Europe’s utilities have developed a wanderlust. Deregulation has given them the freedom to explore new geographic markets and new businesses. But shareholders would be wise to question how well companies are handling this newfound liberty. Some could be in danger of losing their way.

Examples of diversification abound. The Dutch electricity company PNEM/MEGA has moved into water and waste services. Reliant Energy (based in the United States) has acquired gas and electricity utilities in Europe. And the former electricity monopolies of Ireland, Italy, Scotland, and Spain all have telecom and Internet businesses.

Such diversification can create enormous value. Yet shareholders should bear in mind that utility markets around the world are at various stages of a transition: they are in the process of being liberalized but have not yet become fully competitive. During this transition, there are, unquestionably, opportunities for a diversified utility to make money. But once full competition is established, diversified companies are unlikely to perform as well as focused ones, and utilities will find themselves paring down their noncore asset base as quickly as they are now enlarging it.

In the meantime, what are the attractions of diversifying? First, electricity companies, which are leading the trend...