by Dana Bacciocco
Associate Editor
How will the utility sector evolve when uncertainty abounds, with deregulation, government reevaluation of energy policies and dynamic corporate strategies. Decision-makers are at a crossroads that will take utilities through the decade, amid changing structures, where influences will ebb and swell. Deloitte Research, in cooperation with Welling & Co. and International Communications Research, conducted a global survey of interested parties exploring salient issues of the utility industry between now and 2010. Results are presented in the multi-part series, “The Utility Executive’s Field Guide to the Future,” compiled by Dwight Allen, communications and utilities director with Deloitte Research.
Allen told EL&P, “There will undoubtedly be a series of developments through the decade that will require a lot of adjustment both in public policy and corporate strategies. Our basic premise has been that the energy sector is going to be of great importance during this new decade; already, some of the things that have been happening in California and the Middle East, and with respect to global warming bear that out.”
A common thread
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It is striking that, in the initial survey, government is perceived as the number one factor driving the utility industry both globally and in North America (Figure 1). “I think that is because this industry is in transition between the old monopolistic model, on the one hand, and the wide open competition model on the other,” Allen said. “Respondents are correctly proceeding,” he continued. “What government does, for example, confronted by a situation such as the California crisis, or problems with transmission infrastructures and rising natural gas prices, will have major impact on the industry.
“It’s still a business which has to pay close attention to government. Looking at California, it’s possible that government control over the business could stage a comeback during this period,” Allen reiterated.
Survey content bolsters this remark, suggesting that government has not only direct bearing on utilities, for example through rate deregulation, but also indirect impact through actions related to monitoring and control in areas from mergers and acquisitions to monetary policy, from consumer protection to taxation.
Added Allen, “The Bush administration and Congress are now at work on new energy policies and plansellipseI doubt that whatever they may do in the next few months will answer all the questions and solve all the problems.”
Allen revealed further commonality in the survey, “Looking at lower end, the fact that, comparatively, respondents didn’t see some factors like economy and environment as being major, may be a bit optimistic.”
An uncommon twist
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Allen explained that beyond the overall rankings (Figure 2), “Going deeper into the process, it began to appear that utilities, by and large, tend to build strategies on a particular set of assumptions, about things like energy prices and government policy and global warming.” In contrast, he found, “A lot of divergent opinion particularly outside of the industry on some of these questions, such as what direction government policy will take, what will happen with the economy, and whether or not it will be a decade of globalization.” For these reasons, Allen added, “Our basic conclusion is that scenario-based planning is a good idea for businesses like energy, facing a time of significant complexity and uncertainty.”
Turning points are difficult to predict. However, applying assumptions and scenarios can help build a strategy reinforced by flexibility and responsiveness (and cash).
Allen asserted, “scenario-based planning will provide options, contingency plans, and even exit strategies, so that when change hits, companies will: 1) recognize changes early on, 2) have already given thought to how changes could affect strategy, and 3) have taken steps to actively prepare for that change, putting them ahead of game.”
In conclusion, Allen shared, “A year ago when I gave a talk based on this material, it was a bit of an uphill battle to get people to worry too terribly much about scenarios in which the economy slowed down and stock markets plunged, where global warming became more of a concern, and the promise of the Internet came into doubt.
“I would submit that recent events would show that it’s dangerous to be too confident that your assumptions are going to hold for any period of time in today’s world.”
The final report of the series proposes four scenarios for the next decade and discusses how companies can develop strategies taking into account these versions of the next 10 years.
Deloitte Research is a permanent thought leadership organization established by Deloitte & Touche Consulting. Their research identifies and analyzes market forces and major strategic, organizational and technical issues. For more information about the company and the study visit their Web site at www.dc.com/research. Dwight Allen may be reached at [email protected] or 202-220-2667.
