10/28/98

CONTACT: Kathleen O'Toole, News Service (650) 725-1939;

e-mail kathleen.otoole@stanford.edu

Energy industry reform set back, not stopped, by financial turmoil

"If we build it, they will come."

That was the mantra for the energy industry until six months ago. It was based on a global economy in which investors lined up to build or buy energy plants to serve a worldwide population eager for economic growth.

Today, the trends toward privatization and deregulation of the energy industry have been slowed but not stopped by the Asian financial crisis, four representatives of the industry told a Stanford audience. The occasion was a day-long conference on the "winners and losers" of globalization sponsored by the Institute for International Studies and the Bechtel Group Inc., a worldwide construction company that began life in California 100 years ago.

John D. Carter, president of Bechtel Europe, Africa, Middle East and Southwest Asia, described the present as the "inevitable hangover from the champagne of last year." Deregulation of energy markets has stalled and some regions are retreating, he said. California has modified and delayed its commitment to deregulation, the United Kingdom's new Labor government is trying to help coal miners by delaying the development of gas resources, and the financial tools available to energy entrepreneurs in the developing world suddenly have contracted. Countries strapped for cash also are reconsidering the desirability of using foreign currency to buy gas as a fuel for producing electricity. While they want the cheapest prices they can get, they are also worried about being dependent on foreign fuel supplies. The desire for energy to drive economic growth is still there, he added, but the new cautious environment will work to the advantage of those companies who have been in the energy field longer and to the disadvantage of new entrants.

Joseph W. Ferrigno, president and chief executive of Prudential Asia Infrastructure Investors Ltd., said privatization of energy is a "highly complex and chaotic" field driven by the tension between people's desire for a more stable and affordable supply of energy and their fears of the displacement costs of moving away from a public utility. Privatizations are really public-private partnerships with most countries striving to make sure they retain 51 percent ownership.

Energy is a local business rather than an Internet business, said Carlos A. Riva, president and CEO of InterGen, a joint venture of Bechtel and Shell that is developing energy production capacity on six continents. "Being local means more than local offices," he said. "You have to hire local staff and conduct business in the local language."

Joseph W. Sutton, president and CEO of Enron International, said privatization of energy had been a "fever raging throughout the world." Numerous entrepreneurs have been building or buying power facilities, and countries want them because they believe the cheaper prices provided through competition will help them "grow their economy." Central America and the Caribbean were among the first to allow independent power providers. Chile and Argentina have been leaders in deregulation and Brazil will follow suit, he predicted. Only the United Kingdom and Norway have deregulated in Europe. The financial crisis in Asia is forcing national leaders there to consider privatization, and Africa's west coast, with substantial natural resources but political problems in the past, appears to be more democratic now and heading toward better development of infrastructure, he said.

Who are the losers in this globalization battle? asked Helmut Schmidt, the former chancellor of West Germany, who was in the audience.

Bechtel's Carter said they were the employees of state-owned utilities who were displaced by more efficient private companies. In Thailand, for example, 120,000 public employees have been replaced by 10,000 private ones. In England, he said, it might be the coal workers if the government decides to permit cheaper gas.

Enron's Sutton had a different answer: The losers, he said, will be the citizens of the countries that are "slow to react" to the competitive forces driving privatization and deregulation, because their future national productivity will be lower.

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By Kathleen O'Toole