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Electric Industry Seen Swamping Gas

October 12, 1998
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Electric Industry Seen Swamping Gas

The electric industry will swallow up the majority of the natural gas distributors over the next 10 years, predicted a marketing executive last week, adding that the doubters of this scenario are forgetting or just don't know how "extremely big" electricity is.

"Within the next decade...the majority of the power companies will end up owning the gas companies for the main reason they are larger on average, they have a much stronger balance sheet at this point in time, and [there are] two words which make a huge difference - stranded assets," the recovery of which will give power utilities a large enough " play with to use to consolidate their regions," said David R. Pruner, executive vice president of strategic planning and business development for Engage Energy U.S. LP.

The two industries will "blur" to the point of being indistinguishable, he noted at the seventh annual DOE-NARUC natural gas conference in Pittsburgh, PA. Of the 300 LDCs and 110 investor-owned utilities (IOUs) in existence now, Pruner said there was a "good chance" that only about 100 IOUs/LDCs would be left standing in 10 years, with the top 50 companies controlling 80% of the market.

On the marketing side, the electricity business has been "kind of like the second coming" for companies like Engage, a joint venture between The Coastal Corp. and Calgary-based Westcoast Energy Inc. "Gas has gotten very commoditized, and we now spend a lot of time focusing on power...," Pruner said. Engage sells 40 million MWs annually and 2.7 Tcf of natural gas, making it one of the largest energy marketing companies in the nation.

Industry-wide, the number of power marketers in the energy field "already [has] exceeded the amount of gas marketers that existed even at the peak of the gas marketing business, back in the go-go days of the mid-1990s," he noted. This high concentration of power marketers had led to "hyper-competition" in the market, which means "it's difficult to predict on a bid-to-bid basis who's going to actually end [up] with the business it wants the most."

Energy marketers, as has been widely reported this summer, have been faced with extreme volatility in the market. "Electricity basically has been averaging somewhere between 80%-90%" in the near-month market, which is the percentage that prices could go up or down over the next year, and more than 100% in the hourly market, which is the amount prices could swing on a daily basis, Pruner said. Natural gas, on the other hand, "has been averaging somewhere around 75%-78% for the [past] two or three months" for nearby contracts. This is the percentage gas contract prices could go up or down over a year's period. This is "near the upper end" of the scale for gas volatility, he said, adding that during Hurricane Georges it got near the 100% level.

Aside from energy, "there is no in the world that has this kind of long-term precedence in increased volatility," he said. This price volatility, as well as deregulation, has put pressure on margins. "Most every major industry that's been deregulated has seen great decline in price to the tune of 10%-20%," which usually means a reduction in margin.

As a result, "we [at Engage] tend to hire many more people at the senior level that have a very strong risk management background" because "with margins tight and volatility big, your margin [could] disappear quickly."

Pruner noted that there is "definitely a somber mood" in the midstream business now (marketing, gathering and process), as it has had one of its "worst years" ever due to depressed crude oil prices. However, he said he expects to see a turnaround probably in the third or fourth quarter of 1999. Even if financial analysts' predictions of a recession next year bear out, Pruner believes a turnaround still would be imminent, but it may be delayed a bit longer. Natural gas, he noted, is "less recession vulnerable" than other forms of energy.

Pruner also took the opportunity to strongly criticize state retail unbundling regulations, which he said are preventing companies like Engage from getting a foothold in some states. He particularly singled out New Jersey's retail gas regulations, which require a marketer to open an office in that state and conduct regular business hours between 9 a.m. and 5 p.m. Monday through Friday. He noted that Georgia's certification rules for marketers are equally as tough. "...[I]t's regulations such as these that make it difficult for many entities to go ahead and be competitive because the costs start to get onerous."

Susan Parker

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