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New Marketing Triumvirate Targets GA, Southeast

New Marketing Triumvirate Targets GA, Southeast

Dynegy added a fourth regional marketing alliance and gained entry into Georgia's deregulated gas market by partnering with AGL Resources (parent of Atlanta Gas Light) and Piedmont Natural Gas of North Carolina. The three equal partners - what Dynegy CEO Chuck Watson calls a "dream team" - formed SouthStar Energy Services LLC to offer unregulated energy products and services to industrial, commercial and residential customers in the Southeast. Offerings will include gas, electricity, fuel oil and propane, along with related retail services. The Atlanta-based company will have offices in Charlotte and Nashville.

SouthStar initially will target southeastern industrial and commercial customers and will offer residential and small business energy services to Georgia customers as that market opens to competition in November. SouthStar will expand its residential and small business services to the other states as markets open. Electricity marketing is anticipated, but SouthStar has no plans to own electric generation. Revenues will be shared according to the timing of market openings and ultimate market share achieved, according to the joint venture agreement.

"Georgia will be among the first markets to open statewide to competition for natural gas sales. Through SouthStar Energy, we will be well-positioned to serve the changing needs of the customers of Georgia and the Southeast with quality energy products and services as our industry continues to evolve, said AGL CEO Walt Higgins.

SouthStar wants to do business in Georgia as Atlanta Gas Light Services; however, last week the Georgia Public Service Commission (PSC) said Atlanta Gas Light Co. could not name an affiliate so similarly to the name of the regulated utility. An AGL spokesman said the company has not seen the commission's order yet and thinks there may be some wiggle room with regard to using the name with a disclaimer or disclosure statement. "We believe there's some range of results that might be included in that order." SouthStar's filing with the PSC includes alternate names the company might do business under. Alternatives include Georgia Natural Gas Services, Georgia Gas Services, and Georgia Gas Co. All of the names have been used for various businesses by AGL Resources before. SouthStar plans to operate as Piedmont Energy in the Carolinas.

Dynegy (formerly NGC Corp.) made three other regional partnerships to serve industrial, commercial and residential customers during the last eight months of 1997. In May 1997 the company formed an alliance with IPL Energy subsidiary Consumersfirst to serve the Canadian market. In June of last year the company formed a joint venture with NICOR to serve the Midwest. In December, an alliance with AllEnergy Marketing was formed to serve the Northeast.

"The SouthStar Energy joint venture is a significant step in our strategy to serve the retail markets through alliances with companies with strong regional presence," said Dynegy CEO Watson. "Piedmont and AGL clearly are leaders in the Southeast region and are well positioned to compete in the marketplace as deregulation allows customers to choose their energy provider. Dynegy's strength as a wholesale provider of energy and risk management services will enhance the competitive advantage of this alliance as the market opens."

Not insignificantly, the alliance gives Dynegy entree into Georgia. "We did feel like we needed to align with a major utility player in the Southeast," Watson said. "We're not a company that is going direct into retail marketing. We did in fact think very seriously about going alone in Georgia. We've had offices in Atlanta for years. We'd be a little bit out of our element trying to get into the retail business."

Georgia's plan to open the retail market is a model other states likely will follow, Watson said. "I think there's a high level of probability it will be successful relative to California." A strong point is that local utilities are forced to leave the merchant function. "That was important." Watson predicted half the marketers starting out in Georgia will drop out in the first year, and half of those remaining will drop out in the second year.

Dynegy will be the 100% wholesale supplier of gas and electricity to the alliance and has an equity interest. "We'll be contributing not only the commodity for gas and power but also the risk management." Products such as weather derivatives, which can be moved through all the Dynegy regional alliances, could be on the plate of offerings as well. Watson said Dynegy's capital contribution to the alliance is minimal.

Now that it has alliances serving the Southeast, Midwest, Northeast, and Canada, conspicuously absent from Dynegy's partnership roster are pairings serving the western United States. Watson said those are on the way, but he wouldn't say when. "There's no question about it. We intend to blanket the U.S. and Canada. We continue to work on filling the gaps for all over the country, and we'll announce them as soon as we get them in place."

Piedmont will bring to the alliance its head office in Houston opened in 1982, from which it's been selling gas to off-system industrial customers. The contribution includes 300 large volume industrial customers in North and South Carolina and Tennessee. "We're bringing immediate cash flow," said Piedmont Chairman John H. Maxheim. The customers are currently being served by Resource Energy, a partnership Piedmont is exiting. Piedmont also is contributing additional capital of about $5 million, Maxheim said. He said the other two partners also are making capital contributions. Neither Dynegy nor AGL would say what their capital contributions are. AGL wouldn't say exactly how many industrial customers its bringing to the alliance, but a spokesman said it's more than 20% of about 650 Georgia industrial customers.

For its contribution, Piedmont gains an opportunity to grow its existing presence and expand to other states. Piedmont Natural Gas is the second largest gas utility in the Southeast serving 620,000 customers. The company also sells propane to 50,000 customers in the same states. "[The alliance] also gets part of what [AGL has] already developed, and it gets the backroom and the expertise of Dynegy. And it offers us with the alliance in Atlanta the opportunity to move into the first deregulated state for natural gas, Georgia, with a major player in that market," Maxheim said.

A total of 26 marketers signed up to participate in Georgia. To be among the first group of marketers considered, a marketer must have applied to the PSC by last Thursday, said PSC spokesman Shawn Davis. Applications will be ruled on in mid-October, and competition is set to begin Nov. 1. After today, marketer applications will be accepted on a rolling basis. Those in the first batch of applications are SouthStar, PG&ampE Energy Services, Enron Energy Services, Shell Energy Services, Williams Energy Services, PS Energy Group, Infinite Energy, NorAm Energy Management, Columbia Energy Services, PanCanadian Energy Services, Texas-Ohio Gas (DBA e prime), Optimum Energy Sources, SCANA Energy Marketing, FPL Energy Services, Volunteer Energy Services, Valdosta Natural Gas Services, Energy America, Duke Energy Trading and Marketing, UtiliCorp Energy Solutions, Sonat Marketing, Georgia Gas Services, InterResource Ministries, City of Fort Oglethorpe, Global Gas &amp Light, Phelts Natural Gas Associates, and Utility Service Group.

As a participant in Georgia's unbundling, Piedmont hopes to learn lessons it can apply to the Carolinas and Tennessee when customer choice becomes available in these states. "I don't think anybody at this stage can say that this is a model or that there won't even be revisions to the present model. I think being a player there is going to be very important for us to assist the other states and commissions and work with them on what's good and what's bad. It's certainly a wide-open market. They definitely have opened it up, and that's what makes us think it's a good place to move into."

Maxheim said the company likely won't pursue similar alliances elsewhere but will retain its focus on the Southeast. "That's where the growth is. That's where the market is. We have all the opportunities we need in about seven southeastern states."

Joe Fisher, Houston

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