Can the Merchant Energy Industry Survive?
It Can, and It Must
By Chuck Watson, Chairman and Chief Executive Officer
WHO IN HOUSTON REMAINS UNAWARE of the intense scrutiny that has been focused on energy companies in the last year, with the demise of Enron amidst allegations of shady accounting practices, document shredding, and behind-the-scenes manipulation of power markets in California? The entire industry has been transported from relative obscurity to the front page. Nowhere have people felt the impact as much as those of us in Houston, the nation's "energy capital."
Lost behind the headlines is the plain truth that the nation's energy merchants – in Houston and elsewhere – are good companies, staffed by good people who are doing an important job. Without these companies and these people, our economy simply could not function today as efficiently as it does.
Energy merchants such as Dynegy, which I have the privilege of leading, perform three major functions. First, we generate electricity and buy the fuel to run the plants. In the last two years, energy merchants have built 160,000 megawatts of new generation capacity in the U.S., according to the DOE. By our estimates, that's a savings to utility ratepayers of approximately $65 billion. Since these new power plants are much more fuel-efficient than old plants, we have significantly reduced air pollution emissions associated with power generation. Energy merchants also are investing in renewable energy sources like wind, hydroelectric and geothermal power plants.
We also manage the transportation of energy – whether natural gas or electricity – from its origin to its ultimate place of use. Most often, the delivery path is not an energy superhighway. It's more like a maze of city streets with stop signs, construction zones, dead ends, traffic congestion, and different rules in neighboring towns. We know our way around this system as well as the legendary London taxi drivers know their way around their city. We know the best routes to deliver energy, and use them to benefit our customers.
Lastly, energy merchants protect end-use customers from what could otherwise be wildly fluctuating prices for the energy services they want and need. Through financial arrangements known as hedging, we keep energy prices stable and predictable, even in the face of complex and rapidly changing dynamics in production, transmission and consumption of energy. Our management of the financial risks involved in energy procurement allows people to live their lives and businesses to focus on their core missions, rather than having to worry about energy costs.
Our industry has seen phenomenal growth – real growth for most companies, not just an illusion generated by accounting sleight of hand. But some in our industry stretched rules to their outer boundary – and beyond – in the name of higher profits. Most (and I put my own company squarely in this camp) have sought to make a fair profit in a difficult, competitive business environment, while doing everything possible to ensure that we conduct our business honestly, ethically and effectively.
Thus, I welcome the scrutiny to which my company and our industry are now being subjected. We have an obligation to all our constituents to do our jobs properly, and to make sure we report our actions appropriately. If our industry has sometimes been opaque in its financial reporting, we need to become more transparent. If we have depended too much on financial leverage and the assumption that growth will continue unabated, we need to reduce our risk profiles and solidify our balance sheets. At Dynegy, we understand these points well. We commit ourselves to making whatever changes are needed so that the public will trust our industry and our company, whether they deal with us as investors, customers, or neighbors.
What lessons should we draw from recent developments?
First, energy merchants like Dynegy fill an important role in America's economic future. As the nation's energy needs grow, energy merchants must grow and continue to expand their vast physical assets (be they power plants, pipelines, electric transmission lines or storage facilities) that deliver real services to the public. To grow, energy merchants will need continued access to capital. Emotional over-reactions that cut off access to capital for all energy merchants, because of the faults of a few, will lead inexorably to future energy shortages that will constrain future economic growth.
Second, energy merchants and, indeed, all of Corporate America, will comply with whatever new rules and regulations society requires of us in response to recent events. But we will need a little time to adjust so that the transition will be smooth. Precipitous over-reaction could seriously upset the delicate balance of energy supplies and leave consumers stranded. Also, retroactively applying new rules to past situations would clearly be a mistake.
Third, don't assume that financial complexity is wrong, evil or unnecessary. Our business is extraordinarily intricate, and we must employ unique and sophisticated financial arrangements to fulfill our dual responsibility to deliver energy safely and manage financial risk. Excessive restrictions on the use of financial (hedging) instruments in the energy industry could mean that the lights will go out and houses are cold – an outcome that nobody desires.
Lastly, let's not make the mistake of assuming that current problems in the industry mean that energy deregulation has failed, or that it was a bad idea. Time and again, in industries ranging from telecommunications to airlines, from trucking to finance, we have seen that deregulation brings significant benefits to consumers, including innovation, better service, and lower costs. Since competition first was introduced into the electric utility industry in the mid-1980s, electricity prices have reduced 31 percent, after adjusting for inflation. (By comparison, the price of gasoline is about the same, inflation adjusted, over the same period.)
Regulation of the electric utility industry was proposed more than a century ago – not by consumer advocates, but by the notorious utility monopolist, Samuel Insull. He recognized that regulation would protect competitors from each other and from their own incompetence. Now we know better: competition is the best way to make sure companies perform in ways that benefit all consumers.
(Last modified 05/20/2002) |
