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Implementation of retail competition
has to address drop in utility executives' confidence
22 January 2003
Confidence in deregulation has fallen over the last twelve
months among senior executives in global energy utilities
companies according to a new survey by Cap Gemini Ernst &
Young. The survey - Delivering Value Through Competition
- based on interviews with over 130 global senior executives
finds that more than 40% are now less positive about the prospects
for deregulation.
Among the negative points raised were concerns about interventions
in markets by regulators and governments, loss of liquidity
in wholesale markets and the challenges associated with implementation
of deregulation.
Energy companies collapses, caused for some of them by their
inability to comply with new regulatory rules were also recurring
issues raised by executives.
On a positive note, however, there was the recognition that
the industry has adapted to life after Enron, despite a significant
fall in credit ratings among US utilities. Furthermore, the
survey finds continued support for trading with strong risk
management tools, however a large majority now believed that
only asset-backed trading models were viable within the sector.
Another success story is the way the market has embraced
retail competition for larger, non-residential customers with
90% of responses considering it important or very important
to creating value. There are a number of concerns about implementing
retail competition for residential customers, with only 55%
believing it has the potential to be important or very
important to creating value. However, a number of markets
are now committed to implementing full residential competition,
including all the EU countries by 2007, so the challenge is
to design and deliver appropriate solutions. Hub-based approaches
for customer data management were considered by respondents
as a more concrete basis for sustainable and cost-effective
competition.
When it comes to operating in competitive markets, the survey
highlighted that price is by far the most important factor
for residential and non-residential customers alike. Customer
service is also of importance for retail customers, but is
best employed as a tool to retain existing customers, not
acquire new ones. In this area few respondents intend to rely
on organic growth with many focusing on mergers and acquisition.
The survey also raises questions over diversification as a
model for competition, with responses illustrating that while
dual-fuel offers have been reasonably successful, added-value
services and products have generally produced disappointing
results to date.
An effective wholesale market is recognised by almost all
those questioned as critical to future success. It must create
clear signals that enable balancing decisions to be executed
in the short term and decisions for investment in generation
or network assets in the longer term. The principle behind
market design standardisation has strong support, with 97%
of respondents believing standardisation is important for
the future development of wholesale markets. Debate remains,
however, in North America around the practicalities surrounding
the implementation of the current design.
Interpreting the survey's key findings, Dr Jayesh Parmar,
Vice President, Utilities Market Restructuring, Cap Gemini
Ernst & Young said: "We found a growing sense of realism
as the scale of transformation and its associated business
issues emerge across the globe. The dip in confidence our
survey finds is linked to the awareness of these and a growing
appreciation of the challenges to come. However, government
and regulatory objectives are clear, deregulation is set to
continue, and the focus must now be on delivering competition
and value to consumers."
The future
The survey also provides an interesting insight into the
future shape of the industry:
Consolidation - faced with a combination of regulatory
and competitive pressure to improve efficiency, many respondents
felt a smaller number of larger players and 'brands' would
emerge. The challenge for regulators is to balance this trend,
and its associated benefits, against the emergence of oligopolies
that would ultimately limit competition. The challenge for
players in this market is to deliver value through this process
of consolidation.
Vertical integration - survey responses point to the
natural tendency for players in competitive markets to combine
upstream generation or gas purchase, with the downstream retail
business. Regulatory concerns about the market effects of
this appear overstated, instead concern should be focused
more on the number and comparative size of competitors in
each market.
Unbundling - there is a clear view that unbundling
of major value-chain segments does matter, but also that unbundling
of functional elements such as meter reading is counterproductive.
Survey responses also suggest that unbundling is not yet being
implemented effectively. Cap Gemini Ernst & Young's view
is that effective unbundling does not necessarily require
separation of ownership although clear separation of costs,
contracts, accounting, people, branding and information handling
is needed.
---Ends---
Notes for editors
A full summary of the report is available from www.cgey.com/energy
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 organisation
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.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 www.cgey.com/energy
For further information please contact:
Philippe Guichardaz
+33 1 47 54 50 45
philippe.guichardaz@cgey.com
Paul Davies/Debbie Lindau
+44 20 7208 2749/4704
pauld@consol.co.uk
debbiel@consol.co.uk
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