It’s amazing what a difference a year makes when it comes to merger and acquisition (M&A) strategies for utilities. Executives could well be on the verge of tearing up the old blueprints for industry transformation. And that has significant implications for investors.

Last year, the conventional wisdom was that larger utilities would pursue mergers with smaller ones in higher-growth areas to offset low electricity demand in their service territories. And competitive utilities would pursue acquisitions of regulated utilities to help stabilize earnings that have been undermined by low commodity prices and distributed generation.

The merger between integrated utility Exelon Corp. (NYSE: EXC) and distribution utility Pepco Holdings Inc. (NYSE: POM) is emblematic of the need to reduce earnings risk at utilities with exposure to unregulated markets.

And the pending acquisition by Wisconsin Energy Corp. (NYSE: WEC) of smaller, higher-growth utility Integrys Energy Group Inc. (NYSE: TEG) is an excellent example of a larger utility seeking new growth.

Most experts fully believe such deals will likely continue to be a staple of the industry for some time.

Industry Consolidation Continues

But at the recent Power & Gas M&A Symposium, at least one seasoned utility M&A consultant argued that industry players’ relentless bid for ever-greater scale may no longer be the best strategy in an era of declining electricity demand and depressed wholesale power prices.

Instead, Thomas Flaherty, III, a senior partner with PwC’s Strategy& consultancy, argued that it might make more sense for utilities to downsize into leaner operations with a more customer-driven focus, since no single business model will address all the issues these companies now face.

Of course, Flaherty’s approach would still be incredibly challenging for even the most talented utility executives to pull off successfully.

His suggested options for how utility giants can become more focused operations range from selling non-core assets that are a drag on earnings, or spinning off these businesses into standalone pure-plays, or executing a “merge and spin,” whereby a spinoff is strengthened by combining it with similar assets from another company.

That was just one of the many interesting perspectives shared in a recent research note by Bill Kemp, founder of the utility consultancy Enovation Partners, who was in attendance at this prestigious conference of industry insiders.

Flaherty’s remarks were a refreshing take on how utility M&A strategies must change. But I am somewhat less confident than him that utilities “have a culture that enables different groups to pursue different models.”

Utilities have a mixed record when it comes to diversifying their portfolios, especially when it involves areas such as energy trading, insurance and banking. Indeed, we’ve witnessed some spectacular blowups, such as the various energy trading and merchant utility spinoffs that went bankrupt over the last 10 to 15 years. So utilities may not be all that much better at M&A even when it takes them in the opposite direction.

And it remains to be seen whether utilities truly have the ability to become more customer-centric. Except in states where there is electric retail competition, utilities have not had to develop the culture necessary to be responsive to a highly competitive market environment. But the disruptive threat from renewables certainly will require this increased focus.

Simplify, Simplify and Simplify

One of the more interesting perspectives to come out of the conference was that M&A strategy is concentrating on more simplified structures, rather than complex and diversified, even as the primary rationale remains unchanged: the need for growth as electricity sales have remained sluggish since the recession.

According to Enovation’s research note, “JPMorgan Chase’s Jay Horine warned that two-thirds of stock price increases has come from multiple expansion, not earnings per share (EPS) growth–that’s risky for stock prices if the multiples and core growth revert to normal.” That’s why the industry is so laser-focused on growth.

In his note, Kemp observed that business model clarity is now more important than geographical proximity in mergers. That means investors want companies to seek growth from targets involved in similar areas, rather than building an unwieldy empire from disparate operations.

And if utilities don’t simplify their business models themselves, then chances are someone else will do it, especially since activist shareholders are becoming more of a force in the power industry.

Looking ahead, conference attendees predict that utilities will increasingly partner with tech firms, as well as associations and regulators, on a much bigger scale. They also believe the utility of the future will still be managing the grid, but that advances in technology will make it more affordable for customers to generate and store energy on site for their own use.

At an industry level, it’s clear that even as established players voice their usual confidence, there are undercurrents of worry about new challenges in the strategic landscape.

For subscribers, we identify which utilities are best positioned for this brave new world.