Out of the ashes of Enron: Where do utilities go from here?

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By Jamie Biddle, CEO, Orcom

As the utility industry sifts through the remains of the once powerful Enron, we are confronted with some uncomfortable questions about the direction of our industry.

Certainly the California crisis and Enron’s decent into history will raise serious questions from some constituents about the future of energy trading as a financial strategy. It is also clear that incentive-based ratemaking and uncertainties around deregulation will require utility companies to turn in new directions to find future profitability and growth. But is energy trading and deregulation no longer a viable path to increasing earnings per share? Must utilities now, more than ever, turn inward and reevaluate business processes to lower expense and improve their competitive edge?

Where are the Feds?

An amazing thing happened on Dec. 2, 2001. Enron, one of the world’s largest traders of oil, gas and power, filed for bankruptcy and no one came to their rescue. One of the largest proponents of deregulation plunged to uncertain death and the silence was penetrating. Why did no one, including the federal government, come to the giant’s rescue?

Enron was an irony. Despite being the largest advocate for deregulation, the company managed to turn off a good number of regulators, utilities and oil and gas companies with its enormous thirst for power and cumbersome, bullyish maneuvers.

Yet, many in the utilities industry should be asking, “Where is George Bush of Texas?” Perhaps the void would not be so obvious had the federal government not so recently intervened to save the airline industry after 9-11. It was widely publicized that the Feds re-fused to watch the airline giants suffer the fatal consequences and came to their rescue with billions of dollars worth in aid.

However it is not just national tragedy that leads to federal government intervention. In 1998, when Long-Term Capital Management, a large and prominent hedge fund was on the brink of failure, the Federal Reserve and leading investment banks organized a rescue. They intervened because they were concerned about the possible dire consequences for world financial markets if the hedge fund failed.

Yet on November 29, Enron sank alone and no one appeared concerned with the fate of the wholesale gas and electric trading markets. Perhaps this development was quietly greeted with sighs of relief in the boardrooms of regulated utilities across the country. Supporters of deregulation have good reason to be concerned.

Where do utilities go from here?

But have industry pressures moved our collective focus off the mark: increasing the bottom line of our business?

Today major utilities are turning to the state and federal government for rate increases to pay for the high costs of purchased power or to cover losses associated with wholesale energy trading. In addition, the financial markets are scrutinizing the revenue streams of utility companies, requiring greater transparency in business functions. The perceived risk profile for all utility/energy investors has increased, driving greater sensitivity on Wall Street to financial performance and cost-reduction strategies.

Enron’s demise combined with energy price volatility and reliability issues over the past couple of years gives regulators, and maybe energy companies themselves, reason to take an extra step or two in the decision process while considering non-traditional, non-regulated activities. Utilities need to focus on tightening budgets to increase their competitive edge as well their profits. In order to compete in the post-Enron era, companies must promote a return to core competencies and, as a result, outsource aspects of the business process like customer care and billing. This reduces much of the heavy financial risk utilities are now taking and offers a more certain, manageable future.

Despite the tremendous uncertainty of this time, one thing is clear. It will be those companies that grow earnings and continue to harbor high-value relationships with customers that will surely survive in the end.

Biddle is the CEO of ORCOM solutions based in Bend, Ore. He can be reached at Jamie_biddle@orcom.com.

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