TORONTO & HOUSTON, Feb. 12, 2003 -- While confidence in the prospects for deregulation among energy executives has fallen in the last 12 months, US and Canadian companies indicate that some progress is being made towards standardizing wholesale electricity markets even though events in California and Ontario have slowed momentum on retail competition at the residential level.
Those are among findings for the North American portion of the Cap Gemini Ernst & Young study released this week at a forum at the Toronto Service Delivery Centre and at an energy risk management class held at the Global Energy Management Institute at the University of Houston. The CGE&Y survey is titled "Delivering Value Through Competition."
More than 130 global utility executives from 18 countries participated in this second annual Cap Gemini Ernst & Young study conducted in the fall of 2002, including 30 executives from 18 companies based in the US and Canada. Major headlines from the global findings include:
* 90% of respondents feel retail competition at the large commercial & industrial customer level is "very important" or "important" to creating value
* Only 55% thought retail residential competition had the potential to be "very important" or "important" to the value of deregulated markets, because of the extremely negative responses on the current effectiveness of retail competition (only 33% of US and 10% of Canadian respondents rated it "good" or "neutral" today)
* In terms of wholesale markets, 55% of US and 50% of Canadian respondents have concerns about supply margins and their ability to balance their portfolio within the next 3-5 years
* The three most significant issues facing companies with regard to trading and risk management after Enron are 1) changes to risk framework; 2) designing and building of new systems, and 3) increases of credit.
* European regulatory focus is on the EU-wide extension of full retail competition by 2007, while the US Federal Energy Regulatory Commission's proposed Standard Market Design (SMD) focuses exclusively on wholesale market standardization over a five-year period.
"The North American responses to this year's study were reflective of the challenging economic environment and the aftershocks of California and Enron," said Bill Hunter, vice president and utility restructuring co-leader with Cap Gemini Ernst & Young.
"Executives are concerned about finding ways to create a more liquid market for wholesale electricity and still support energy trading as long as the industry has strong risk management tools in place. However, executives remain cautious as a result of the potential for political and regulatory intervention in the markets. Regulatory uncertainty is always detrimental to investment and action."
Most US utility companies endured a brutal 2002, with their accounting policies, credit ratings, and growth strategies under fire. Not surprisingly, their survey responses were focused on the FERC's Standard Market Design proposal for wholesale markets and the future of trading and risk management after Enron.
"After California, it was widely recognized that the availability of generation and transmission capacity is a major issue in the US, and that fact is a major driver behind the FERC's proposed SMD," said Steve Behrens, vice president and utility restructuring co-leader for the Americas at Cap Gemini Ernst & Young. "However, the survey respondents are warning us that the markets cannot afford to wait until SMD is implemented to reward the capacity and connectivity investments that need to be made now."
Other notable US findings include:
* All US respondents agree that "pure-play" trading models will not be viable for the foreseeable future, and that asset-backed trading is the foundation of proper energy trading and risk management portfolio management. However, there is no agreement on who will play the "market maker" role that Enron held for a decade to stimulate the development of markets and liquidity.
* The industry realizes that, in the words of one respondent, "the S in 'SMD' stands for similar not standard...FERC is quite happy to avoid problems by accommodating regional variations."
* As a sign of how unpredictable today's energy markets are, the 130 global survey respondents identify Duke Power as the third most admired competitor because of its "consistency of performance" and "culture for opportunities." Last year's "most admired company" from the Cap Gemini Ernst & Young survey (taken in the fall of 2001) was Enron.
Deregulation of Canadian energy markets is evolving on a province-by-province basis and while opportunities are developing across the country, Ontario has almost been paralyzed by the introduction of Bill 210 as market participants sort out the impact of the legislation.
This regulatory change, which is scheduled to last until 2006, gives residential and other designated customers a guaranteed price, whether or not they have also signed a retail contract. In effect, some investments in new retail businesses appear to have been stranded.
"Both power producers and retailers have largely put plans for Ontario on hold and are watching to see what happens," said Denis Posten.
Other notable findings include:
* Even before the Ontario price cap decision, the mood among most Canadian respondents was negative about the prospects for wholesale and retail deregulation in 2003. In the words of one respondent, "California and Enron together have poisoned deregulation in North America."
* While the pace of retail deregulation in eastern Canada has slowed to a standstill, the beat goes on in western provinces, as Alberta has maintained its open markets, and wholesale prices have eased as new capacity has come online. In addition, Centrica, Direct Energy recently announced the purchase of ATCO's retail customer base. British Columbia has also signalled plans to encourage independent power producers and to place its transmission system under separate management and governance.
About Cap Gemini Ernst & Young
The Cap Gemini Ernst & Young Group is one of the world's largest providers of Consulting, Technology and Outsourcing services. The company helps businesses continue to implement growth strategies and leverage technology. The organization employs around 53,000 people worldwide and reported 2001 global revenues of more than 8.4 billion euros. More information about individual service lines, offices and research is available at www.ca.cgey.com
With more than 6,000 dedicated consultants engaged in Energy, Chemicals Mining and Utilities projects across Europe, North America and Asia Pacific, Cap Gemini Ernst & Young's Energy, Utilities & Chemicals Global Sector Unit serves the business consulting and information technology needs of many of the world's largest players of this industry. More information about individual service lines, offices and research is available at http://www.ca.cgey.com/industry/energy/index.html.