by Roger Feldman -- Bingham, Dana and Gould, P.C.
The news magazines are full of efforts to delineate cults from faiths. In business we similarly seek to sort out "fads" from "trends." In the energy business, we are constantly required to make this distinction at two continually interacting levels: economic/regulatory formulations ("public policy") and strategic corporate responses ("business planning").
Currently, the deregulating electric power industry is sorting out the public policy and business planning ramifications of "convergence" - the interplay at the end use customer level of multiple end use services. Already put in play has been the convergence of electricity and natural gas. The connections in that context are readily apparent: alternative energy sources; deregulated trading possibilities; shared savings possibilities through energy service companies. Convergence has emerged as a national strategy of some firms for leapfrogging markets and a defensive strategy to, in effect, create regional energy fortresses. In short, the institutionalization in modern, electronic based form of the combination company, has clearly graduated to the trend stage. As pointed out in an earlier "viewpoint," the regulators have yet to catch up and the federal legislators remain too embroiled in the electric wars.
Following behind gas-electric convergence has been the potential assimilation by the electric power industry of telecom applications-physical asset usage (e.g. PCS) new services based on access to end use customers; hybrid IT - electric power products. Clearly present, but harder to conceptualize because telecom deregulation - with its strong technological driven - and power deregulation - still principally economically based - present greater strategic difficulties. Nevertheless, in the telecom deregulation bill, Congress drove a greater hole in PUHCA for telecom-power convergence by regulated companies than it ever has been willing to permit in the gas-electric context. In short convergence with more wizardry, but not therefore dismissible as a new cult.
Enter now a sinister sounding combination: electricity and water. The latter, in may way the last relatively untouched relic of the pre-competitive era of regulated natural monopolies. What logic in fleeing from the rigors of deregulation to what traditionally has been the "backwater" (a pun") of regulated industry? Nostalgia? Fear of competition? Cult tendencies?
And yet, like the first drops of rain on a windshield that presage a storm, more and more instances of aqua/power have begun to emerge. As with power deregulation, the first landmark signs are from the U.K. North West Water executed a $2.9 billion merger with Norweb, an electricity company. Welsh Water followed South Wales Electricity plc. Enron forms a special subsidiary to commoditize water use. Jacek Makowski reemerges from IPPdom as (modest corporate sobriquet) Poseidon. Smaller utilities begin to play "pac man" with smaller water companies, e.g. NIPSCO, (IWC Resources) Minnesota Power. In the US. power producers joint venture with affiliates of English deregulated water companies, e.g. Ogden Yorkshire. Giant European utilities begin to straddle both fields in the Western hemisphere, e.g. Compagnie Generale des Eaux. Globally, its French rival Lyonnaise des Eaux appears to be pursuing a similar route. Utilities and sophisticated automatic meter reading companies create strategic alliances. The interplay of water and energy management and conservation begins to be institutionalized. Power plays into the water business begin to look less like an awkward lumber and more like a strategic lunge.
What is the significance of the broadening ripples of convergence, now reaching water, caused when the regulators threw the rock of deregulation into the once turgid regulatory pool? Not, I would suggest, the creation of a mere cult. Rather, a signal to those who would play in the private power deregulated market that there are more options to think about than becoming just another power merchant on the block. Innovation to exploit the general regulatory trend toward introduction of competitive flexibility may be a key business strategy for nimble, high intellectual capital firms, whether private or part of unregulated holding companies. Because todays apparent lack of orthodoxy in thought could well become part of tomorrows differentiating and even strategically necessary strategy.
In sum, "dew convergence" is a phenomenon not just for a few extra-capitalized firms. It is a challenge and opportunity for that segment of the private power industry which seeks to benefit from rather than be submerged by convergence. Whether the logic is similar developmental skillset requirements or analogous traditional utility regulatory characteristics, private power should recognize that if they cast their electric cord upon the water, it may be returned many fold. I look for legislators to recognize and be supportive of this form of cumulative deregulation through convergence. Perhaps it will even find its way into pending federal legislation.
ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon Markets Group has practiced law related to the finance of environmental and energy projects and companies for 40 years. In particular, he has analyzed and executed a wide variety and substantial value of project financings. He chairs the American Bar Association’s Committee on Carbon Trading and Finance, serves on the Board of the American Council for Renewable Energy, and has been a senior official in the Federal Energy Administration. He is a graduate of Brown University, Yale Law School and Harvard Business School.