Marketing Revenue Growth, Margin Shrinkage Remain the Norm
High revenues and low margins will continue to be the plight in the
energy marketing industry as consolidation continues over the next five
years, a new study, North American Wholesale Energy Marketers, by the California
consulting firm Frost and Sullivan concludes.
"Yes I do think margins will continue to shrink if at all possible.
There's not much more room for them to go down much further. But I don't
think they'll be going up anytime soon," said energy analyst Susan
Hutchinson, the author of the report. "In the next five years, I see
the industry consolidating a lot. There's going to be five, six or seven
really huge marketers, probably Enron, Dynegy, Duke and several other top
companies. They'll be buying up the smaller operations or merging with
"Once the industry consolidates a little more, some will say 'it's
too rich for my blood' and will exit the market, like LG&E
and CNG have done, or they'll merge with other companies. So the selling
at a loss will end in the next few years but I think margins will stay
very low. And marketing volumes will continue to rise with the energy going
through multiple marketers before actually reaching distribution."
A ranking of energy marketers by operating margin puts many of the largest
marketers near their volume ranking but also shows which marketers potentially
might be the next takeover targets. The study notes, "In 1997, many
marketers mistakenly believed that if the volume they traded was increased,
their company would be more profitable. However, it seems that the opposite
was true. Marketers saw margins fall an average of 50% in 1997. Many companies
who saw their volumes skyrocket did not see an increase in earnings, while
some companies with a more conservative approach kept earnings steady despite
narrowing margins." For example, Duke was ranked third in overall
Btu volume. Its revenues rose 96% last year to $7,489 million. Despite
the record sales, however, its operating margin dropped 60%. Sonat, which
had a more conservative volume growth rate at 44%, experienced only a 25%
decrease in operating margin.
"This phenomenon may be indicative of a lack of economies of scale
in the energy marketing industry. It is more likely, though, that marketers
are attempting to gain market share by selling gas and power at or below
The report shows the natural gas market grew 22.4% in 1997, mainly because
marketers sell the same volume two or three times among themselves, Hutchinson
noted. The Frost &Sullivan study predicts the revenue growth rate in
the gas and power markets will decline over the next few years and then
flatten in 2003 and 2002, respectively. The firm predicts the revenue growth
rate in gas will be 18% this year, 14% in 1999, 12% in 2000, 10% in 2001
and 8% from 2002 through 2004, with $201.17 billion in revenue in 2004.
In the power market, the revenue growth rate is expected to be 115% this
year, 60% in 1999, 35% in 2000, 25% in 2001, 15% the following year and
10% in 2003 and 2004 with total revenues of $204.85 billion in 2004.
Most of the top gas marketers also are the top power marketers, which
shows the one-stop shopping approach has gained in popularity as a way
of holding onto a large customer base.
Marketer profiles are the meat of the report, providing a detailed look
at marketing contracts, strategies, financial snapshots, software utilized
and risk management activities. The study also provides a look at what
criteria endusers use in selecting marketers. Not surprisingly, price was
identified as the top determining factor when choosing from which marketer
to purchase energy.
"Once they're on the list then it comes down to price," one
utility told the survey. "The basic qualifier is that we expect whoever
is supplying the gas is going to meet nomination deadlines, make sure the
gas shows up...once they're there, then it's price."
Other determining factors in selecting a marketer were: open communication,
service quality, prior relationship and a successful risk management operation.
Frost &Sullivan is an international marketing consulting firm based
in Mountain View, CA, that monitors the energy industry for market trends,
measurements and strategies and reports results in a variety of studies.
For a copy of the Wholesale Energy Marketers study contact Frost &Sullivan
at (650) 237-4385. The study costs $2,950.