A panel of top utility executives agreed Thursday that the U.S. power industry is less risky than it was five years ago, but still unsure which direction the market is headed because of the conflicting signals from regulators, customers and forecasts. Edison International’s CEO meanwhile offered a dire outlook for California, suggesting that the state is only in the calm before another huge storm.
Speaking at Cambridge Energy Research Institute’s CERAWeek in Houston on Thursday, Edison International CEO John E. Bryson offered his views along with Cinergy Corp. CEO James E. Rogers, Consolidated Edison CEO Eugene R. McGrath, Constellation Energy Group CEO Mayo A. Shattuck III and Lawrence J. Makovich, CERA Senior Director, Global Gas and Power Group.
Rogers noted that the utility industry is in a better place than it was five years ago, but he noted that management across the board remains cautious, even though it has to be agile to ensure future growth.
“We sit here today on this fault line not clear when to move off of it because there are so many forces at work,” Rogers said. While utilities needed to grow their businesses, especially in the commercial arena, at the same time they cannot neglect the regulated segment. “We need to plan on both sides of our market…because at the end of the day, we need to play in both.”
McGrath, who has spent more than 40 years in the utility business overseeing New York’s power sector, said the industry has “learned something in the turbulence of the last five years, but I believe there is a lack of clarity in many areas.” He noted that in some sectors, there are conflicting roles for regional and wholesale competition.
Shattuck, who joined Constellation less than a month before Enron Corp. collapsed, believes that what business should have been concentrating on, which he called the three “Cs,” — cost, customers and competitors, instead were the many “Fs” as Enron’s merchant takeover threw the sector into a frenzy, causing “fragmentation in the marketplace, fear, followers”who were led into the growth path of merchant energy, and finally, “fanaticism” by regulators and credit ratings agencies that have made it difficult for many to restructure.
“For ‘foolishness,’ I will only mention Enron,” Shattuck said. “Lastly, there was a certain degree of ‘fickleness,’ with lots of changed strategies, lots of dramatic shifts of certain companies, particularly around competitive markets.” He said the fundamental shift has led Constellation to make certain decisions along the way.
“Now we have a fundamental dilemma as to who is going to bear the risk, shareholders or customers,” Shattuck said.
McGrath noted that it was “very difficult” for his company to not “jump into the parade” to follow Enron, and while he was criticized at the time, he kept the company on a path to make investments that would not hurt ConEdison’s financial status. “We kept our balance sheet devoted to the core business,” he said. “You have to make your investments best suited to solve your issues.”
Still, there are more problems foreseen for California, according to Bryson. He said it was the “calm before the storm” and not vice versa. “We have been through misery in California,” he noted. “It’s nice not to be in the headlines, be boring and just get about our work, but we need to be noisy. Others would prefer calm, but the state of the framework and what that might mean for future supplies in the state” remains tentative.
“There simply isn’t sufficient power generation being built in California to meet our relatively near-term needs,” Bryson cautioned. “It’s very ‘peaky,’ and there is a critical need to meet summer peak. Forecasters are rarely commenting so that it scarcely impacts public awareness.”
However, Bryson said that forecasts show that by the summer of 2006, “in the event of a hotpoint, there is a risk again of shortages of supply and blackouts in California.” However, while Bryson acknowledged the differing views on California’s energy future, the “big problem is investment is not being made where it needs to be made. We need clarity on supply in California. We have aging power plants…, but utilities are reluctant to contract long term for lack of clarity about customer base.” The “volume of concern is beginning to rise, but still in relatively hushed terms.”
Bryson said, “I raise a kind of strong and dire message. I hope it will be heeded. CERA may forever debate what went wrong in California. but lack of framework is very much a critical issue.”
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