Scandal, recession hurt energy markets, speakers say

Kate Thomas
OGJ Online

HOUSTON, Feb. 12, 2002 — The global energy market is experiencing a collective pause as it digests an economic slowdown and absorbs the combined effect of the California electricity crisis, the Enron scandal, and turmoil in Argentina, speakers said at the UBS Warburg global energy and utilities conference in New York.

In the short term, “capital will be more skeptical of this industry,” warned Mike Thompson, president of PSEG Global Inc., a unit of Public Service Enterprise Group Inc., Newark, NJ.

But most remained optimistic about the long-term outlook for electricity restructuring and deregulation. UBS global utilities strategist Lawson Steele said recent announcements of cancellation and delay of new generating capacity will help improve supply and demand, but he also said it’s unclear if “companies are really prepared to bite the bullet.”

He noted the reserve margin in the UK is about 30% and in Germany about 25%, levels that could set off price wars. In the US Steele said only about 20% of some 500,000 Mw of proposed generating capacity has been delayed or canceled.

In Latin America, he cited Brazil as a “ray of hope.” Bruce Williamson, CEO of Duke Energy Global Markets, a unit of Duke Energy Corp., Charlotte, NC, said Duke’s Brazilian generation assets give it a long position in a short market.

Argentina, where PSEG Global has substantial holdings, has succumbed to the “politics of electricity” said Thompson, despite what appeared to be a model restructuring plan. He said the country degenerated into a constitutional crisis because of a widespread system of patronage and corruption.

In Chile, where PSEG is the nation’s third largest distributor of electricity, Thompson said regulators have taken a more balanced approach to the market. However, he noted, it is a much smaller economy than Argentina and could use more diversification.

“With discipline and political will,” Peru has a “perfect opportunity” to differentiate itself from Argentina, Thompson said. He noted the country has achieved notable economic progress and PSEG is hopeful it will get back on a path to recovery.

Roger Urwin, group chief executive of the UK’s National Grid Co., said the company expects to capitalize on its ability to manage large complex systems and to work effectively with regulators to achieve its growth target.

The acquisition of Niagara Mohawk Holdings Inc., Syracuse, NY, will double National Grid’s US investment, Urwin said. The company expects to grow by acquisition and consolidation in fragmented markets such as the US.

National Grid has cut costs 50% since 1990, Urwin said, while connecting 20,000 Mw of new generating capacity in the UK. Among other measures taken was the consolidation of seven separate control centers into a single center. Regulators have now set a target of an additional 20% reduction in costs, he noted, which will be more difficult to achieve.

“Our performance is greatest in the early stages when we can grab the low hanging fruit,” he said. Under a 10-year performance-based rate plan agreed to by New York regulators, Urwin said National Grid will share its expected savings with ratepayers.

He estimated New Yorkers pay about $1 billion extra in congestion charges. In the UK congestion charges amounted to about £200 million in 1990 when deregulation got under way. In 3 years time, it has risen to more than £500 million/year, Urwin said. Regulators stepped in and set progressively tougher goals. He said congestion costs last year had fallen below 1990 levels.

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