New Power is Bullish on Retail; CEO Sees California in Future

Despite the danger of a consumer backlash to soaring energy prices this winter and the potential for reregulation, the CEO of The New Power Company, the self-proclaimed first national retail energy marketing company, believes the future is bright for his company as it enters its first winter in operation.

New Power CEO Eugene Lockhart admitted yesterday at a Washington, D.C. press briefing that many state regulators are very concerned about high prices mainly because of the "consumers' mind's eye. [Consumers] will relate these increased prices to deregulation and they are not related at all. They are related more to supply and demand economics from the generation and drilling standpoint. Prices would even be higher over time if there weren't competitive players trying to offer a better deal," he said.

"Do we think there is going to be meaningful reregulation? I really don't think so. I've talked to regulators now in many states. Those states that have deregulation in the books are looking for sustainable marketers who will come into those states and offer value propositions that have not been offered before. We have the marketing skills and the balance sheet necessary to compete in these markets for a very long time."

New Power was started earlier this year by Enron Corp. and formed key partnerships with IBM and American Online (see Daily GPI, May 17). The company now has 150 employees across three locations: its home base in Greenwich, CT; an operations center with 350 employees in Charlotte, NC; and a branch office in Houston where 30 people handle New Power's risk management requirements. All of the 30 Houston employees came from Enron. The company started retail marketing in October in northern New Jersey and Philadelphia (PSE&G and PECO territories) and since then completed an acquisition of Columbia Energy Services, which included 300,000 customers in nine states. In total, New Power currently has 340,000 customers in those states. Last week, it was awarded Pennsylvania utility PECO Energy's default supplier position, which will give New Power the opportunity to add another 299,000 customers next year.

"We would expect by the end of the first quarter or the second quarter to have about three-quarters of a million customers and easily achieve over one million customers next year," Lockhart said. That would make New Power the largest unregulated retail marketer of gas and electricity.

New Power plans to enter nine additional utility territories next year, including the rest of Pennsylvania, the rest of Ohio, Texas and "believe or not" California. "We would expect to see the California situation will by market forces resolve itself in the course of the next nine months."

Lockhart said New Power's approach to the California market would be a lot different than Enron's approach. Enron exited the market four years ago after a poor showing and a bad outlook for the retail market there.

"What Enron learned... was that it is not a B-to-C company; it is a B-to-B company and a great B-to-B company," he said. "But in order to be a B-to-C company you have to understand how the consumer thinks, what kinds of messages are going to work, what kind of pricing structure is going to work. You have to make it simple. You have to make it dead easy.

"I think you'll see us going into the California market with a price-certainty message. We'll save people money, but I know what they really want out there is price certainty and we'll be able to do that from a multi-year contract perspective. We'll also construct products that give them benefits, maybe airline miles or maybe discounts at Home Depot or Wall Mart. What we'll also be able to do is have them tailored to their home or business profile.

"That was number one. Number two is that when Enron went into California the Internet didn't exist," he noted. Lockhart said 30% of New Power's sales already come over its own web site and 60% of the people who visit the site end up being New Power customers. "It's literally three clicks. It couldn't be easier, and that whole technology did not exist when Enron was in California."

One advantage New Power has over other retail marketers, according to Lockhart, is its risk management expertise. He said the current market price situation actually should work in New Power's favor because of the way retail prices are set and because New Power completely hedged all of its energy sales in the fall when prices were much lower.

New Power models residential load in each territory by type and size of home or business and then examines the forward prices in the retail markets. "If you take a look at the forward markets in these territories, they are all backwardated in varying degrees... In the gas markets, we use the [regulated utility's] gas-cost recovery rates or posted gas rates. Usually those are lag-effected prices... And because they are basically taking lagged spot market prices and we are using backwardated markets on a forward basis, there is an improvement in margin there and a fully hedged position."

As a result, the current increase in gas prices "perversely could work in our favor because as the commodity costs increase, [utility gas cost recovery rates] increase," he said. Over the course of next year, retail marketers actually will have an increasing price with which to compete. "That represents a pretty good opportunity for us."

He said New Power operated at a 10.8% margin in the third quarter after giving retail customers a 20-25% discount in their commodity prices. Although the company has not made a profit yet --- the net loss in the third quart was $69.9 million --- he said it would do so by the end of 2002.

Lockhart would not say whether New Power intended to buy another large package of small retail customers as it did with Columbia Energy deal earlier this year, but he did indicate the company would be involved in some core customer auctions by utilities entering deregulation. "If there are good deals out there, we'll take advantage of them. Are we building our business model around deals? No. Our basic business model is built on marketing."

New Power hopes to grab a 5% market share in the territories in which it operates within five years. Lockhart estimated 90% of the households in the United States by the end of 2005 would be located in territories that would be partially or totally deregulated in both the gas and power markets.

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