The electric industry will swallow up the majority of thenatural gas distributors over the next 10 years, predicted amarketing executive last week, adding that the doubters of thisscenario are forgetting or just don’t know how “extremely big”electricity is.

“Within the next decade…the majority of the power companieswill end up owning the gas companies for the main reason they arelarger on average, they have a much stronger balance sheet at thispoint in time, and [there are] two words which make a hugedifference – stranded assets,” the recovery of which will givepower utilities a large enough “kitty…to play with to use toconsolidate their regions,” said David R. Pruner, executive vicepresident of strategic planning and business development for EngageEnergy U.S. LP.

The two industries will “blur” to the point of beingindistinguishable, he noted at the seventh annual DOE-NARUC naturalgas conference in Pittsburgh, PA. Of the 300 LDCs and 110investor-owned utilities (IOUs) in existence now, Pruner said therewas a “good chance” that only about 100 IOUs/LDCs would be leftstanding in 10 years, with the top 50 companies controlling 80% ofthe market.

On the marketing side, the electricity business has been “kindof like the second coming” for companies like Engage, a jointventure between The Coastal Corp. and Calgary-based WestcoastEnergy Inc. “Gas has gotten very commoditized, and we now spend alot of time focusing on power…,” Pruner said. Engage sells 40million MWs annually and 2.7 Tcf of natural gas, making it one ofthe 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 existedeven at the peak of the gas marketing business, back in the go-godays of the mid-1990s,” he noted. This high concentration of powermarketers had led to “hyper-competition” in the market, which means”it’s difficult to predict on a bid-to-bid basis who’s going toactually end [up] with the business it wants the most.”

Energy marketers, as has been widely reported this summer, havebeen faced with extreme volatility in the market. “Electricitybasically has been averaging somewhere between 80%-90%” in thenear-month market, which is the percentage that prices could go upor down over the next year, and more than 100% in the hourlymarket, which is the amount prices could swing on a daily basis,Pruner said. Natural gas, on the other hand, “has been averagingsomewhere around 75%-78% for the [past] two or three months” fornearby contracts. This is the percentage gas contract prices couldgo up or down over a year’s period. This is “near the upper end” ofthe scale for gas volatility, he said, adding that during HurricaneGeorges it got near the 100% level.

Aside from energy, “there is no other…market in the world thathas this kind of long-term precedence in increased volatility,” hesaid. This price volatility, as well as deregulation, has putpressure on margins. “Most every major industry that’s beenderegulated has seen great decline in price to the tune of10%-20%,” which usually means a reduction in margin.

As a result, “we [at Engage] tend to hire many more people atthe senior level that have a very strong risk managementbackground” because “with margins tight and volatility big, yourmargin [could] disappear quickly.”

Pruner noted that there is “definitely a somber mood” in themidstream business now (marketing, gathering and process), as ithas had one of its “worst years” ever due to depressed crude oilprices. However, he said he expects to see a turnaround probably inthe third or fourth quarter of 1999. Even if financial analysts’predictions of a recession next year bear out, Pruner believes aturnaround still would be imminent, but it may be delayed a bitlonger. Natural gas, he noted, is “less recession vulnerable” thanother forms of energy.

Pruner also took the opportunity to strongly criticize stateretail unbundling regulations, which he said are preventingcompanies like Engage from getting a foothold in some states. Heparticularly singled out New Jersey’s retail gas regulations, whichrequire a marketer to open an office in that state and conductregular business hours between 9 a.m. and 5 p.m. Monday throughFriday. He noted that Georgia’s certification rules for marketersare equally as tough. “…[I]t’s regulations such as these thatmake it difficult for many entities to go ahead and be competitivebecause the costs start to get onerous.”

Susan Parker

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