The utility industry's roller coaster ride is not
finished. There are more highs and lows to come. The role
of key executives is to envision potential scenarios and
to understand what could result from each possibility.
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Ken Silverstein
EnergyBiz Insider
Editor-in-Chief |
Risk taking, of course, is part of the enterprise
system. But, the matter of whether the utility sector
should become a greater part of that vision is yet to be
answered. The industry, no doubt, is much more competitive
now than it was 10 years ago -- a healthy development as
companies have streamlined operations and become more
productive. Still, any risk needs to be properly assessed
and many have questioned whether utilities have the
mindset and corporate cultures to undertake competitive
ventures.
"Very few companies are able to transition outside
their core business," says Bill Esrey, former chairman and
CEO for Sprint, at a conference sponsored by the Structure
Group to discuss these matters. "If you do, make sure you
have competitive advantages."
Esrey spearheaded Sprint's rise and witnessed first
hand the gradual fall of long distance giant AT&T. He is
now on the board of Duke Energy, which he says learned the
difficult lesson of getting into such outside ventures as
telecom and trading. "Duke has paid the piper and now it
has returned to its roots."
Just how did a blasé sector like utilities go for such
a tumultuous ride? A look at the last couple decades might
provide a hint. In the 1980s, those companies got into
real estate and insurance -- investments that eventually
went south. And, in the 1990s, the pressure was on again
to participate in the growth segments of the economy, such
as unregulated merchant generation and international
ventures. If the downsides were properly considered and if
done in moderation, it might have been a prudent
consideration.
Certainly, businesses must "fail forward." In other
words, they must learn from their mistakes and use those
lessons to gain strength going forward. In his book, "The
Art of the Long View," Peter Schwartz gives the example of
the 1973 oil embargo and how the Japanese responded
compared to the United States. Japan responded to high oil
prices by implementing energy efficient strategies. This
country meanwhile did little, believing instead that such
an economic dynamic was temporary.
Potential Scenarios
At the time of any policy decision, it is impossible to
know which scenario will play out. Still, it is imperative
to think through all decisions -- in effect, to suspend
one's beliefs in an effort to think the unthinkable.
Indeed, boom and bust cycles are inevitable. Entire
industries once thought to be inevitable have faded.
Meantime, upstarts unheard of 20 years ago are the fabric
of many societies.
"If last decade you had said Enron and WorldCom would
fall, and the World Trade Center and the city of New
Orleans would also be gone, people would have said you
were crazy," says David Hallam, CEO of the Structure
Group. "Executives understand the implications of each
scenario and use them when evaluating decisions."
The landscape is littered with companies that entered
into all-consuming enterprises that ultimately failed.
Take Montana Power, which like a lot of utilities
supported deregulation as a way to unlock shareholder
value. Unlike some, it didn't hedge its bets and put its
entire efforts into one pursuit: telecom, which shot up
faster and came crashing down harder than any industry of
the last century.
In March 2000, it would divest all its utility assets
and finance its telecom unit called Touch America. At
first, the enterprise seemed like a dream. The once
unexciting Montana Power saw its stock jump to $64 a share
because of that investment -- a huge success, given that
the share price had hovered between $10-$14 for years.
Well, the rest is history: In June 2003, the assets of the
telecom operator were sold to a Canadian company for
pennies on the dollar, or $28 million.
A lot of experts say that the utility industry must
recognize its limitations. If it excels at managing assets
and working the halls of regulatory agencies, why change?
And if investors are looking for growth industries, they
should consider companies that understand competitive
markets and are well-equipped to take risks.
That's how Barry Abramson thinks. The energy analyst
with Gabelli Asset Management in Rye, N.Y., emphasizes
that utilities are low risk and low growth companies. Any
added cash flows should go toward paying down debt and
investing in basic utility businesses. In the past,
however, such companies have made sound arguments for
expanding outside their core strengths only to realize
that they had calculated wrong. The emphasis is now on
bread-and-butter issues.
None of this is to say that utilities should allow
inefficiencies and complacencies to set in. Certainly,
those that are well capitalized are using some of their
resources for speculative enterprises such as broadband
over power lines. But, they are not bet-the-farm ventures.
All utilities, meanwhile, are on the lookout for emerging
technologies that could fundamentally change their
businesses, like newer communications tools.
Economic Forces
At the same time, power and gas companies must not only
understand the political and economic environments, they
must be able to play out potential events that could
influence their businesses. Concern now exists, for
example, that investment in transmission infrastructure is
insufficient to meet the expected future demand for
electricity. Despite the worries, there is additional fear
that the state and federal governments don't have the
stomach to ensure that necessary infrastructure gets
built, in large part because there are too many other
demands on their resources.
In any society, though, there are driving forces that
cause scenarios to change course. If prices skyrocket as a
result of supply shortages or if rolling blackouts occur,
there would be an outcry and policymakers would react, and
more investment would get dedicated to transmission. In
essence, the democratic process is the cornerstone of a
capitalistic society.
"Economic forces focus on problems," says Tom Schrader,
CEO of the Electric Reliability Council of Texas. "If you
believe in that, you believe in the Notre Dame," or the
American spirit of Manifest Destiny.
The energy sector is the very foundation of economic
life. And in that wide spectrum, utilities have a defined
role: the production and delivery of power. It's a job in
which they have excelled and one that will invariably get
better and more efficient over time. Toward that end, the
industry will continue to examine new technologies and new
ways of thinking -- all in an effort to plot a future
course. The goal is to know their strengths and
weaknesses, and to focus on their core talents.
For far more extensive news on the energy/power
visit: http://www.energycentral.com
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