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Convergence Seems Only Sure Thing in Deregulation

Convergence Seems Only Sure Thing in Deregulation

Convergence of gas and electricity is no longer a trend on the horizon but rather the law of the land. Anyone doubting this need only look at who the big players are in both commodities, noted Kenneth D. Rice, CEO of Enron Capital &amp Trade Resources (ECT). However, Rice and other speakers at Energy &amp Power Risk Management's Power '98 conference in Houston last week also voiced uncertainty at how the deregulated marketplace for electricity will evolve.

(Some of that uncertainty reportedly took shape last Friday as the heat wave moved off the charts over two-thirds of the nation and electric prices did the same. There were reports of hundreds of thousands of dollars being made and lost and slugfests on trading room floors. None of the above could be confirmed by press time Friday.)

"Although there have been over 500 applications and certificates for power marketers, only six power marketers last year sold more than 50 million Mwh," Rice said. "Virtually all of those, I think, all of those six except one was also one of the top 10 gas marketers in the country. So what that tells me is it's not an easy thing to get into this business. Just because you've got a power marketing certificate doesn't mean you're in the business. Just because you say you're selling power doesn't make you competitive. What this tells me is people that are competitive, businesses that are competitive, are the ones that understand both gas and electricity and are big players in those markets," Rice said.

Top gas marketers in 1993 were Enron, Amoco, Western Gas, Tenneco, and Natural Gas Clearinghouse, Rice noted. Today that ranking is Enron, Dynegy (formerly NGC), Engage Energy, El Paso Energy, and Duke. "So we've had a lot of consolidation in this business, but virtually everybody who's a leader today was also a leader five or six years ago."

Rice noted "a huge amount of strategic alliance activity" among utilities and marketers trying to put their complementary skills together. He said utilities are struggling to redefine themselves in the face of competition. But the hesitancy of regulators to move forward with electric restructuring has made it even more challenging for utilities. ".[T]he regulators don't really know what they want, and they don't want to let the utility make the transition until they know what they want."

Amanda Martin, president of energy and finance services for ECT, pointed to "exploding" alliance activity and called some of the deals humorous while others are indeed serious. "There are going to be some pretty heavy competitors that are going to need to be watched very carefully. What all of this says is we're in a complete period of change." Now is not the time for establishing business plans and organizational structures, which slow down a company's ability to react to the market, Martin said. "I was asked by an analyst what was our five-year business plan. We have no five-year business plan. We don't have a business plan six months ahead. We don't know what this market is going to do." Instead, ECT's strategy is focused on building up trading tools, staff and competencies, she said.

Rice predicted a dim future for nuclear power but a good outlook for coal. "As the coal industry is forced to deal with deregulation, they will become more innovative. They'll come up with some ideas and structures that challenge natural gas producers and marketers who are part of this new market share in the electric generation business. Nuclear will decline over time, and unless there's a new technology there I don't think it's going to have a big future."

The cost structure for power generation, once predicted to drop dramatically by Enron, according to Rice, is now expected to be "increasingly uncertain." That's due to the fact that 30,000 MW of nuclear plants will come up for relicensing in the next 15 years. "Chances are they're not going to get relicensed. We don't know what's going to happen with gas supply. There's a lot of uncertainty in the marketplace, and there's going to be more and more volatility."

While market forces are pushing for electric deregulation at break-neck speed, state and federal legislatures are moving at a snails pace, speakers said. Standing in the way is still the issue of stranded costs, according to Greg Jenkins, president of El Paso Energy Marketing.

"Until that issue is effectively addressed, all of the prospects for major competition, major access to customers will not take place. And there are so many constituencies or stakeholders involved in each of these states that have major stranded cost issues that it's very problematic for the regulators and legislatures in those states to take quick action. So with that as really the biggest question mark and the biggest problem to be solved, from our perspective, you have to focus on optimizing the value and the use of the existing assets. And in this interim period of time, until that problem is solved, the focus on trading from my perspective is not necessarily the right focus. It should be directed more at adding value."

Joe Fisher, Houston

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