(Updates July 19 story with additional comment from GE, Saudi
Electricity comment and GE results)

By Alwyn Scott and Stanley Carvalho

NEW YORK and ABU DHABI, July 19 (Reuters) – One of General
Electric Co’s largest and most valuable customers, Saudi
Arabia, is lining up competitors to bid against GE for lucrative
power plant work, according to five people familiar with the
situation.

State-controlled Saudi Electricity Co has
qualified at least two companies to provide service or parts for
some of its more than 50 GE-made F-class turbines, and it is in
talks with two others over investments to set up facilities to
service the plants over many years, according to sources with
direct knowledge of the matter.

These approvals for the first time put Saudi Electricity in
a position to break GE’s hold on that work by having others bid
against GE on maintaining the F-Class fleet – among the largest
owned by a single entity and among the most lucrative service
portfolios in the industry – when the existing contracts come
up, according to the sources and industry databases.

Saudi Electricity Co (SEC) has not yet offered any
substantial F-Class contracts to new bidders, and it is unclear
how soon it intends to seek bids, according to sources familiar
with the matter.

In response to questions from Reuters, GE said: “At present,
GE’s F-class units in SEC continue to be covered under long-term
service agreements.” Saudi Electricity initially declined to
comment.

In a joint statement to Reuters on Sunday after Reuters
published, the companies stressed they have been partners on
power generation for nearly 40 years.

“SEC has always embarked on a very balanced policy of
procurement to ensure well diversified sources of suppliers,”
said Khalid Al-Tuaimi, executive vice president for generation
of Saudi Electricity.

Saudi Electricity “always qualifies multiple vendors to bid
on services,” Al-Tuaimi said, adding, “We have repeatedly found
GE to be an excellent strategic partner for meeting our
servicing needs.”

Joseph Anis, President and CEO of GE Power Services, Africa,
India and the Middle East, and Hisham Al Bahkali, President and
CEO of GE Saudi Arabia and Bahrain, said: “We support more than
half of the Kingdom’s power supply, and are proud to be a part
of the ongoing development of the sector.”

Saudi Arabia, the world’s largest oil producer, has grown
increasingly cost conscious, and under its “Vision 2030” reform
plan it aims to reduce oil dependence, lower state budget
deficits and create jobs.

The kingdom also wants to obtain the best possible prices on
large contracts with big companies, according to a source with
direct knowledge of Saudi Electricity.

Saudi Electricity is in the process of getting other
companies involved in bidding for power plant services, rather
than relying on GE as the sole provider, because qualifying
competitors will lower prices, the source said.

Saudi Electricity previously created competition for an
earlier generation of turbines known as the E-class, according
to the sources. After bidding began, GE ended up with less work
and prices for the work fell by about 40 percent, sources said.

One source with knowledge of GE’s service history in Saudi
Arabia said some F-Class turbines that Saudi Electricity
purchased more recently may not be under long-term agreements
because the service price was high, and those could be opened
for bidding at any time.

One side effect of Saudi Electricity qualifying third-party
firms to repair its F-Class is that it is large enough to enable
competitors to set up operations that they could use to sell the
parts and repair services to customers outside Saudi Arabia,
potentially threatening portions of GE’s service business
globally, three sources said.

Saudi Electricity’s rigorous qualification process is seen
as a stamp of approval that will help bidders sell to other
utilities and industries, one of the sources said.

The companies Saudi Electricity has qualified for work on
GE’s F-Class are Power Systems Mfg LLC, a unit of Ansaldo
Energia SpA of Genoa, Italy, and San Diego-based Combustion
Parts Inc. Both declined to comment.

GE Chief Executive John Flannery has said service revenue is
important to restoring growth to GE’s power business, where
profit fell 58 percent in the second quarter. The
division, which makes equipment for gas, coal and nuclear power
plants, is coping with a steep drop in orders for new plants.
Flannery said on Friday that fixing
the unit was “clearly our top priority.”

As a sign of its emphasis on increasing its own service
revenue, GE in May posted videos on YouTube saying it is
offering high-tech upgrades to turbines made by rivals Siemens
AG and Mitsubishi Hitachi Power Systems.

Two other service companies said they are in talks to
qualify to work on Saudi Electricity’s F-Class plants:
Chromalloy, based in Palm Beach Gardens, Florida, and Al Masaood
John Brown, in Dubai. Both said they already work on SEC’s
E-Class turbines.

Al Masaood John Brown shareholders have approved investment
to enable it to repair certain F-Class components at its Dubai
facility. It plans to present details of the planned investment
to SEC as a way of “kick starting” the formal pre-qualification
process, General Manager Brian Waddell said in an email.
Chromalloy said it is considering a large investment to
enable it to work on Saudi Electricity’s F-Class turbines for
the long term.

“We’re definitely willing to make that commitment and are in
discussions with SEC on that,” said spokesman Jeff Romaine.

“We’re looking at doing parts repairs or manufacturing of
parts for the long term,” he added. “That’s what SEC is asking
us for.”

(Reporting by Alwyn Scott in New York, Stephen Kalin in Saudi
Arabia and Stanley Carvalho in Abu Dhabi; editing by Joe White
and Edward Tobin)