by Roger Feldman -- Bingham, Dana and Gould, P.C.
Enrons announcement of California disillusionment should be a wakeup call to the architects of the deregulation revolution. So too should the announcement of the Citigroup merger. It is useful to reflect on what they suggest.
Thirty years ago, banks looked like utilities: fragmented service areas, reflecting regulatory policy; fragmented service lines, again a product of regulation. Stability, based on that territorial division.
While regulation stood still, it turned out funds could be raised, transferred and paid more for by non-bank competitors. Electronic commerce turbocharged the process. ("Independent liquidity producers", as it were, arrived on the scene) Goliath Trust stirred, however, breathed the fire of deregulation, and broke the chains of regulation, both sectoral and regional. The result is the elephant mating dance we now see; the prospect is for a few tyrannosaurii roaming the financial jungle.
Energy superficially took a different route from banking. Deregulation began as a David & Goliath upstart revolution; it proceeded in Congress as a mega consumers revolt. Consolidation thus appeared to be the last gasp of the old order.
But what does California teach us? The stranded cost recovery gambit has proved a powerful delaying barrier to change. The retail customer market has proved dauntingly unfluid, pax Enron. Meanwhile, the asset purchasers have turned out to be mostly the biggest utility boys-next door. The divested behemoths have become the acquirers across the continent. Convergence has been fully rationalized.
Meanwhile the use of ISOs in the name of system efficiency has all the earmarks of providing large market territories for those with expanding generation power. Even were anti-trust standards to suddenly be reasserted, they will do so in the light of this larger definition of competition. Just as the securities and banking industries have melded, so too inexorably will the energy industries.
So, despite seemingly divergent pathes, after thirty-five years, banks and utilities may well look alike again. Private power, aggregation and discount brokerage are alike - all slated to be divisions of national pillars. (Indeed, the rationale of separation of energy and finance may be expected to blur as well.)
In neither industry does a reliance on resurgent consumer populism seem like a likely business strategy. In finance, the possibilities for customization under the radar "seems possible". In a sense, private ESCOs represent an analogous phenomenon in energy.
But is this all for the good? It is not entirely clear that the cycle of deregulation/competitive diversification/consolidation is necessarily in the optimal long term public interest in either industry. Just as enforced fragmented monopoly led to stagnated innovative change, so too can apparently competitive oligopoly. (Remember what happened to the U.S. auto industry when it ruled the market.)
Since we are still in the period of industry transition to change, this concern may seem extraneous or alarmist musing. The political debate is still being framed as one of consumerists versus monopolists defending their fiefdoms.
But perhaps a different public policy tack out to be taken in banking and in energy. Not a backward-looking Luddite cry for community banks and neighborhood reddy kilowatts, but a focus on what it will take to perpetuate the sparks of innovation which deregulation initially produces: new services, new technical products, continual possibilities of market entry. Not a backward looking restraint on self generated growth, but a preservation of some areas of growth, for some period of time, before their opening to the general marketplace.
Inevitably the actual areas of opportunity where such a policy may be appropriate often prove to be different than those which appear most plausible at any time. But just as there seems to be a logic to preserving the internet as a vehicle for competitive finance, so the area of dispersed energy development might benefit from protective "infant industry" status.
While deregulated capitalism can produce both astonishing creativity and undreamt of new forms of business organizations, in energy as in banking, there is merit in recognizing that it will seek financially satisfying (and potentially stultifying) oligopolistic stasis, unless our approach to deregulation seeks to learn from the past. We may bank our energies, if we allow energy to go the way of the banks.
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.