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1998 Highlights: Oil Prices, Mergers, Power Gen (Retail Wimps Out)

1998 Highlights: Oil Prices, Mergers, Power Gen (Retail Wimps Out)

Last year clearly didn't turn out as most industry officials expected, according to a new survey by the Washington International Energy Group, a Washington, D.C.-based energy consulting firm. The firm's 1999 Energy Industry Outlook notes the retail market revolution "wimped out," mergers were quite a bit larger than expected, the oil price glut was more serious than many thought, and power generation became much more important than most initially believed.

Power generation now is viewed as the most profitable business sector in the industry, ahead of distribution and way ahead of energy services, which was the favorite in 1998. A year ago, the industry was clearly focused on marketing and value-added services. For the utilities it was because of the expected imminent loss of customers through deregulation. That hasn't panned out, however.

The 40,000 MW of merchant power plants that went to the blueprinter last year illustrates the shift in industry perspectives. Even though only 25% of the 833 survey respondents said they would pick generation if they had one business to stay in, the majority of respondents agreed it is possible to make more money in generation than was thought last year.

The industry also is more convinced this year compared to last that most players will not survive in the coming years. Seventy nine percent believe there will be no more than 100 North American generation companies. Only 25% of energy companies are expected to survive the transition to competition. Three-quarters of the industry expect the new retail mass-marketing initiatives to fail, according to the outlook.

"There are two sides to the opening of regulated markets: the expansion of customer choice and the reduction in the number of companies," said Washington International Energy Group President Roger W. Gale. "So far in the electric and gas industries in North America, we're seeing consolidation but not much customer interest in shopping. Worst case, we'll have market power concentration with no incentive to cut costs. Best case, consolidation will optimize efficiencies, cut costs and stimulate innovation."

Confidence in natural gas remains high, however. Most believe gas will dominate among new generation fuels and will remain in sufficient supply at reasonable prices. But the prospects for nuclear power also appear to have improved. For the first time in many years, the industry is more confident that nuclear power plants can be operated competitively, the firm said.

The survey was conducted on a random sample of senior U.S. and Canadian energy executives. This year, the sample base also was broadened to include the gas industry, the financial community, and state and federal regulators. More than 8,500 surveys were mailed out and 833 were returned. For copies of the outlook call (202) 833-7145 or go to www.wieg.com on the web.

Rocco Canonica

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