulating gas to businesses and innovations in fuel technology that have households. Natural gas utilities operate made smaller-scale electricity generation, about 1.2 million miles of underground usually gas-fired, more economic. Other gas pipes. These gas transmission key changes have related to pollution pipelines convey gas to citygate stations, control and end-user energy-efficiency. the links to the distribution network. In terms of renewable generation, both Citygate stations measure the quantity of wind and solar energy have experienced gas leaving the transmission pipeline and technological advancement. In terms of reduce the pressure of the gas entering wind power, the major advancement has the distribution network. Gate stations been in bringing down the cost of energy also add mercaptan, a sour odorant, to generation. With major government gas so that consumers can easily smell assistance through the Investment Tax gas and potential leaks. Credit, wind power generation prices have fallen significantly. In terms of solar Water supply and other power, technological change can be The Water Supply and Irrigation Systems measured by the efficiency of solar energy industry (IBISWorld report 22131) conversion. Concentrating solar power operates by distributing water stored in (CSP) devices use direct heat from the dams and reservoirs to users via a system sun, concentrating it (often in large of pipelines. This water is almost always curved dishes) to produce heat at useful treated with chlorine and other chemicals temperatures. This technology has to ensure that it is potable and fit for progressed significantly over the past five consumption. Techniques used to treat years but is currently being outpaced by water prior to entry into the water increasingly lower-priced photovoltaic distribution system, as well as to monitor panels. However, this may change over its purity, are becoming more refined the next five years if panel input costs over time. should fall. In terms of sewage treatment, pipelines are used to transport Electric power transmission and wastewater to treatment plants, where it natural gas distribution is purified until it can be released into Electric power transmission has not rivers, streams or lakes. New sewage- changed significantly over the past five treatment technologies are being applied years. The major new technology used to electrical systems that oversee the over the past five years has been efficiency of the process.

Revenue Volatility Revenue volatility for the Utilities sector customers, movements in revenue are is in the high end of the low range. In relatively stable. Nevertheless, the general, because the majority of industry Natural Gas Distribution industry Level services are a necessity for downstream (IBISWorld report 22121), which The level of volatility is Medium  WWW.IBISWORLD.COM Utilities in the US November 2019 32

Operating Conditions

Revenue Volatility accounts for over 20.0% of total sector years, the sector’s largest single-year continued revenue, does provide some volatility, as revenue increase was 4.6% in 2014, revenue for this industry is directly tied when rapid increases in the price of to the price of natural gas. Other natural gas caused revenue to grow industries, including the Water Supply significantly. The largest decline and Irrigation Systems industry (22131) occurred in the following year when the and the Sewage Treatment Facilities price of natural gas fell precipitously, industry (22132), experience relatively leading to a decline of 5.0% in total low revenue volatility. Over the past five sector revenue.

Regulation and Policy Every segment of the Utilities sector is power transmission, FERC has heavily regulated at both the state and encouraged utilities to join regional federal levels. transmission organizations (RTOs) that Level & Trend are in charge of regional transmission The level of Federal regulation management; these organizations also Regulation is The three largest segments of the Utilities help to promote interstate cooperation. Heavy and the sector, electric power generation, electric In terms of natural gas distribution, trend is Steady  power transmission and natural gas FERC administers a number of laws in its distribution, are all regulated heavily at role as overseer of interstate trade in the federal level. These three segments natural gas. The most important of these fall under the purview of the Federal include the Natural Gas Act of 1938, the Energy Regulatory Commission (FERC). Natural Gas Policy Act of 1978, the Outer FERC regulates interstate transmission, Continental Shelf Lands Act, the Natural distribution and sales of both natural gas Gas Wellhead Decontrol Act of 1989 and and electricity. FERC is also in charge of the Energy Policy Act of 2005. Under the wholesale power markets, natural gas Natural Gas Act, FERC regulates both the and electric transmission investments, construction of pipeline facilities and the reliability of services provided and transportation of natural gas traded merger and acquisition activity within the interstate. Companies providing services power industry group. In terms of electric and constructing and operating interstate WWW.IBISWORLD.COM Utilities in the US November 2019 33

Operating Conditions

Regulation and Policy pipelines must first obtain FERC pricing, access to infrastructure and continued certificates of public convenience and regulation of areas in the state where a necessity. In addition, FERC approval is specific natural gas distributor may required to abandon pipelines and provide services. At the state level, PUCs related facilities and to cease providing also have the power to regulate water services, as well as to set rates for utilities. These PUCs have broad these services. authority to establish rates for service, In terms of water supply, various prescribe service standards and review regulations have been passed at the and approve rules and regulations. federal level to ensure the cleanliness of Sewage treatment and steam supply also water. For example, the 1974 Safe encounter significant oversight at the Drinking Water Act established criteria state level. and procedures for the US Environmental Protection Agency (EPA) Clean energy to develop national quality standards for Over the past five years, states have drinking water. Regulations issued increasingly introduced renewable energy pursuant to the Safe Drinking Water Act targets, requiring utilities to provide a set set standards on the amount of certain amount of renewable energy. As a result, microbial and chemical contaminants industry operators had to fund additional and radionuclides permissible in transmission infrastructure to connect drinking water. The Safe Drinking Water renewable energy to the power grid, Act was most recently amended in 1996; which significantly increased capital additional water-quality standards set by costs. However, strong government the EPA have been implemented over subsidies and tax incentives offset the time. Disinfection byproduct limits, for majority of construction costs. In example, were lowered in 1998 and took addition, utilities received, on average, effect in 2002. More-stringent surface positive rate increases that covered water treatment performance standards construction costs, boosted revenue and also became effective in 2002. In 2001, improved profit. These Renewable the EPA adopted a limit for arsenic in Portfolio Standards (RPSes) have been water of 10.0 parts per billion. The new implemented by 29 US states. limit, which became effective in 2006, is The Clean Power Plan (CPP), the one-fifth of the previous allowable level toughest climate change policy to date on and required investment spending on the the part of the United States and a part of water suppliers that did not component of a broader federal agenda to already meet the standard. address global warming, was finalized in August 2015. Building on the EPA’s State-level regulation proposed 2012 and 2014 regulations, the State governments have significant new rules would cut the electricity jurisdiction over investor-owned utilities sector’s 2005 carbon dioxide emission in the major segments of this sector. For levels 32.0% by 2030. The EPA would example, in-state public utilities provide individualized reduction targets commissions (PUCs) have direct to each state, which would then decide on jurisdiction over power transmission and methods to achieve these goals. In distribution. PUCs are able to set October 2017, however, the US Energy electricity rates based on costs. State Information Administration under the governments also have significant Trump Administration announced that it jurisdiction over natural gas distributors would abandon the CPP. Despite the within a state. These regulators oversee removal of this plan, many states have WWW.IBISWORLD.COM Utilities in the US November 2019 34

Operating Conditions

Regulation and Policy already implemented RPSes to reduce 22111a) experienced numerous plant continued emissions. Over the two years the plan retirements that will keep the industry was implemented, the Coal and Natural from returning to its previous levels. Gas Power industry (IBISWorld report

Sector Assistance Assistance to the Utilities sector is in the 10.0% in 2022. In terms of wind power, medium-to-high range. Electric power the US Congress also extended the wind transmitters and generators have been Production Tax Credit (PTC), worth 2.3 Level & Trend provided assistance through various cents per kilowatt-hour of electricity The level of Sector government subsidies over the years, generated, for another year. Any wind Assistance is especially those that update their grids, facility built before 2020 is eligible for Medium and the switch to smart metering or start the subsidy, although the credit’s value trend is Steady  sourcing more energy from renewable declines during the five-year period. resources. For example, the Investment Facilities constructed in 2017 can claim Tax Credit (ITC), a 30.0% credit granted only 80.0% of the credit, followed by to residential and commercial solar 60.0% in 2018 and 40.0% in 2019. systems set to expire at the end of 2016, In terms of water utilities, there is a has been extended to 2022. The ITC has high level of government involvement been instrumental to the Solar Power and, therefore, investment in the industry’s (IBISWorld report 22111e) maintenance and operation of this breakneck growth over the past five segment. The Natural Gas Distribution years, during which industry revenue industry (22121) gets the least amount of rose at a rapid annualized rate of 47.2%. support from the government, though The ITC will be phased out slowly, falling there are many industry associations that to 26.0% in 2020, 22.0% in 2021 and support natural gas distributors. WWW.IBISWORLD.COM Utilities in the US November 2019 35 Key Statistics

Sector Data Sector Value Revenue Added Exports Imports Wages Domestic ($m) ($m) Establishments Enterprises Employment ($m) ($m) ($m) Demand 2010 932,998.5 351,097.6 86,473 60,941 915,212 1,042.1 441.6 81,649.1 932,398.0 2011 909,901.0 341,443.2 86,814 61,256 915,709 1,184.8 340.9 82,972.3 909,057.1 2012 864,658.2 338,191.5 90,619 64,106 922,997 1,425.3 288.5 83,604.7 863,521.4 2013 881,667.8 349,394.9 91,796 65,484 921,208 1,563.9 258.0 84,776.7 880,361.9 2014 921,820.1 382,794.3 91,920 65,751 925,157 1,592.6 318.4 85,401.1 920,545.9 2015 875,808.0 401,037.4 91,286 65,391 924,038 1,877.4 225.5 87,614.3 874,156.1 2016 863,483.8 403,622.4 92,895 66,816 926,242 1,725.2 147.4 88,669.0 861,906.0 2017 898,535.8 403,038.5 95,250 68,735 930,861 1,521.6 217.1 90,636.1 897,231.3 2018 902,734.1 388,373.9 97,138 70,210 939,970 1,768.8 281.2 91,807.6 901,246.5 2019 908,313.6 394,492.8 98,430 71,324 933,039 1,740.2 281.7 90,675.4 906,855.1 2020 931,995.7 407,610.4 99,752 72,301 943,346 1,729.1 287.2 91,676.1 930,553.8 2021 943,317.5 414,740.5 100,734 73,050 948,976 1,726.8 289.5 92,182.2 941,880.2 2022 961,781.9 425,877.6 101,840 73,865 958,737 1,710.0 295.3 93,194.1 960,367.2 2023 985,238.9 438,036.5 103,166 74,828 971,192 1,774.2 305.6 94,499.0 983,770.3 2024 1,009,455.5 449,176.9 104,508 75,774 985,732 1,808.7 314.8 96,044.7 1,007,961.6

Annual Change Sector Value Domestic Revenue Added Establishments Enterprises Employment Exports Imports Wages Demand (%) (%) (%) (%) (%) (%) (%) (%) (%) 2011 -2.5 -2.7 0.4 0.5 0.1 13.7 -22.8 1.6 -2.5 2012 -5.0 -1.0 4.4 4.7 0.8 20.3 -15.4 0.8 -5.0 2013 2.0 3.3 1.3 2.1 -0.2 9.7 -10.6 1.4 2.0 2014 4.6 9.6 0.1 0.4 0.4 1.8 23.4 0.7 4.6 2015 -5.0 4.8 -0.7 -0.5 -0.1 17.9 -29.2 2.6 -5.0 2016 -1.4 0.6 1.8 2.2 0.2 -8.1 -34.6 1.2 -1.4 2017 4.1 -0.1 2.5 2.9 0.5 -11.8 47.3 2.2 4.1 2018 0.5 -3.6 2.0 2.1 1.0 16.2 29.5 1.3 0.4 2019 0.6 1.6 1.3 1.6 -0.7 -1.6 0.2 -1.2 0.6 2020 2.6 3.3 1.3 1.4 1.1 -0.6 2.0 1.1 2.6 2021 1.2 1.7 1.0 1.0 0.6 -0.1 0.8 0.6 1.2 2022 2.0 2.7 1.1 1.1 1.0 -1.0 2.0 1.1 2.0 2023 2.4 2.9 1.3 1.3 1.3 3.8 3.5 1.4 2.4 2024 2.5 2.5 1.3 1.3 1.5 1.9 3.0 1.6 2.5

Key Ratios Imports/ Exports/ Revenue per Share of the SVA/Revenue Demand Revenue Employee Wages/Revenue Employees Average Wage Economy (%) (%) (%) ($’000) (%) per Est. ($) (%) 2010 37.63 0.05 0.11 1,019.43 8.75 10.58 89,213.32 2.25 2011 37.53 0.04 0.13 993.66 9.12 10.55 90,609.90 2.16 2012 39.11 0.03 0.16 936.79 9.67 10.19 90,579.60 2.09 2013 39.63 0.03 0.18 957.08 9.62 10.04 92,027.75 2.12 2014 41.53 0.03 0.17 996.39 9.26 10.06 92,309.85 2.26 2015 45.79 0.03 0.21 947.81 10.00 10.12 94,816.77 2.30 2016 46.74 0.02 0.20 932.24 10.27 9.97 95,729.84 2.28 2017 44.86 0.02 0.17 965.27 10.09 9.77 97,368.03 2.23 2018 43.02 0.03 0.20 960.39 10.17 9.68 97,670.78 2.08 2019 43.43 0.03 0.19 973.50 9.98 9.48 97,182.86 2.07 2020 43.74 0.03 0.19 987.97 9.84 9.46 97,181.84 2.10 2021 43.97 0.03 0.18 994.04 9.77 9.42 97,138.60 2.10 2022 44.28 0.03 0.18 1,003.18 9.69 9.41 97,205.07 2.11 2023 44.46 0.03 0.18 1,014.46 9.59 9.41 97,302.08 2.14 2024 44.50 0.03 0.18 1,024.07 9.51 9.43 97,434.90 2.16

Figures are in inflation-adjusted 2019 dollars. SOURCE: WWW.IBISWORLD.COM WWW.IBISWORLD.COM Utilities in the US November 2019 36

Jargon & Glossary

Industry Jargon DISTRIBUTION The transportation of electricity along TRANSMISSION The transportation of electricity along low-voltage wires, typically to end users. high-voltage wires. PUBLIC UTILITY COMMISSION (PUC) A governing body that regulates the rates and services of a public utility.

IBISWorld Glossary BARRIERS TO ENTRY High barriers to entry mean that INDUSTRY REVENUE The total sales of industry goods new companies struggle to enter an industry, while low and services (exclusive of excise and sales tax); subsidies on barriers mean it is easy for new companies to enter an production; all other operating income from outside the industry. firm (such as commission income, repair and service CAPITAL INTENSITY Compares the amount of money income, and rent, leasing and hiring income); and capital spent on capital (plant, machinery and equipment) with work done by rental or lease. Receipts from interest that spent on labor. IBISWorld uses the ratio of royalties, dividends and the sale of fixed tangible assets are depreciation to wages as a proxy for capital intensity. High excluded. capital intensity is more than $0.333 of capital to $1 of INDUSTRY VALUE ADDED (IVA) The market value of labor; medium is $0.125 to $0.333 of capital to $1 of labor; goods and services produced by the industry minus the low is less than $0.125 of capital for every $1 of labor. cost of goods and services used in production. IVA is also CONSTANT PRICES The dollar figures in the Key Statistics described as the industry’s contribution to GDP, or profit table, including forecasts, are adjusted for inflation using plus wages and depreciation. the current year (i.e. year published) as the base year. This INTERNATIONAL TRADE The level of international trade removes the impact of changes in the purchasing power of is determined by ratios of exports to revenue and imports the dollar, leaving only the “real” growth or decline in to domestic demand. For exports/revenue: low is less than industry metrics. The inflation adjustments in IBISWorld’s 5%, medium is 5% to 20%, and high is more than 20%. reports are made using the US Bureau of Economic Imports/domestic demand: low is less than 5%, medium is Analysis’ implicit GDP price deflator. 5% to 35%, and high is more than 35%. DOMESTIC DEMAND Spending on industry goods and LIFE CYCLE All industries go through periods of growth, services within the United States, regardless of their maturity and decline. IBISWorld determines an industry’s country of origin. It is derived by adding imports to industry life cycle by considering its growth rate (measured by IVA) revenue, and then subtracting exports. compared with GDP; the growth rate of the number of EMPLOYMENT The number of permanent, part-time, establishments; the amount of change the industry’s temporary and seasonal employees, working proprietors, products are undergoing; the rate of technological change; partners, managers and executives within the industry. and the level of customer acceptance of industry products and services. ENTERPRISE A division that is separately managed and keeps management accounts. Each enterprise consists of NONEMPLOYING ESTABLISHMENT Businesses with no one or more establishments that are under common paid employment or payroll, also known as nonemployers. ownership or control. These are mostly set up by self-employed individuals. ESTABLISHMENT The smallest type of accounting unit PROFIT IBISWorld uses earnings before interest and tax within an enterprise, an establishment is a single physical (EBIT) as an indicator of a company’s profitability. It is location where business is conducted or where services or calculated as revenue minus expenses, excluding interest industrial operations are performed. Multiple and tax. establishments under common control make up an VOLATILITY The level of volatility is determined by enterprise. averaging the absolute change in revenue in each of the EXPORTS Total value of industry goods and services sold past five years. Volatility levels: very high is more than by US companies to customers abroad. ±20%; high volatility is ±10% to ±20%; moderate volatility is ±3% to ±10%; and low volatility is less than ±3%. IMPORTS Total value of industry goods and services brought in from foreign countries to be sold in the United WAGES The gross total wages and salaries of all States. employees in the industry. The cost of benefits is also included in this figure. INDUSTRY CONCENTRATION An indicator of the dominance of the top four players in an industry. Concentration is considered high if the top players account for more than 70% of industry revenue. Medium is 40% to 70% of industry revenue. Low is less than 40%. www.ibisworld.com | 1-800-330-3772 | [email protected]

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