Here is a lecture by Mr. Phil Nolan, BG Group Executive Director and Chief Executive, Transco. His lecture deals with market changes and the creation of growth opportunities.
It is my pleasure to open the second day of the IGE's Annual Conference. In doing so, I would like to take as my theme the scope that exists in Britain's newly-liberalized gas industry for embracing change and, in doing so, for creating new growth opportunities.
Those of us working in the industry today are no strangers to the profound and continuing changes which are part and parcel of the liberalized and steadily expanding British gas market. I will be touching on some of the more far-reaching aspects of such change which are likely to preoccupy us in the coming months. But first let me address the over-arching theme of this Conference - the additional scope for radical change and value creation from novel applications of the remarkable power of the Internet.
At the prestigious World Economic Conference in Davos, early in 1999, a good many experts predicted a setback to the world economy at the turn of the new Millennium - a consequence of the Y2K problem and other adverse factors.
No such setback has occurred - far from it. Instead, we have seen the 'dot com' bubble grow and burst as speculative investors piled into so-called 'new economy' shares, pushing them to prices far above those which could be sustained on the fundamentals of cash generation and profit. With bewildering rapidity, paper companies with no demonstrable track record pushed traditionally stable earners out of the FTSE 100, if only briefly.
With a heritage going back to the industrial revolution, BG was inevitably labeled 'old economy' and our experience was the opposite of the 'dot coms'. At the turn of the Millennium, as the world prepared to celebrate while holding its breath to see if the lights would stay on, BG's share price briefly touched £4.
However, by mid-February it had fallen some 35 per cent to £2.59. Now, of course, the 'dot com' bubble has burst, and the fundamentals have reasserted themselves. I am glad to say that our share price is back above £4.
Was it all just a short-term flight of speculative fancy, like others before? I believe not. In this case, there was an important underlying reality - the potential of IT, the Internet and the remarkable advances in telecommunications:
· to transform the nature of human activity, and of business;
· to give us undreamed of capabilities with which to create new sources of value; and,
· in the case of the liberalised British gas industry, to reinforce the empowerment of the individual consumer, now provided with choice, information and connectivity.
One thing is clear. There can be no lasting divide between so-called new and old economy companies. 'Old economy' companies will have to embrace the 'new economy' attributes, techniques and capabilities - because if they don't, they simply won't survive.
In gas industry terms, that essentially is the theme of this conference - significantly, the IGE's first Annual Conference of the 21st Century. Like all the other 'old economy' sectors, the gas industry must embrace change and recreate itself, on the basis of e-commerce, information management and the huge potential of broadband telecom.
As David Varney said yesterday in his keynote address to this Conference, "the international gas industry is now truly universal" - as we saw demonstrated at last week's 21st International Gas Conference organized in France by the IGU.
Yet for all the growth and development in the international gas industry, no company has accomplished more than Transco in embracing 'new economy' attributes and techniques, and in applying them to the benefit of consumers.
The plain fact is that the British gas industry has led the world in successfully liberalizing and opening up to competition the most intensely developed gas supply system to be found anywhere. Transco has been central to this achievement, providing not just the physical infrastructure but the unique commercial protocols and the complex information systems.
To the outside world Transco is the company that pipes gas to you and ensures the safety of the gas system in Great Britain. That is only as it should be. Our customers, and the public at large, have every right to expect a safe and reliable gas network - the more so as gas assumes a proportionately greater role in meeting the country's energy needs.
What they do not see is a Company that handles 50 per cent more data than a clearing bank; more than 1 million Internet transactions a day; and a Company that daily e-trades 24 TWh to balance supply and demand across the gas transportation network. Increasingly, Transco - with its traditional strapline of 'piping gas to you' - is becoming 'e-Transco'; not just the world's leading gas network manager, but also the leading exemplar of the transforming power of IT and the Internet.
Given Transco's leading capabilities and experience, we face growth opportunities across the UK utilities sector. And potentially these opportunities exist overseas in other OECD countries, as they seek to emulate the successful British experience in liberalizing their established gas industries, and opening them up to competition. They too will need the enabling expertise of network managers with the sort of attributes which Transco now exemplifies.
This factor, and the exceptional opportunities also facing BG International in contributing to the development, management and supply of new gas industries, is the reason why BG is pursuing another demerger - this time born out of strength and opportunity.
Given the scale and nature of the opportunities now foreseen, the continuing organic growth of the BG Group is no longer seen as being sufficient to realize the full potential for building shareholder value. Structural growth through acquisitions, mergers or alliances should be allowed to play its part.
Here, the ability of the successor companies to use their own shares as 'currency' will be a significant benefit, creating greater freedom than that available to BG with its two principal businesses, each different in character for equity investors.
The 'Transco group' will comprise not only Transco, the regulated provider of Britain's gas transportation network, but also subsidiaries for participating in joint ventures to realize the opportunities in Britain's telecommunications sector through the complementary use of our gas-related infrastructure and expertise.
Also, as we press ahead with the separation of Transco's regulated assets from the contestable activities servicing their needs, we foresee the creation of service subsidiaries both to meet the needs of Transco's assets, and to win third party business in the utilities sector.
As I have already said, the Transco group is well positioned to take advantage of the opportunities in the liberalizing, information-based gas markets which will soon be established in most other OECD countries.
But while BG's demerger should provide the platform for the Transco group to pursue these new growth opportunities, Transco's core business of managing Britain's regulated gas transportation network continues to be engaged in far-reaching and innovative change.
Indeed, one of the lessons we have learned from the rapid and successful liberalization of the British gas industry is that liberalization is not a straightforward transition from one stable state, monopoly, to another, a fully open and competitive market. Instead, it is a continuing process of change and evolution as advancing technology facilitates new possibilities for creating value and benefiting consumers.
Nothing stands still. Take, for example, the current areas of development and change affecting the legislation, public policy and regulation which frames the liberalized British gas industry. The last three weeks are perhaps exceptional in this regard, but there are certainly some big issues in play:
· for a start, Ofgem has published its initial consultation document on Transco's 2002 Periodic Review. This document sets out the principal issues and Ofgem's intended approach to the Review. Perhaps the most significant aspect of the paper bearing on the future structure of the British gas industry is the proposal to develop separate price controls for Transco's National Transmission System, and potentially for our individual regional distribution networks;
· complementary to this, Ofgem is defining the issues and consulting on options for planning the long-term expansion of the NTS, and for providing appropriate investment incentives;
· and at the same time, a blueprint for the liberalisation of gas metering has been put forward for consultation, this time jointly by Ofgem and Transco;
· meanwhile, earlier this week, the Utilities Bill advanced to Standing Committee debate in the House of Lords.
What does this flurry of recent developments tell us about the evolution of the institutional framework within which Transco, and the gas industry as a whole, will be operating?
First the Utilities Bill. Ever since the new Government started to consult on its proposals for regulatory reform back in March 1998, BG has publicly supported the stated goal of achieving a system of utility regulation that is consistent, transparent and predictable. Our support stems from the belief that these attributes will mutually benefit consumers and investors.
Utility industries, such as gas, are dependent on the continuing development and maintenance of their capital-intensive transportation infrastructures. As utility regulation matures, it becomes increasingly difficult to sustain the early, big improvements in operating efficiency.
Instead, the emphasis needs to shift to capital efficiency which, in part, is a function of the cost of the capital. In large measure the cost of capital for regulated infrastructure businesses like Transco is determined by capital markets and their perception of regulatory risk and uncertainty. This is why regulatory consistency and predictably is such a worthwhile prize.
However, as it currently stands, there is a danger that the Utilities Bill will turn out to be an opportunity missed. Do not mistake me, there are large parts of the Utilities Bill which we can support, for example, the creation of a merged Gas and Electricity Markets Authority and a single Gas and Electricity Consumer Council.
We also support the provisions which will underpin the new electricity trading arrangements. Beneficially, this in turn will allow the lifting of the DTI's stricter consents policy for new gas-fired power stations. In addition, we see merit in the explicit recognition of the social and environmental, as well as economic, aspects of regulation. Far better that these dimensions of regulation are dealt with transparently and with appropriate safeguards for investors.
Source:BG
© 2000 Mena Report (www.menareport.com)
