Ebb and flow aside, deregulation continues worldwide

Bill Hunter, Cap Gemini Ernst & Young

Wouldn’t you have liked being a fly on the walls in the suites of top corporate executives charged the last two years with making sense out of a chaotic international phenomenon called utility deregulation?

Lucky for us those opinions have been captured and decoded—in PG-13 form—the last two years by two Cap Gemini Ernst & Young polls of 130 of those harried senior executives at utility companies around the world. After all, so much has changed in their lives and the utility industry in the last 24 months. The players are different, state and federal regulatory approaches have shifted considerably, and in many ways European progress has leapt ahead of North American deregulatory efforts.

In this environment, the results that were uncovered in this year’s “Delivering Value Through Competition” report show that more than 40 percent of executives are now less positive than the year before about the prospects for deregulation. But the 2001 survey was taken before Enron’s collapse and arguably executives were then demonstrating some irrational exuberance given deregulation’s sometimes painful history in other industries.

This year’s survey shows executives on a much more sober, even keel. And that’s good. In hindsight, the irrational exuberance of the high-flying trading days was bound to crash. But, as bad as things have gotten in energy trading, people should remember that the regulatory changes that caused the S&L crisis of the late 1980s impacted more people negatively and more widely. Despite the financial melt-down of trading companies such as Enron and Dynegy, the bankruptcy of Pacific Gas & Electric, and the steep fall of the merchant generation business, prices to consumers have fallen under deregulation, the lights have stayed on, and when Enron stopped trading, there was scarcely a blip in the market.

Therein lies the value of the surveys. They help remind the industry to put things in perspective. Deregulation is good, but it doesn’t come without pain. While things did not go well in 2002, there are reasons for encouragement in 2003.

This year shows executives are optimistic that progress is being made toward standardizing wholesale electricity markets. They haven’t given up the ghost on trading but see changes to risk management as necessary. They are very concerned about credit and financial uncertainty—as well they should be—but a large majority believe that asset-backed trading is more viable now.

In addition to the greater perspective which comparison of these two surveys provide, there are some ironies too. In 2002 our survey concluded that Europe could learn about the development of standards for deregulation from the United States. The subsequent collapse of Enron and trading afterwards brought the U.S. standards-making process to its knees.

Executives in 2001 were concerned that regulatory uncertainty would delay investment in generation and transmission in the United States in 2002. This year’s survey seems to indicate that financial uncertainty is foremost on executives’ minds.

And not surprisingly, when comparing the mood of executives around the world, this year’s survey results indicate that executives at U.S. companies are more pessimistic than the average global utility executive. Disturbingly—and very surprisingly to most observers—executives at New Zealand utilities were even more pessimistic than their American counterparts. New Zealand was thought to be a shining light for positive outcomes for deregulation. Unfortunately, we don’t have data on how the consumers feel and we’re likely to learn more as the year progresses.

On a positive note, the surveys do indicate that deregulation seems to grow on executives the more they ‘deal’ with it. This year’s survey shows that executives around the world seem to feel more comfortable with—and more upbeat about—deregulation the longer they work within its frameworks—and throes. Those working through deregulation for the longest period of time seem more upbeat, even though they admit it has been uncomfortable at times. After all, the United Kingdom is on its second deregulatory effort, and it seems to be working well there.

The history of deregulation in the utility and other industries indicates that new, open markets need strong surveillance and oversight. Just like other industries that have deregulated in the past, the utility industry had insufficient surveillance and oversight, creating new sets of problems and public concerns.

In the end, there are strong arguments that can be made for deregulation and the benefits it brings consumers and companies. Despite this there is some credence to those who say “Can we really trust this to the markets?” As the Cap Gemini Ernst & Young studies clearly indicate, global utility executives are adjusting to rapidly changing financial and regulatory scenarios. Their propensity to continue to move their organizations back to the basics of lowering costs, better sourcing and developing better relationships with customers will determine how they move to the next stage of operating within a deregulated environment.

Hunter is vice president in the utility deregulation practice at the consultancy at Cap Gemini Ernst & Young; this article is based on comments he delivered to the energy & risk management class at the University of Houston’s Global Energy Management Institute.

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The Clarion Energy Content Team is made up of editors from various publications, including POWERGRID International, Power Engineering, Renewable Energy World, Hydro Review, Smart Energy International, and Power Engineering International. Contact the content lead for this publication at Jennifer.Runyon@ClarionEvents.com.

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