Utility Globalization

Abstract

Not too long ago I met with two young representatives of a Brazil-
ian utility. They looked at me strangely when I told them they should be
prepared for US utilities to enter their market. Why, they wondered,
would the weak Brazilian market attract money, time, and attention from
a huge, well developed one?
Probably they had not thought through the implications of US util-
ity deregulation. Perhaps they were not fully aware of the make-up of
consortiums which bought generating plants when neighboring Argen-
tina privatized its system in the mid-1990’s. Most basically, they probably
failed to pay attention to forecasts of long-term worldwide economic
growth rates.
These forecasts project average annual growth of 1-2% for mature,
developed economies while developing economies are projected to grow
at 4-6%. This growth rate differential acts as a siphon for capital. In
developing economies population growth continues apace and markets
are far from saturated. Growth means expanding operations and new
projects, requiring new infrastructure and investment. And the invest-
ments are justified by higher than normal returns. Since these countries
are capital poor, they become net borrowers, attracting and utilizing
funds from the developed economies.
On the other hand, the mature economies offer huge revenues but
limited growth. Population and energy demands are stable and tradi-
tional energy markets saturated. Moreover, deregulation has made pro-
tected and assured profit margins a thing of the past. Competition prom-
ises to reduce profit margins towards zero, a textbook phenomenon seen
in increasingly competitive offers for commodity supply.