In a bid to secure growth, utility companies have been frantically buying generation capacity, distribution networks, and customer franchises in Europe’s deregulating markets, often paying extraordinary amounts of money in the process. Strategic value is cited: the strengthening of geographic position, fast entry into a new market, or access to end customers. But it is difficult to see how this kind of strategic value can amount to more than 100 percent of the fundamental value of the underlying assets—the price some have paid.

In eight recent deals for German local utilities, the average price paid per customer was about €2,200 ($1,950). Yet McKinsey’s best estimate of the value of such a customer is €900 to €1,400 (Exhibit 1, part 1). Buyers of pure retail customers in the United Kingdom have paid, on average, €330 each, as against McKinsey’s estimate of €120 to €170 in customer value—if the retailer manages to sell not only electricity but also some natural gas and telecom services (Exhibit 1, part 2). More modest premiums are being paid for generation: recent acquisition prices in Europe have averaged €700 per kilowatt of installed capacity, as against an investment cost of €450 to €500 per kilowatt for...