January 22, 2003 — Confidence in deregulation has fallen over the last twelve months among senior executives in global energy utilities companies according to a new survey by Cap Gemini Ernst & Young.
The survey – Delivering Value Through Competition – based on interviews with over 130 global senior executives finds that more than 40% are now less positive about the prospects for deregulation.
Among the negative points raised were concerns about interventions in markets by regulators and governments, loss of liquidity in wholesale markets and the challenges associated with implementation of deregulation.
Energy companies collapses, caused for some of them by their inability to comply with new regulatory rules were also recurring issues raised by executives.
On a positive note, however, there was the recognition that the industry has adapted to life after Enron, despite a significant fall in credit ratings among US utilities. Furthermore, the survey finds continued support for trading with strong risk management tools, however a large majority now believed that only asset-backed trading models were viable within the sector.
Another success story is the way the market has embraced retail competition for larger, non-residential customers with 90% of responses considering it important or very important to creating value. There are a number of concerns about implementing retail competition for residential customers, with only 55% believing it has the potential to be important or very important to creating value.
However, a number of markets are now committed to implementing full residential competition, including all the EU countries by 2007, so the challenge is to design and deliver appropriate solutions. Hub-based approaches for customer data management were considered by respondents as a more concrete basis for sustainable and cost-effective competition.
When it comes to operating in competitive markets, the survey highlighted that price is by far the most important factor for residential and non-residential customers alike. Customer service is also of importance for retail customers, but is best employed as a tool to retain existing customers, not acquire new ones. In this area few respondents intend to rely on organic growth with many focusing on mergers and acquisition.
The survey also raises questions over diversification as a model for competition, with responses illustrating that while dual-fuel offers have been reasonably successful, added-value services and products have generally produced disappointing results to date.
An effective wholesale market is recognised by almost all those questioned as critical to future success. It must create clear signals that enable balancing decisions to be executed in the short term and decisions for investment in generation or network assets in the longer term.
The principle behind market design standardisation has strong support, with 97% of respondents believing standardisation is important for the future development of wholesale markets. Debate remains, however, in North America around the practicalities surrounding the implementation of the current design.
Interpreting the survey’s key findings, Dr Jayesh Parmar, Vice President, Utilities Market Restructuring, Cap Gemini Ernst & Young said: “We found a growing sense of realism as the scale of transformation and its associated business issues emerge across the globe. The dip in confidence our survey finds is linked to the awareness of these and a growing appreciation of the challenges to come. However, government and regulatory objectives are clear, deregulation is set to continue, and the focus must now be on delivering competition and value to consumers.”
The survey also provides an interesting insight into the future shape of the industry:
Consolidation – faced with a combination of regulatory and competitive pressure to improve efficiency, many respondents felt a smaller number of larger players and ‘brands’ would emerge. The challenge for regulators is to balance this trend, and its associated benefits, against the emergence of oligopolies that would ultimately limit competition. The challenge for players in this market is to deliver value through this process of consolidation.
Vertical integration – survey responses point to the natural tendency for players in competitive markets to combine upstream generation or gas purchase, with the downstream retail business. Regulatory concerns about the market effects of this appear overstated, instead concern should be focused more on the number and comparative size of competitors in each market.
Unbundling – there is a clear view that unbundling of major value-chain segments does matter, but also that unbundling of functional elements such as meter reading is counterproductive. Survey responses also suggest that unbundling is not yet being implemented effectively. Cap Gemini Ernst & Young’s view is that effective unbundling does not necessarily require separation of ownership although clear separation of costs, contracts, accounting, people, branding and information handling is needed.