Ken Silverstein EnergyBiz Insider Editor-in-Chief

Risk taking, of course, is part of the enterprise system. But, the matter of whether the utility sector should become a greater part of that vision is yet to be answered. The industry, no doubt, is much more competitive now than it was 10 years ago -- a healthy development as companies have streamlined operations and become more productive. Still, any risk needs to be properly assessed and many have questioned whether utilities have the mindset and corporate cultures to undertake competitive ventures.

"Very few companies are able to transition outside their core business," says Bill Esrey, former chairman and CEO for Sprint, at a conference sponsored by the Structure Group to discuss these matters. "If you do, make sure you have competitive advantages."

Esrey spearheaded Sprint's rise and witnessed first hand the gradual fall of long distance giant AT&T. He is now on the board of Duke Energy, which he says learned the difficult lesson of getting into such outside ventures as telecom and trading. "Duke has paid the piper and now it has returned to its roots."

Just how did a blasé sector like utilities go for such a tumultuous ride? A look at the last couple decades might provide a hint. In the 1980s, those companies got into real estate and insurance -- investments that eventually went south. And, in the 1990s, the pressure was on again to participate in the growth segments of the economy, such as unregulated merchant generation and international ventures. If the downsides were properly considered and if done in moderation, it might have been a prudent consideration.

Certainly, businesses must "fail forward." In other words, they must learn from their mistakes and use those lessons to gain strength going forward. In his book, "The Art of the Long View," Peter Schwartz gives the example of the 1973 oil embargo and how the Japanese responded compared to the United States. Japan responded to high oil prices by implementing energy efficient strategies. This country meanwhile did little, believing instead that such an economic dynamic was temporary.

Potential Scenarios

At the time of any policy decision, it is impossible to know which scenario will play out. Still, it is imperative to think through all decisions -- in effect, to suspend one's beliefs in an effort to think the unthinkable. Indeed, boom and bust cycles are inevitable. Entire industries once thought to be inevitable have faded. Meantime, upstarts unheard of 20 years ago are the fabric of many societies.

"If last decade you had said Enron and WorldCom would fall, and the World Trade Center and the city of New Orleans would also be gone, people would have said you were crazy," says David Hallam, CEO of the Structure Group. "Executives understand the implications of each scenario and use them when evaluating decisions."

The landscape is littered with companies that entered into all-consuming enterprises that ultimately failed. Take Montana Power, which like a lot of utilities supported deregulation as a way to unlock shareholder value. Unlike some, it didn't hedge its bets and put its entire efforts into one pursuit: telecom, which shot up faster and came crashing down harder than any industry of the last century.

In March 2000, it would divest all its utility assets and finance its telecom unit called Touch America. At first, the enterprise seemed like a dream. The once unexciting Montana Power saw its stock jump to $64 a share because of that investment -- a huge success, given that the share price had hovered between $10-$14 for years. Well, the rest is history: In June 2003, the assets of the telecom operator were sold to a Canadian company for pennies on the dollar, or $28 million.

A lot of experts say that the utility industry must recognize its limitations. If it excels at managing assets and working the halls of regulatory agencies, why change? And if investors are looking for growth industries, they should consider companies that understand competitive markets and are well-equipped to take risks.

That's how Barry Abramson thinks. The energy analyst with Gabelli Asset Management in Rye, N.Y., emphasizes that utilities are low risk and low growth companies. Any added cash flows should go toward paying down debt and investing in basic utility businesses. In the past, however, such companies have made sound arguments for expanding outside their core strengths only to realize that they had calculated wrong. The emphasis is now on bread-and-butter issues.

None of this is to say that utilities should allow inefficiencies and complacencies to set in. Certainly, those that are well capitalized are using some of their resources for speculative enterprises such as broadband over power lines. But, they are not bet-the-farm ventures. All utilities, meanwhile, are on the lookout for emerging technologies that could fundamentally change their businesses, like newer communications tools.

Economic Forces

At the same time, power and gas companies must not only understand the political and economic environments, they must be able to play out potential events that could influence their businesses. Concern now exists, for example, that investment in transmission infrastructure is insufficient to meet the expected future demand for electricity. Despite the worries, there is additional fear that the state and federal governments don't have the stomach to ensure that necessary infrastructure gets built, in large part because there are too many other demands on their resources.

In any society, though, there are driving forces that cause scenarios to change course. If prices skyrocket as a result of supply shortages or if rolling blackouts occur, there would be an outcry and policymakers would react, and more investment would get dedicated to transmission. In essence, the democratic process is the cornerstone of a capitalistic society.

"Economic forces focus on problems," says Tom Schrader, CEO of the Electric Reliability Council of Texas. "If you believe in that, you believe in the Notre Dame," or the American spirit of Manifest Destiny.

The energy sector is the very foundation of economic life. And in that wide spectrum, utilities have a defined role: the production and delivery of power. It's a job in which they have excelled and one that will invariably get better and more efficient over time. Toward that end, the industry will continue to examine new technologies and new ways of thinking -- all in an effort to plot a future course. The goal is to know their strengths and weaknesses, and to focus on their core talents.

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