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Columbia Profiting in Both Retail and Wholesale Markets

September 14, 1998
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Columbia Profiting in Both Retail and Wholesale Markets

"I like retail. I like retail a lot," Columbia Energy Group Chairman Oliver "Rick" Richard said last week in explaining how he believes Columbia is at the forefront of retail gas unbundling. While this side of the business remains largely "unexplored," with the ultimate winners still to be decided, "we're first movers in retail unbundling and [the] consumer products market in the energy business."

"There's a different pitch to retail, and if you don't know that pitch, then you don't know the customers." For Richard, the retail end of the gas business is "Main Street America, and not so much the capitals of the states. It's buying groceries, it's working in refineries, it's folding newspapers, it's selling insurance. It's not doing big things, and [making] big announcements. It's one customer at a time," and realizing that "every single one of [them is] different from the neighbor next door."

While claiming leadership in the retail arena, Columbia is not doing too badly in the wholesale market, Richard told a Washington energy audience. Although still a novice in the electricity market, the company accomplished something that a number of seasoned veteran traders failed to do when power prices in the Midwest shot up last June - it made a profit. The Columbia CEO declined, however, to reveal the amount of the profit.

He chalked up this feat to his company's "conservative" and "thoughtful" approach to electricity trading. "We found [that] by being a little conservative and using basic trading structures and trading rules, we were okay." Moreover, "we've been very thoughtful...about how do you trade in this business," paying close attention to the legal, accounting, midstream and backroom aspects of trading, Richard said at a briefing sponsored by the Washington International Energy Group. He said he was surprised that some of the more veteran traders weren't equally as thoughtful.

"This is the value of not being a first mover [in the trading business]. Columbia [had] not been a first mover in gas marketing. We started late in the 1990s. We've learned a lot from the examples of other very successful wholesale companies [on] the gas side. And we watched the electricity markets beginning to form very carefully...before we allow[ed] our traders to go out and trade," he noted, adding that the company entered the electricity market less than a year ago.

Although a number of power marketers have decided to exit the electricity market and others are rethinking their futures in the business in the aftermath of the June price fiasco, Columbia Energy plans to stay put. "We will continue to be in that market," Richard told reporters.

He believes the June price spikes were and still are a sign of growing pains in the electricity market. Although Columbia survived intact, "the fact that some people [did] not is an illustration of a market opening up..."

"I think the electric industry trading...is learning a lot what the gas industry learned in the last 15 years," especially about the importance of creditworthy sources with access to physical power, Richard said. He recalled a time when marketers "were just in it [the gas market] for what they could get while the PGA was a lot higher than the market was...They made a little money, and they got out when the squeeze came back down and the market cleared a little bit more efficiently. So that'll probably occur in the electricity business as well."

As to the retail market, Richard noted that The Toledo Blade newspaper in Ohio, where Columbia of Ohio has a major unbundling pilot underway, has begun to publish the gas prices being offered by marketers to residentials. On its face this may not appear significant, but what the industry is seeing is the "sloppy, awkward creation of a trading market for the smallest customers in America," he said. "The next step, of course, is how do you do it on a real-time basis so people can choose wisely."

In building retail market share, "we're concentrating on the eastern half of the United States because we believe we're focused there. With our acquisition of the Penn Union Trading Co., it's expanded us at least that far," Richard noted. "And as we continue to go into these pilots and grow customer share, we would intend to go nation[al] as well." He predicted eventually there will be national leaders on the retail gas side similar to those seen on the wholesale side.

Separately, Richard said he opposed efforts, both regulatory and legislative, that would limit the use of utilities' corporate brand names under restructuring. "We see [this] as a threat by those who don't have a brand. The ones that never have built one up or invested in the assets over 100 years all of a sudden want to deny you the ability to use your brand. There are some strong competitors out there that don't need to use that argument if they're as good as they say they are...So I think that's frankly kind of [a] bogus argument."

Richard was non-committal when asked about Columbia's reaction to FERC's notice of proposed rulemaking (NOPR) addressing pipeline transportation in the short-term market. "Without getting too specific, we can say we're encouraged by what we see" in the NOPR, said INGAA President Jerald Halvorsen, who also was at the briefing. Richard is slated to become chairman of the Interstate Natural Gas Association of America (INGAA) within a week.

Halvorsen noted that the INGAA Foundation has begun a study of the obstacles the gas industry will face in achieving a 32 Tcf market by 2010. "...[T]he challenge for the gas industry, I think, is going to be can we build the pipeline, can we get the gas out of the ground, can we get it to the customers on time..." Early nuclear plant shutdowns and enactment of the Kyoto accord to reduce greenhouse gas emissions could boost the demand figure by another 7.5 Tcf, and pose a greater challenge for pipelines, he said.

Halvorsen sees other possible roadblocks to building new pipeline projects. "...[W]e are alarmed by the better organized landowner groups. I think on one of the pipelines they had put coupons in supermarkets, and the FERC got 5,000 vote cards or something." Another "issue for us is the federal-state [permitting] dilemma...That may be one of the biggest problems we've got in getting to a 30 Tcf economy," he noted.

Susan Parker

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