Global Utilities Companies Wake Up To Challenges Of Deregulation

Global utilities lack confidence in market's ability to cope in times of crisis

Paris, France, January 14, 2002 - While nearly two-thirds of global utilities companies feel deregulation has been a success so far, many are uncertain about their ability to cope with the unexpected or extremes in the new deregulated marketplace, according to the first Global Utilities Survey released today by Cap Gemini Ernst & Young, the leading IT services and management consultancy.

To fully understand the impact of deregulation on the world's utilities companies, Cap Gemini Ernst & Young interviewed over 100 senior utility executives from more than 85 leading companies. The survey identified key challenges facing energy and utilities companies as markets deregulate on a global scale. These were identified as:

• Political and regulatory obstacles
• Maintaining efficiency and delivering profits
• Inter-market connections
• Asset-backed trading

According to the survey report, over two-thirds of respondents felt that deregulation has been a success, even though there is acceptance that it is in its infancy in many countries. Deregulation has brought about substantial and value-adding change with the basic arrangements for third-party access, and wholesale markets, already in place or under development.

A degree of competition is also underway with an increasing focus on cost reduction and improvement of performance.

"While deregulation is creating a much-altered global utilities landscape, there is clear indication from the companies affected that the current mood is positive with many embracing change, albeit at different speeds and with varying degrees of success," said Colette Lewiner, Senior Vice President & Global leader, Cap Gemini Ernst & Young Energy, Utilities & Chemicals.

"However, the highly publicised outcomes of the 'California crisis', utility company bankruptcies and questions about the direction of the Federal Energy Regulatory Commission (FERC) and the European Commission have knocked the confidence utility companies across the globe. While these experiences have undoubtedly provided invaluable learning opportunities, they have also highlighted complex political and regulatory challenges still to be faced."

Economic uncertainty is accepted by survey respondents as part of their new operating environment. However, confidence in the current regulatory system remains a major concern and in particular the lack of clarity over market rules and standards. Respondents said that a prolonged period of transition with wavering signals from regulatory agencies decreased their confidence in the ability of the market to effectively deregulate. Attempting to create systems that meet the demands of a shifting landscape has caused many utilities company executives to feel uneasy. Improved methods of control of this regulatory system appear vital to boost confidence.

Deregulation is expected to bring tangible efficiency benefits, the most visible of these being lower prices. However, expected price reductions have not automatically followed due to issues surrounding the efficiency and effectiveness of wholesale markets and the pattern of prices. Experience from the markets that were first to deregulate suggests that such barriers to market effectiveness can be overcome but may be hampered by the political environment.

Furthermore, the majority of executives, especially in Europe, felt that deregulation made it harder to maintain profitable balance in the market. A number of markets have seen initial substantial falls in wholesale commodity prices as a result of deregulation, but this price reduction does not exist on a global scale. In the US, for example, a tighter supply and demand balance has pushed up wholesale commodity prices and squeezed profit margins. As a result of long-standing exposure to upstream commercial negotiations, gas companies were more comfortable with the prospect of price fluctuations than less experienced electricity companies.

The survey also highlights a consensus regarding the need for stronger inter-market links. Progress so far has been slow and respondents lack confidence that the issues of capacity and market rules will be solved quickly. Global utilities companies see two main requirements to ensure effective inter-market connections. Firstly, Europe will need to follow the US lead by developing a much greater degree of standardisation in market designs. Secondly, the process by which new rules are agreed must change. In Europe there is no single regulator, while in the US there is uncertainty about interaction between FERC and state regulation. Closer alignment with the regulatory agenda and a clear sense of commitment from all sides is needed.

The survey reveals a high awareness of the importance of trading in deregulated markets. However, while many companies indicated asset optimisation was the preferred business model, a dilemma emerges as to whether traders benefit from asset backing. In principle, if traders have confidence in wholesale markets and transportation arrangements, they can trade profitably without the need for physical assets. Yet the survey indicates that this confidence does not exist and organisations recognised for their trading awareness are developing physical portfolios.

Deregulation creates a fluctuating environment where winners and losers will emerge. Participants of the survey highlighted certain attributes deemed essential for success. Clarity of strategy and focus, an effective use of technology and a clear and dedicated focus on their clients topped the list.

However, it appears that the flexibility and adaptability of an organisation is the key differentiator. According to Colette Lewiner, "There is no doubt that deregulation poses great challenges to all involved. As the survey results emphasise, much is beyond the control of utilities companies. However, those able to accept its challenges and adapt swiftly will emerge the victors and will reap the real benefits of a deregulated future. "

Ends

Notes to Editors:

About Cap Gemini Ernst & Young

Cap Gemini Ernst & Young is one of the largest management and IT consulting firms in the world. The company offers management and IT consulting services, systems integration, and technology development, design and outsourcing capabilities on a global scale to help businesses continue to implement growth strategies and leverage technology in the new economy. The organisation employs about 57,000 people worldwide and reports global revenues of more than 8.5 billion euros (2000 pro forma).

With more than 5,000 dedicated consultants engaged in Energy, Chemicals Mining and Utilities projects across Europe, North America and Asia Pacific, the Group's Global Sector Unit - Cap Gemini Ernst & Young Energy, Utilities & Chemicals - 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 www.cgey.com/energy

For more information, please contact:

Philippe Guichardaz
Cap Gemini Ernst & Young
Tel: +33 (1) 47 54 50 45
philippe.guichardaz@cgey.com

Philippe Coquet
Cap Gemini Ernst &Young Energy,
Utilities & Chemicals
Tel: +33 (1) 49 67 45 83
philippe.coquet@cgey.com