Electric Industry Seen Swamping Gas
The electric industry will swallow up the majority of the
natural gas distributors over the next 10 years, predicted a
marketing executive last week, adding that the doubters of this
scenario are forgetting or just don't know how "extremely big"
"Within the next decade...the majority of the power companies
will end up owning the gas companies for the main reason they are
larger on average, they have a much stronger balance sheet at this
point in time, and [there are] two words which make a huge
difference - stranded assets," the recovery of which will give
power utilities a large enough "kitty...to play with to use to
consolidate their regions," said David R. Pruner, executive vice
president of strategic planning and business development for Engage
Energy U.S. LP.
The two industries will "blur" to the point of being
indistinguishable, he noted at the seventh annual DOE-NARUC natural
gas conference in Pittsburgh, PA. Of the 300 LDCs and 110
investor-owned utilities (IOUs) in existence now, Pruner said there
was a "good chance" that only about 100 IOUs/LDCs would be left
standing in 10 years, with the top 50 companies controlling 80% of
On the marketing side, the electricity business has been "kind
of like the second coming" for companies like Engage, a joint
venture between The Coastal Corp. and Calgary-based Westcoast
Energy Inc. "Gas has gotten very commoditized, and we now spend a
lot of time focusing on power...," Pruner said. Engage sells 40
million MWs annually and 2.7 Tcf of natural gas, making it one of
the largest energy marketing companies in the nation.
Industry-wide, the number of power marketers in the energy field
"already [has] exceeded the amount of gas marketers that existed
even at the peak of the gas marketing business, back in the go-go
days of the mid-1990s," he noted. This high concentration of power
marketers had led to "hyper-competition" in the market, which means
"it's difficult to predict on a bid-to-bid basis who's going to
actually end [up] with the business it wants the most."
Energy marketers, as has been widely reported this summer, have
been faced with extreme volatility in the market. "Electricity
basically has been averaging somewhere between 80%-90%" in the
near-month market, which is the percentage that prices could go up
or down over the next year, and more than 100% in the hourly
market, which is the amount prices could swing on a daily basis,
Pruner said. Natural gas, on the other hand, "has been averaging
somewhere around 75%-78% for the [past] two or three months" for
nearby contracts. This is the percentage gas contract prices could
go up or down over a year's period. This is "near the upper end" of
the scale for gas volatility, he said, adding that during Hurricane
Georges it got near the 100% level.
Aside from energy, "there is no other...market in the world that
has this kind of long-term precedence in increased volatility," he
said. This price volatility, as well as deregulation, has put
pressure on margins. "Most every major industry that's been
deregulated has seen great decline in price to the tune of
10%-20%," which usually means a reduction in margin.
As a result, "we [at Engage] tend to hire many more people at
the senior level that have a very strong risk management
background" because "with margins tight and volatility big, your
margin [could] disappear quickly."
Pruner noted that there is "definitely a somber mood" in the
midstream business now (marketing, gathering and process), as it
has had one of its "worst years" ever due to depressed crude oil
prices. However, he said he expects to see a turnaround probably in
the third or fourth quarter of 1999. Even if financial analysts'
predictions of a recession next year bear out, Pruner believes a
turnaround still would be imminent, but it may be delayed a bit
longer. Natural gas, he noted, is "less recession vulnerable" than
other forms of energy.
Pruner also took the opportunity to strongly criticize state
retail unbundling regulations, which he said are preventing
companies like Engage from getting a foothold in some states. He
particularly singled out New Jersey's retail gas regulations, which
require a marketer to open an office in that state and conduct
regular business hours between 9 a.m. and 5 p.m. Monday through
Friday. He noted that Georgia's certification rules for marketers
are equally as tough. "...[I]t's regulations such as these that
make it difficult for many entities to go ahead and be competitive
because the costs start to get onerous."