Convergence of gas and electricity is no longer a trend on thehorizon but rather the law of the land. Anyone doubting this needonly look at who the big players are in both commodities, notedKenneth D. Rice, CEO of Enron Capital &amp Trade Resources (ECT).However, Rice and other speakers at Energy &amp Power RiskManagement’s Power ’98 conference in Houston last week also voiceduncertainty at how the deregulated marketplace for electricity willevolve.

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

“Although there have been over 500 applications and certificatesfor power marketers, only six power marketers last year sold morethan 50 million Mwh,” Rice said. “Virtually all of those, I think,all of those six except one was also one of the top 10 gasmarketers in the country. So what that tells me is it’s not an easything to get into this business. Just because you’ve got a powermarketing certificate doesn’t mean you’re in the business. Justbecause you say you’re selling power doesn’t make you competitive.What this tells me is people that are competitive, businesses thatare competitive, are the ones that understand both gas andelectricity 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 thatranking is Enron, Dynegy (formerly NGC), Engage Energy, El PasoEnergy, and Duke. “So we’ve had a lot of consolidation in thisbusiness, but virtually everybody who’s a leader today was also aleader five or six years ago.”

Rice noted “a huge amount of strategic alliance activity” amongutilities and marketers trying to put their complementary skillstogether. He said utilities are struggling to redefine themselvesin the face of competition. But the hesitancy of regulators to moveforward with electric restructuring has made it even morechallenging for utilities. “.[T]he regulators don’t really knowwhat they want, and they don’t want to let the utility make thetransition 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 thedeals humorous while others are indeed serious. “There are going tobe some pretty heavy competitors that are going to need to bewatched very carefully. What all of this says is we’re in acomplete period of change.” Now is not the time for establishingbusiness plans and organizational structures, which slow down acompany’s ability to react to the market, Martin said. “I was askedby an analyst what was our five-year business plan. We have nofive-year business plan. We don’t have a business plan six monthsahead. We don’t know what this market is going to do.” Instead,ECT’s strategy is focused on building up trading tools, staff andcompetencies, she said.

Rice predicted a dim future for nuclear power but a good outlookfor coal. “As the coal industry is forced to deal withderegulation, they will become more innovative. They’ll come upwith some ideas and structures that challenge natural gas producersand marketers who are part of this new market share in the electricgeneration business. Nuclear will decline over time, and unlessthere’s a new technology there I don’t think it’s going to have abig future.”

The cost structure for power generation, once predicted to dropdramatically by Enron, according to Rice, is now expected to be”increasingly uncertain.” That’s due to the fact that 30,000 MW ofnuclear plants will come up for relicensing in the next 15 years.”Chances are they’re not going to get relicensed. We don’t knowwhat’s going to happen with gas supply. There’s a lot ofuncertainty in the marketplace, and there’s going to be more andmore volatility.”

While market forces are pushing for electric deregulation atbreak-neck speed, state and federal legislatures are moving at asnails pace, speakers said. Standing in the way is still the issueof stranded costs, according to Greg Jenkins, president of El PasoEnergy Marketing.

“Until that issue is effectively addressed, all of the prospectsfor major competition, major access to customers will not takeplace. And there are so many constituencies or stakeholdersinvolved in each of these states that have major stranded costissues that it’s very problematic for the regulators andlegislatures in those states to take quick action. So with that asreally the biggest question mark and the biggest problem to besolved, from our perspective, you have to focus on optimizing thevalue and the use of the existing assets. And in this interimperiod of time, until that problem is solved, the focus on tradingfrom my perspective is not necessarily the right focus. It shouldbe directed more at adding value.”

Joe Fisher, Houston

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