After a complete pullback following the energy merchant sector meltdown of two years ago, the power industry’s dramatic earnings and valuation swings in recent years have led many companies to again reset their priorities, according to a study released Thursday at Cambridge Energy Research Associates’ CERAWeek 2004 in Houston.

Lawrence J. Makovich, senior director of CERA, said in a report on new power strategies that the model utilities had turned to following the energy merchant meltdown of two years ago is now being fine tuned.

“In the wake of a crisis of confidence, trading scandals and valuation collapses, companies in many segments of the power industry turned to a back-to-basics’ model, but they are now finding that this approach falls short in providing earnings growth,” Makovich said during a briefing Thursday.

Makovich noted that the combined net income of the companies in the Dow Jones Utilities Index fell from $12 billion in 2001 to a loss of more than $5 billion in 2002, and the 15 companies’ combined market capitalization was cut in half from almost $250 billion to less than $123 billion from 2001 to 2002. Net income recovered to about $8 billion during the first nine months of 2003, but market cap has remained less than two-thirds of what it was at the start of 2001.

“As back-to-basics is recognized as a holding action, companies must develop new strategies that can sustain improved returns over longer periods of time,” Makovich said. “This requires understanding that the industry landscape has changed dramatically, and then fitting strategy to the opportunities that are available. However, when the landscape shifts, people are often slow to recognize it because of blind spots that result from missing or misinterpreting information. That’s what creates the real opportunities in the power business — finding places where other people have blind spots.”

Dramatic shifts in the power industry have been caused in part by blind spots and failures of foresight, according to Makovich. Understanding and analyzing these failures, which are not unique to the power business, provides important insight into strategy development, and he noted that this is particularly applicable to strategic planning in the power business.

“The lessons for the power business are clear,” Makovich said.”The combination of complexity and change can easily produce persistent blind spots that result in a failure of foresight, foiled plans and missed opportunities.”

He identified five dynamics that shape the landscape that power companies use to set their new strategies:

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