la Frontera

Just two weeks after lawmakers passed sweeping legislation to restructure the electric-utility industry in Texas, TXU Corp. has launched an important test of how it will respond in the soon-to-be competitive electric marketplace.

The Dallas-based utility, formerly Texas Utilities Co., has struck a deal to provide a comprehensive package of services electricity, gas, telephone, cable and home security to tenants of a 328-acre, business and residential development called La Frontera on the fast-growing northern border of Austin.

The deal, to be announced next week, is the first such comprehensive "bundling" arrangement for the utility, and analysts say it's one of the first in the U.S.

It's also an important test for the idea critical for utilities that will soon be facing competition for the first time that consumers will reward companies that provide such all-in-one-service with their loyalty, even if it doesn't save them money.

"Companies are looking ahead to see how they can keep the customers they have and attract new customers," says Susan Tonkin, an analyst with Frost & Sullivan, a research firm in Mountain View, Calif. "It has the possibility to be a very good tool to compete in a deregulated marketplace."

Come Jan. 1, 2002, customers will be able to choose their electricity provider, much as they can shop around now for long-distance service. TXU and the state's other monopoly utilities, which serve about 70% of the Texas market, must also separate their companies into generating, distribution and retail companies.

"In the new world of restructuring, customers won't have to take service from TXU," says Tom Baker, president of distribution for TXU Electric & Gas.

Bundling enables TXU to sell services such as phone, long-distance and Internet access that provide higher profit margins than gas and electric rates.

That is important, since deregulation freezes rates for utilities such as TXU for the next 2 years. Just as important, it is seen as a way to woo customers with the convenience of all-in-one service; market surveys indicate consumers will pay extra for such packages.

La Frontera , which could be worth more than $10 million in annual revenue if the development is fully built, is to be the first test of its bundling strategy. If successful, the strategy could be made available for all of TXU's retail customers.

The development in which Ed Bass of Fort Worth's Bass family is the majority investor lies along Interstate 35 on the border between Travis and Williamson counties. Both counties are among the fastest-growing in the state, and their border has become a high-tech corridor.

TXU has agreed to bear the cost of building the utility infrastructure; laying gas, electric and phone lines for the entire development, which will combine high-end commercial, retail and residential tenants. The project's first 112 acres are expected to be completed early next year. TXU doesn't get exclusive utility rights in the project, but its services will be part of the developers' marketing pitch.

For partners in the La Frontera development, the arrangement guarantees convenient access to a full range of services for their tenants. It also limits the amount of construction; since TXU will provide all the services, it will lay its fiberoptic, electric and gas lines in the same trench. "We want to bring in all the services at the beginning," says Don Martin, an Austin developer and public relations executive who is one of La Frontera 's three managing partners. "It's a one-point solution."

The TXU deal doesn't guarantee the company will sell to every tenant; it must make those deals individually. But Mr. Martin says that by being on site first and having a solid brand name in electric and gas, TXU should prosper. "Once they've built customer loyalty in their core services," he says, "it's not going to be that much more difficult to sell other services."

In looking for a one-stop utility provider, the partnership 35/45 Investors L.P. had few companies to choose from. The only real competition was CoServ Electric Inc., an aggressive Corinth-based cooperative that has offered bundled services in its fast-growing home turf in North Texas. But CoServ couldn't provide full electric service until the beginning of 2002, when competition takes hold, and Mr. Martin says his partnership wanted a complete package of services. Bill McGinnis, CoServ's general manager and chief executive, confirms this, and says the coop also decided it didn't have enough personnel to expand much beyond its base.

TXU and other giant utilities have, in recent years, been on an acquisition binge designed to provide an opportunity to sell other types of service to customers.

Since 1997, TXU has bought natural-gas concern Enserch Corp. and its Lone Star Gas division, and a local telephone company, Lufkin-Conroe Communications, which it has developed into a regional carrier with high-speed Internet access, networking and Web-design capabilities. TXU also owns 20% of the Texas operations of wireless provider PCS PrimeCo.

To give its services a single brand-name identity among customers, the company last month changed its name to TXU and slapped the new name on its subsidiaries. TXU executives say they want the newly named company to be thought of as something more than a utility: "We want to be involved in the full energy chain, if you will," Mr. Baker says.

So far, other bundling experiments have been "pretty rocky," says Ms. Tonkin, the Frost & Sullivan analyst. For instance, NorAm Energy Corp., a Houston natural-gas company, and Sprint Corp. of Westwood, Kan., launched a limited bundling venture in early 1997 that offered NorAm's gas customers in Ohio long-distance discount plans and free calling minutes from Sprint. Sprint customers could use credits from their longdistance bill to reduce their gas bill.

But the companies didn't continue the six month trial when it ended in late 1997. One reason, according to an April report by Frost & Sullivan: a "weaker than anticipated link between brand loyalty ... and bundling of unrelated products."

NorAm was acquired in 1997 by Houston based Reliant Energy Inc. as the trial wrapped up. A spokesman for Reliant, formerly called Houston Industries, says that in the short term the company won't be straying from its core businesses in energy. The company doesn't have a telecom component and doesn't think it can compete as a "middleman" in those areas.

La Frontera Development

Acres: 328
Managing partners: William Boecker, Fort Worth, and
Bill Smalling and Don Martin, Austin

Site: Interstate 35 on border of Williamson and Travis counties

Parcels sold: 112 acres to Diversified Developers REIT,
Cleveland, Ohio

Property types: Retail, midrise offices (10to12 stories), hotel,
900 residential units, other mixed use