One thing for the US energy industry to remember is that not all governments are taking the same approach as the US towards energy markets. Asian markets, for example, are taking a much more cautious approach to deregulation and are asking themselves if the US paradigm is appropriate. Crude oil markets are global -- the natural gas market isn't. Major consumption shifts can have large impacts on US natural gas market participants. The question of whether volatility can cause permanent impacts to consumption is not as far fetched as it appears.

The cost of energy can be anywhere from 75% or more of production costs (in the chemical to fertilizer industries) to less than 10%. However, a company with 10% of production costs still has major exposures. For example, in a 60% volatility market, this means that the market expects that the cost of energy could move over 3.75% -either direction in a day. The one-year volatility is around 30% - this implies the market expectation of the cost of the one-year strip could vary by over ten cents every day. For a 10,000 MMBtu per day consumer that is an expectation of a $365,000 shift in annual costs every single day.

Investment is driven by perceived risk/reward ratios. If other governments use market regulation to control risk and utility rate structures to subsidize industry, then they have lowered investment risk. While it is true that most regulators over collect the cost of capital investment for serving them from the industrial consumers, it is also true that many systems manage the volatility of energy prices for the industrial consumer.

In addition, I have written previously about the increased cost of risk capital in the energy business caused by the deregulation process. This cost easily exceeds $5-6 Billion per year. Add to this the fact that the deregulation of electricity prices changes the fundamental relationships in the ownership and management of the production options (use of generation assets) in a manner that has an undeniable upward pressure on the risk premium cost for hedging from the consumer side and you have a significant impact on investment decisions.

At some point the capital investor votes with their feet – and they already are doing so. While labor costs are a major point in the relocation of facilities, energy is inescapably another measurable pressure. At some point the discourse will reach the level where the nattering classes cannot be ignored. The question is – will the industry have any answers? Where are the stable market structure solutions?

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