Risk Management

Darkness on the Edge of Town, Survey Reveals

New study shows few companies have contingency plans for blackouts.
Tim ReasonAugust 29, 2001

Despite the horror show in California, almost half of US businesses are unprepared for energy shortages or prices spikes, according to a new survey. The study of 333 companies, sponsored by Chubb Financial Solutions Inc., showed that nearly a third of the respondents were surprised by the power problems in California and other parts of the country. Remarkably, of those who claimed they did expect shortages, 22 percent said they still elected to do nothing about them.

Among companies that did prepare, about one in four bought a back-up generator. Twenty percent said they socked away money for higher power prices, while 15 percent said they revised employee work schedules. Only 13 percent said they purchased financial protection in the form of derivatives or insurance products, admits Allan Roopan, vice president of Chubb Financial Solutions. ”There is no track record to compare that to,” says Roopan, ”but my gut says that a year or two from now that number will be a lot higher.”

Chubb, which sells weather and energy derivatives, is among a number of companies seeking to convince corporate America that energy and related risks, such as weather, can be managed rather than endured. Goldman Sachs recently announced that it would begin selling weather derivatives (which correlate closely with energy prices) this Fall. Whether energy derivatives become popular could depend on how smoothly deregulation proceeds.

Powerless, Texas?

In California, a deeply indebted Southern California Edison continues to stave off bankruptcy caused by faulty deregulation efforts, but the attention of market watchers is already shifting elsewhere. ”There has been a slowdown in deregulation since the California debacle,” notes Allison Bacon, utility industry analyst for AMR Research. ”Texas is the new deregulation poster child. Anything that happens there is going to be watched closely.”’

Too bad for Texas. In another blow to deregulation, NewPower Holdings Inc, parent of The NewPower Co, announced this month that it missed its $75 million revenue target by more than $10 million in the second quarter, a shortfall that it blamed in part on ”continued and unexplained delays” in deregulation pilot programs in the Lone Star state.

Management at NewPower — a joint venture of Enron, IBM, and AOL — also lowered its third and fourth quarter estimates downward by $20 to $25 million and $5 to $10 million, respectively. Although NewPower convinced 47,000 Texas customers to switch from their traditional distributors, the Electric Reliability Council of Texas (Ercot), which is supposed to act as a central data clearinghouse, has struggled to provide customer billing information to new providers. Shell Energy, another new player in Texas, also criticized the Ercot delays, noting on its Web site that ”We anticipate that several months may pass before all our customers are switched and are receiving power from Shell Energy.”

”Those companies are already fighting an uphill battle,” Bacon tells CFO.com. ”The NewPower Co is targeting the residential sector, where margins are extremely small, so any type of delay is going to have a major impact on their bottom line.”

That’s a bad sign. Long before California’s power shortages, one of the earliest blows to the Golden State’s deregulation efforts was Enron’s conspicuous retreat from the residential power business there. The reason for the pullback? Apparently, Enron management deemed the market unprofitable.

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