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Leadership Isn't Just Volumes Traded

Leadership Isn't Just Volumes Traded

Convergence obviously is alive and well in the energy industry, but it's not exactly what a lot of people seem to think, according to Dynegy CEO Chuck Watson. Convergence isn't just about gas and power coming together. It's not just marketing gas and power and growing market share.

"People are running for market share, and frankly, there's a lot of - we call them bragawatts - there's a lot of companies out there saying I'm doing this amount and I'm doing this volume.. I believe that's a mistake. It was a mistake in the gas business, and it's a mistake in the power business. You run after market share and you lose money doing it, and you're really not learning a damn thing about this industry, and it's not a long-term strategy."

Watson told attendees at the Electric Power and Risk Management Power '99 conference in Houston Wednesday that a convergence strategy must include physical assets combined with marketing and trading and energy services, such as risk management. Watson said about 75% of Dynegy's profits now come from selling services associated with the energy commodity, such as asset and risk management services.

Right now the energy industry has a gap between asset-heavy players and marketing/trading players. "I think what's happened is if you're one or the other, I believe that you're not taking advantage of what I call energy convergence. You're not going to survive just as a marketer or trader because you're not taking advantage of the full spectrum of energy convergence." Not insignificantly, Dynegy last week made a bid to acquire Illinova Corp. and its substantial midwestern asset base (see Daily GPI June 15, 1999).

Watson pointed out gas and power can't come together on the physical side until there is yet another form of convergence on the regulatory side. "Right now there is no compatibility between the gas delivery rules in the industry and the electric delivery rules. We've got to get those to be matched up a little bit better. You can't nominate on a daily basis in gas and an hourly basis or minute-by-minute in power because, in fact, those two commodities have already merged.. The optionality of both of the commodities needs to be maximized. You can't do that right now because of the physical way we nominate the two commodities. We have to have flexible and competitive markets. You've got to put everybody on the same tariff at the end of the day on electricity and on gas so price can be transparent and not be predicated on the different tariff rules for each of the pipelines or transmission companies."

Ultimately, Watson is predicting convergence of technology with communications and a combining of these with energy. "We're going to have the ability to dial in and literally get not only the energy commodity we want but all the services that we want. I believe this is going to happen. Whether or not an energy convergence player is going to be a dominant player in this on the retail side in the future is a question I think you have to ask yourself." Whoever is successful at the retail level will be relying on wholesale providers, such as Dynegy, in order to serve their customers, Watson said.

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