Price spikes, volatility, tight margins and stiff competitionhave prompted many energy marketers to reconsider their positionsand strategy, and this is causing changes in the energy marketingarena as a whole, according to a new report by Frost &Sullivan.

The report finds that although energy marketing revenues areexpected to show continued strong growth over the next five years,that growth will begin to decline this year. In contrast to the 46%growth in 1997 and 30% growth in 1998, the study predicts thatmarketing revenues will grow by 17.2% this year to $196.7 billionbut will show 14.5% growth next year, followed by 10.5% in 2002,8.4% in 2003, 8.3% in 2004 and only 7.3% in 2005. By 2005, revenuesare expected to reach $313.7 billion.

Three primary issues have been driving market growth: tightindustry competition between top-tier marketers; dramatic growth inmerchant power generation; and online trading, which has increasedefficiency allowing marketers to execute more trades, the Frost& Sullivan report explains.

However, several other offsetting forces are beginning torestrain market growth, including increased focus on profitabilityrather than larger volumes; increasing need to acquire assets tosupport trading, which has erected barriers to entry and forcedsome players to exit; and regional transmission constraints, whichhave hindered wholesale power market competition.

The report notes that energy marketing has become an extremelydifficult business with low operating margins of only about 0.4% ofrevenues, down one-third from 1997 levels of 0.6%. Low margins areforcing re-evaluations and restructuring. Industry consolidationand convergence also have resulted in tougher competition, and highcustomer acquisition costs have shrunk bottom lines.

These difficulties have led marketers to adopt several newtrends. They are focusing more on profitability than on volumegrowth. They also are more actively buying power generation,transportation and storage assets to protect themselves againstrisk. In addition, they are increasingly focusing on regionalmarkets rather than national markets.

To order a copy of the report visit Frost & Sullivan’s website, www.frost.com

Rocco Canonica

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