As once-predictable energy markets become highly volatile, executives are confronting a painful irony. "While some are doing better, more companies are now earning less than they did before deregulation," says Gerald Klenner, a partner in the Vienna office. "Generally, balance sheets are weak across the industry."

Broader weaknesses became apparent to the outside world during the August 2003 blackout in the North American northeast that left 50 million people in the dark. The blackout highlighted issues that have long troubled energy industry CEOs – an overburdened system, patchwork regulations, and insufficient incentives for continued investment.

Amid this turbulence, energy companies can improve performance in at least two ways:

	New business models. With the liberalization of markets around the world, companies must determine what they're best at, what kinds of assets to own in which markets, and how to compete in more fragmented markets. But they cannot expect to enter these new markets uncontested. In deregulated European markets, for instance, some utilities have tried to bundle their retail offerings based on services, new technology, or environmental friendliness – but so far, remarkably few consumers have been willing to switch providers.
	Operational improvement. Enhancing operations is a prerequisite for success in the new utility environment in either strong or weak markets. Most utilities could increase their efficiency across the board – from their generating facilities, to their call centers and business processes. Such improvements could probably reduce costs by 10 percent – the equivalent of $20 billion – in North America alone. Yet unless they're allowed to keep at least a share of such savings, companies have little incentive to improve their operations.

To win – or in some cases, simply to survive – energy companies may have to act on many fronts. For instance, McKinsey recently helped a global energy producer step back from the brink by restructuring its assets portfolio, financial structure, organizational design, performance standards, and operations – all at once. Such sweeping action requires not just a deep understanding of the sector but also broad experience across many industries and disciplines.
 
"The turmoil in the industry has brought two responses," says Robert Latoff, a director in the Cleveland office. "Some executives are seeing that in times of great change they can seize the moment and create new strategic and operating agendas. But in many other companies, the uncertainty of the moment has paralyzed action. Those businesses are frozen in the headlights, and that can be fatal. Ten years from now, people will say this was the point that changed the sector, for better or worse."