Brian Watt, CEO of Columbia Energy Services (CES), predicted ashakeout of retail energy providers over the next five years on thescale of what happened in the telecommunications industry, wheremarket participants dwindled from 400 to less than 10.

Speaking at GasMart/Power 2000 in Denver, Watt said the horrorstories in the retail marketing industry have outnumbered thesuccess stories. The mass markets are not paying attention. “Thesad fact of the matter is that when you look at residentialpricing, the impact of going from the top marketer to the bottom interms of lowest price is $30/year.”

For CES, the optimism regarding retail markets is gone. “Westarted off with the perception of a national mass market. Weenvisioned something like the Sprint or AT&T model. Go out. Geta whole bunch of customers, then spread the fixed costs over largeamounts of people and live happily ever after. Well guess what?It’s a local market, not a national one… The regulatory processis local. So that vision of taking a $340 billion business andgetting a market share of it may look great, but getting there is alot tougher,” Watt said.

CES was an active participant in retail markets, signing morethan 300,000 customers all over the country. However, Watt said CESis re-evaluating its approach to marketing altogether. Earlier thisyear, CES sold its wholesale marketing operations to Enron for$38.3 million (see Daily GPI, Jan. 10).

On the retail side, Watt said maintaining the profit margins hasproved very difficult. “Generally, marketers work with a fixedprice. Combined with their estimated volume for a winter, they comeup with a target margin. Then they buy a hedge against that marginto protect themselves. What happens? In warm winters, not meetingthe volume expectations plus buying the hedge causes a hit.”

Watt said that was the rosier of the two scenarios. “If you havea cold winter, there is no safety net of regulated rates like therewas for the vertical utility. The marketer could be forced to buyflowing gas in a volatile market. Some price points traded in the$20 range last winter. That would be very tough for the industry…If there is a cold winter, a number of companies would be taken tothe cleaners.”

Another rough spot for the retail market has been billing. “Inthe different programs, customers are billed by different entities.Sometimes it’s the utility. Sometimes it’s the marketer. In orderto succeed, I think the marketer needs complete access tocustomers.”

Watt pointed to the situation in Atlanta, GA, where CES made animpact by signing 85,000 customers in Atlanta Gas Light’sderegulation process. “It has been well documented about theproblems with Peachtree Natural Gas and their accusations aboutbilling trouble being a main cause of their problems there. Therewill be a political reaction to the Atlanta program [as a result ofbilling problems], and that could push back other deregulationattempts.”

While Watt talked about the difficulties around the retailbusiness, he said he still thinks deregulation is the right path.”I’ve lived in the United Kingdom and other places abroad. I’veseen what too much regulation can do. Deregulated retail marketswill happen I think, but it will take longer than many peopleoriginally thought.”

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