Skyrocketing Prices Discourage Retail Service, Aggregation

The focal point of California's and various other state energy deregulation plans --- nonutility retail energy service providers --- has been all but forgotten in the rounds of legal, regulatory and political battles that have fallen out of skyrocketing wholesale natural gas and electricity prices this year. Although the focal point of the angst has been California, the energy entrepreneurs are feeling the pinch at the retail level elsewhere, too.

"For the short-term, the costs have gone through the roof," said Fred Richards, founder of The Fred Richards Group, a 90-member aggregation of medium-size industrial and commercial customers in Pennsylvania's deregulated electricity market. "It is directly related to the recent oil and natural gas price spikes of the last few weeks. The prices I have been getting for people who are part of the group are quite a bit higher than expected, but I think it is an aberration."

Relative to California, Richards likes the high percentages of customers (20% or more) who have switched from utilities in Pennsylvania --- more than half-a-million earlier in the fall. "It is much more successful than any other state, but it certainly is not saturated. We just can't get any decent prices right now."

With less than 2% of the eligible customers switching so far in California over a longer period of time, Commonwealth Energy of Tustin, CA, operates in both states and is surprisingly making money in both, according to its COO Dick Paulsen.

"We're aggregating some customers (all residential)," Paulsen said Wednesday during an interview. "We'll have another 10,000 or so added in California, but because of the pricing from generators, I don't see how we'll get any more additional supplies."

Until the past two months, Paulsen said, Commonwealth was treading water, adding about as many customers as were returning to utility service, staying around the 50,000 level, but it has been steadily losing customers in the San Diego Gas and Electric Co. territory to the 6.5 cents/kWh capped retail price. In the meantime, Commonwealth has been picking up a lot of new customers in Pacific Gas and Electric Co.'s vast territory covering the northern half of the state, he said, noting it was going to resume paid advertising after a long hiatus, but the company found it is getting adequate numbers of new customers signed up through its telephone customer service representatives.

"The secret to the energy services business is not how many customers you have, but if you can buy the energy you need at competitive prices," said Paulsen, adding that Commonwealth has established what he considers a first-rate "back-office capability," including its own active energy trading business.

"We're over our numbers' plateau (minimum customer load) and are able to make a profit in California. With the number of customers we have and the energy purchasing capabilities we now have, we're here to stay in California."

Right now, future growth hinges on what comes out of the ongoing CPUC emergency hearings and consideration for granting rate increases to PG&E and Southern California Edison Co. and perhaps lifting the current retail rate freeze for the two utilities. Commonwealth and the handful (three or four) of active ESPs in the state also will be watching what the legislature does.

Paulsen said that changes such as allowing the utilities to enter into fixed-price, longer-term bilateral contracts, also would help his company. "We can jump in and buy with them," he said.

A long-time natural gas aggregator has a different view of the California market currently, calling it "a disaster, a joke." Part of this marketer's frustration is aimed at the pending CPUC decision on further unbundling Southern California Gas Co.'s in-state transmission and storage system, and in the process, changing the almost decade-old core aggregation program.

"The electricity restructuring looked like a mistake when they did it (1996), and it has turned out that way," said a California-based marketing manager with TXU. "California's electric model is broken and no one is going to copy it. In fact, other states are learning from California how not to do unbundling. Texas is a good example, and it is a multi-billion-dollar market that opens in 2002."

Aside from the four-month-old investigations ongoing into California's wholesale electricity market, the TXU marketer said other investigations are likely to be launched early next year concerning what are alleged to be "market manipulation" of both the natural gas and electricity wholesale prices earlier this month.

TXU never jumped into the retail electricity market and it is struggling with its natural gas aggregation, although it is one of the original participants in the program. The pending CPUC action could be the gas program's "death knell," the TXU manager said, because the current draft decision is "silent on how the interstate capacity will be unbundled."

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