It’s only about two decades since the first countries to embark on liberalisation of their power industries blazed a trail for the rest of the world. So when it comes to assessing the effects, it is, as with the French Revolution, far too soon to tell.

All the more so as liberalisation is still very much a work in progress. The frontrunners included Chile, Norway and the UK, some US states, and Australia and New Zealand.

Spain is also well ahead of the European Commission’s deadlines, its market due to be fully open by the start of next year. This is one of the reasons we at BP attach such importance to our power and gas operations in Spain, along with other factors like the strong demand growth and Spain’s location between the LNG basins of the Middle East and the Atlantic.

The deregulatory process is, broadly speaking, lagging behind in the rest of Europe. But there’s plenty of top-down pressure from the EU for the stragglers to catch up and the signs are that this will keep up the momentum.

However, one of the difficulties is trying to absorb the lessons of the different experiences so far and apply them to other countries with different corporate and institutional structures. All the more so as the transformation from an industry that was state-run and national structure to one which has been largely privatised and is increasingly globalised has been very rapid in this case.

In the energy industry many of us can see the powerful arguments for liberalisation: the fact that state-owned national monopolies have been supplying each country’s needs more or less self-sufficiently has led to chronic over-capacity and inefficiency. European deregulation offers the potential for big efficiency gains and lower prices for energy customers, offering a tremendous boost to the economy – not to mention new business opportunities.

The example of the UK demonstrates the potential. It has not been completely smooth from the industry’s standpoint. Nevertheless, gas prices charged to consumers have fallen by about 15% since 1997, and electricity prices by 12% since 1996, both significantly steeper falls than the average price decline in the EU.

Still, we need to be sympathetic to public concerns about the security of supply, for instance. Here in Spain recent investment in generation capacity has not kept pace with likely demand. There is some genuine concern about potential power shortages in the next couple of years. European consumers looking at the example of power shortages in California 18 months ago will hardly be reassured by that either.

The lesson from such problems is not that liberalisation is a mistake, but rather that the precise details of market structure and regulation matter very much. We are still very much groping our way towards the best model.

In fact, part of the difficulty in this debate at the European level is that the different characteristics of the individual markets call for different regulatory models. There is no universal ideal in regulation – it always depends on the circumstances.

It is easy to point out flaws with hindsight – like the retail price cap in highly-regulated California which was bound to distort the market when wholesale prices rose far enough; or the implicit cap on pool prices in Spain because of the mechanism for compensating incumbents for costs incurred before the introduction of competition. In both cases the problem was actually too little operation of the market mechanism, not too much.

At the time it’s put in place, however, the regulatory framework for liberalisation has to involve political compromises that might not make the best long-term economic sense.

Regulation is not simply a technical matter, it is a political one, and that means it has to be an evolutionary process subject to messy negotiations. In the power industry the importance of the product to our societies, and the immense infrastructure requirements, will always mean governments are going to be closely involved in our businesses.

This is something to welcome. Regulation by an appropriate authority with clear responsibilities is essential for investor and customer confidence. Without this framework there could be no significant investment in expensive and high-risk new infrastructure.

Although good regulation is vital, it’s important to get across as well the message that competitive markets can indeed offer security of supply – when they are fully developed.

In the transition from regulated industry to free market, though, they can be insufficiently deep and broad. That might well spell unwelcome volatility in prices and also in supply in an industry where decisions to invest in capacity are long-term.

It has to be said that the Enron factor has not been helpful in progressing the case for faster liberalisation in Continental Europe either. While reassuring in the sense that its impact on supply and prices has been remarkably small, the collapse of Enron has been a PR disaster with the general public.

Nor is the world context likely to encourage decisions that might imply any risk-taking at present. Against a background of recession, terrorism and shifting geo-politics, it would not be at all surprising to find sentiment turning very cautious.

Europe does already depend on imports for 40% of its gas supplies, a proportion that is climbing rapidly. The gas trade has been globalising for the past two decades. Although we are still far from having a world market, a quarter of the gas consumed around the globe has crossed an international border, up from 15% in 1990.

It is hard to see any reason why the direction of the trend might change – but its speed could well be affected by recent events. And so too might the shape of the European market, because after all the inefficiency of the state-controlled framework in energy has been precisely a price paid for security of supply.

In the liberalised markets it is often not clear who, if anybody, retains the obligation to ‘keep the lights on’. No doubt Californians hit by the power cuts would have no hesitation in pointing this out as a big drawback.

Spaniards might yet come to share the same concerns, Spain’s utilities having so strongly favoured the Californian model during their privatisation because of its favourable treatment of their stranded costs.

So looking ahead it is difficult for the time being to feel sure about how far and how fast the liberalisation process is going to proceed.

We should not allow the context to be used as an excuse for any backtracking on policy, though. Indeed, moving too slowly will only increase uncertainties and the danger of instability. We need to get from here to there as quickly as possible.

Equally, companies have a responsibility to respond to concerns about security and volatility by adopting robust corporate governance and risk management policies. Collectively as an industry we may need to think harder about our own responsibilities and about the appropriate regulatory structure in this rapidly changing market.

It’s essential though that we do press ahead, both businesses and politicians, with the construction of a competitive, open and integrated market in energy.

This will make an important contribution to the dynamism of the European economy as a whole, which is important for living standards, and important in the global context. The European Union must live up to the world’s need for a second engine of economic growth.

What’s more, liberalisation responds to real needs. After all, energy demand has been growing in all parts of the world and that’s not going to change.

At the same time, both environmental targets and the constant drive for productivity mean that energy must be produced more and more efficiently. What customers want is cheaper, cleaner energy, and more of it.

The fact that gas is in plentiful supply and the desire for cleaner, less carbon-intensive fuels will, along with continuing technical innovations, ensure gas is continuing to increase in importance as an energy source.

The emergence of the gas turbine as an efficient and reliable power generating source, which now accounts for more than 50% of generation in some countries, has helped meet this combination of demands. Fifty years ago oil companies considered natural gas a nuisance, and as recently as 15 years ago UK power stations were not allowed to burn gas at all. But as we know, gas-fired power plants have delivered 50% fuel efficiency savings and emit no sulphur. It’s hard now to remember how serious a threat acid rain was considered to be in Europe in the mid-1980s.

At BP we are of course investing in renewable energy technologies for the future. We are one of the biggest manufacturers of solar energy cells and account for about a fifth of the world solar market. We’ve also just started wind generation on some of our refinery sites. But these are still small, although growing rapidly, and it will be some time before renewables can meet a sizeable proportion of energy demand.

So meanwhile the shift towards gas is going to continue. Gas is well on the way to becoming a globally-traded fuel no longer reliant on extensive pipeline networks, thanks in large part to technical innovations which have changed the economics of natural gas transportation.

BP’s investment in an 800MW power station and LNG regasification facility currently under construction in Bilbao is a good example of this internationalisation. The gas is brought from our reserves in Trinidad and converted to electricity here on the shores of Spain.

Gas now accounts for 40% of BP’s daily production, up from 15% a decade ago. Needless to say, this strategic choice to expand in gas production has been motivated by our belief in the gas as a fuel of the future.

The industry-wide trend means we have certainly seen some convergence in the sense that gas companies have got into power and power companies into gas. The pattern of vertical integration under one state-owned national company is definitively breaking up as companies respond to the new strategic freedoms created by market liberalisation.

The major oil companies including BP all have some small positions in power generation and are expanding them in a modest way. Currently less than 2% of worldwide power capacity is owned by the oil majors. It includes a mix of self-generation on refinery sites and co-generation. Some have tiptoed a bit further into electricity generation.

We believe we at BP have distinct advantages including our brand, our existing customer relationships and trading competencies. For us it’s a question of taking advantage of the best opportunities to deliver quality growth and a high return on capital across our whole portfolio of businesses.

It would be foolish to predict what the eventual configuration of the whole power industry will be, though, when it is in such a state of regulatory and strategic flux. Companies are experiencing very mixed fortunes at present, even in the most liberalised markets.

In the US there are even some signs of a reversal of the earlier break-up of large, vertically integrated companies. The scale of the infrastructure investment and the importance of taking advantage of the enormous economies of scale to reduce unit costs, will always make a strategy based on large size look appealing.

But it’s impossible to know at this stage whether or not the changed economic and political climate will halt the pendulum in its current swing in that direction. What the shifts do tell us is that the industrial structure is not yet stable, and nobody has a definitively successful business model.

As I said earlier, it’s a fact of life that the shape of the regulation of energy markets is bound to influence companies’ strategies.

But the fog of strategic uncertainty is not at all unique to the power industry. On the contrary, it’s a characteristic of all leading industries.

Take financial services, for example. They were given a vigorous shake-up by deregulation in the US first, then the UK and other European countries. But it has taken at least this long for any patterns to start to emerge from the kaleidoscope of changing industry structure. And it is hard to be confident in this case either that we’ve yet reached the final configuration.

Certainly not in Europe where there is a long march ahead to a genuine single market. And in general there are waves of opinion about the right place to put the boundary between investment and commercial banking, for example, or whether banking and insurance should live under the same roof or not, whether it’s better to seek economies of scale or opt for profitable niche operations.

This uncertainty is not just regulatory. Technology is even more disruptive.

Much of the strategic energy in banking right now is focussed on the question of convergence with telecommunications. Mobile phones in particular are seen as crucial to the future of banking, both as a means for consumers to carry out transactions and as a kind of smart card charged with money in themselves.

And that thought stirs into the pot of uncertainty the separate debate within the mobile phone industry about which kind of technology will actually work and win customers, and whether mobiles are converging with handheld computers.

Indeed, we are even seeing some convergence between the energy and financial sectors with the emergence of utilities that are offering gas, electricity, telephone lines and financial services.

The UK’s Centrica is an interesting example, having shaped itself virtually from scratch since its demerger from British Gas five years ago. The core business is providing a range of utility services to customers, and the strategy focuses on revenues per customer. This is proving an attractive model to Spain’s main power utilities too.

The basic questions are not, then, unique to the power industry. Technology has clearly opened up new strategic possibilities and has been one of the crucial forces driving power-gas convergence, taking gas turbines to the point where they have become one of the safest and most efficient means of power generation. But other industries are experiencing the same whirlwind of change.

The ideal place to draw the line around a business – almost any business- has been moved by deregulation and the changing political context; by globalisation; and by technological changes within every industry and in communications.

It would be amazing in the circumstances if we could all agree what the right strategy ought to be. The degree of raw uncertainty makes forecasting the future even more hazardous than usual.

The answer to the question ‘What will this industry’s structure look like in 10 years’ time?’ is that nobody can know – in almost any industry.

The truth is that it’s probably impossible to generalise. What will work for some companies would be a mistake for others.

The signs are that this era of tremendous change is indeed sorting out companies into those well able to adapt and those whose strategies fail. Throughout the advanced economies, the average lifetime of a company is in decline, and the gap in profitability between the best and the worst has widened.

In the United States some companies are reporting increases in productivity of 25% over three or four years, and others have achieved none.

Nor is it easy to predict which companies will be the ones that succeed. Not just Enron but the whole dot com bubble too have made this perfectly clear.

Every boom brings its stars which subsequently fall spectacularly to earth, but we do seem to have had some extraordinary firework displays this time around. So we ought to be humble about claiming one strategy or business model dominates all the others.

Convergence of gas and power has certainly occurred in recent years. We will probably see more expansion by some companies into different parts of the value chain as views about the right model continue to respond to events.

But there is another way to frame the strategic question for businesses, one which will stand any test of time no matter how much the world is changing. That is to ask what policies and decision-making processes will best increase long-term shareholder value and serve the needs of customers and employees?

Obviously that boils down to making particular strategic choices, but doing it in a way that appropriately manages the risks and opportunities involved. How we go about getting from the present to the future may be more important right now than the specific destination.

This is the text of a speech first delivered by Peter Sutherland to to the IESE Business School