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

“People are running for market share, and frankly, there’s a lotof – we call them bragawatts – there’s a lot of companies out theresaying I’m doing this amount and I’m doing this volume.. I believethat’s a mistake. It was a mistake in the gas business, and it’s amistake in the power business. You run after market share and youlose money doing it, and you’re really not learning a damn thingabout this industry, and it’s not a long-term strategy.”

Watson told attendees at the Electric Power and Risk ManagementPower ’99 conference in Houston Wednesday that a convergencestrategy must include physical assets combined with marketing andtrading and energy services, such as risk management. Watson saidabout 75% of Dynegy’s profits now come from selling servicesassociated with the energy commodity, such as asset and riskmanagement services.

Right now the energy industry has a gap between asset-heavy playersand marketing/trading players. “I think what’s happened is if you’reone or the other, I believe that you’re not taking advantage of what Icall energy convergence. You’re not going to survive just as amarketer or trader because you’re not taking advantage of the fullspectrum of energy convergence.” Not insignificantly, Dynegy last weekmade a bid to acquire Illinova Corp. and its substantial midwesternasset base (see Daily GPI June 15, 1999).

Watson pointed out gas and power can’t come together on thephysical side until there is yet another form of convergence on theregulatory side. “Right now there is no compatibility between thegas delivery rules in the industry and the electric delivery rules.We’ve got to get those to be matched up a little bit better. Youcan’t nominate on a daily basis in gas and an hourly basis orminute-by-minute in power because, in fact, those two commoditieshave already merged.. The optionality of both of the commoditiesneeds to be maximized. You can’t do that right now because of thephysical way we nominate the two commodities. We have to haveflexible and competitive markets. You’ve got to put everybody onthe same tariff at the end of the day on electricity and on gas soprice can be transparent and not be predicated on the differenttariff rules for each of the pipelines or transmission companies.”

Ultimately, Watson is predicting convergence of technology withcommunications and a combining of these with energy. “We’re goingto have the ability to dial in and literally get not only theenergy commodity we want but all the services that we want. Ibelieve this is going to happen. Whether or not an energyconvergence player is going to be a dominant player in this on theretail side in the future is a question I think you have to askyourself.” Whoever is successful at the retail level will berelying on wholesale providers, such as Dynegy, in order to servetheir customers, Watson said.

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