Political and Regulatory Risk—The U.S. Challenge

Abstract

The independent power (IPP) industry faces the highest dimension
of political risk, regulatory uncertainty and market challenges in its brief
dynamic history over the next five years. A number of key market issues
in the U.S. driven by regulatory changes are pending for resolution im-
pacting the long term health and performance of the industry.
Originally, the industry was spawned by the provision of strong
regulatory and tax incentives to promote successful non-utility genera-
tion and development. These initial inducements were overtaken by the
forces of competition and project development through the provision of
regulatory market supports, competitive bidding and least cost planning
at the state level.
Finally, competitive market forces were in control during the past
decade as power matured into more of a commodity industry with price
(through marketing and trading) becoming the critical arbiter of service.
This created the current transitional environment in the U.S. in which
regulatory risk is at the largest level the industry has faced in its brief
history. When converged with the threats of overbuilding and plum-
meting asset valuations, the combination, until 2005, could be deadly.
Frequently, IPP developers have faced regulatory risk and its con-
sequences in the development of international projects during the past
decade. Special forms of political risk insurance coverage and support-
ive government programs have been established to manage the volatil-
ity and uncertainty associated with the political and regulatory dimen-
sion of project development in international markets.