In just three years, the energy merchant sector has evolved from an Internet-based, North American-focused Enron-dominated industry into something the new players say is smaller, but better, where success may turn on a telephone call instead of computer screen, and where future business trades will be global instead of regional.

An executive round table of utility executives offered their take on what’s to come for natural gas and power merchants on the opening day of Platt’s Power Marketing Conference in Houston on Monday, and said that while problems linger, there is more optimism and enthusiasm, as former players rebound and niche companies enter the marketplace.

“There is a new breed of energy trader,” said David Owens, senior vice president of Entergy-Koch Trading. Unlike three years ago when success depended on the speed of the computer and the quick and sometimes dubious deal making, Owens said the new players are more savvy about taking care of the customer, and considering new ways to improve business. And he also noted that the energy merchant field is no longer just about gas and power — participants also need to be involved in oil, coal, weather and liquefied natural gas.

“If you want to be big in trading today, you have to be global,” said Owens. “It’s not just the United States as an island anymore; it’s a global market.”

The ranks of players from within the financial community continue to grow, while asset owners (i.e., utilities) are pursuing more “asset optimization” versus speculative strategies, basically trading around their own properties. Still others are taking the outsourcing route, said Owens, preferring to hand off their risks to others. But it will never resemble the system that Enron once ruled.

As an example, Owens noted that Entergy-Koch, although successful, opted to move out of speculative trading and choose a conservative route — at least for the near term — with a “back-to-basics” strategy. Investment banking firm Merrill Lynch & Co. bought the company’s energy trading operations in a transaction completed last month (see Daily GPI, Sept. 3).

However, Entergy is not out of the competitive energy merchant game. One avenue the utility likely will take in the near term is “asset optimization,” trading around its own assets. However, Entergy could re-emerge at some point with a higher profile. “Five years from now, that maybe will change…I just can’t say.”

If the company has the assets, however, the merchant industry is “still important” for a variety of reasons, allowing utilities to capture value and create value through economic and efficient risk transfers. “It’s not a ‘zero sum’ game,” said Owens. “Producers, ratepayers, shareholders…all of them benefit. Trading is good, and it’s going to be here.”

Although Entergy was successful, Owens believes few utilities will pursue any large merchant businesses in the future without strong financial partners. Two exceptions, he noted, were Constellation Energy and Sempra Energy, which kept their liquidity and credit rating during the sector turnaround. What has hurt overall has been the reduced market liquidity and regulatory scrutiny, said panel members. However, along with the increased caution, there has been a returned emphasis to credit quality — and the entry of new kinds of players.

Griff Jones, CEO of Houston-based Eagle Energy Partners, said he expects more niche players like his year-old business to gain success by tapping into smaller, undeveloped markets. Eagle Energy trades and sells natural gas and power in smaller Southeast and Midwest markets. Jones believes it takes more than a strong balance sheet to do well.

“To succeed, you have to have the talent…expertise is key,” said Jones. He started Eagle Energy with the assistance of Chuck Watson, former CEO of Dynegy Inc. “We have created opportunities where we think the market gives us opportunities to speculate in with great commercial expertise. And there are more opportunities out there.”

Jones said there still aren’t enough players — but he thinks there are several ways for smaller businesses to create some value in the marketplace. “The demise of the traditional players has created a vacuum” in nearly every area of the merchant sector. Jones sees opportunities within the transportation/transmission markets, while others are providing agent services as agents. Still others are finding success as risk management consultants, in storage services, asset management and risk management.

The key, he said, is to establish strong relationships, which are a “bigger and bigger factor,” Jones said. It doesn’t come from clicking a mouse on a computer, but rather through telephone calls and service.

John Stauffacher, executive director of the Gulf Coast Power Association, believes there are “a lot more challenges” before the merchant industry can claim success. The credit rating industry’s downgrades are less than they were in 2002, but “the taint is still not gone.” In Houston, for instance, he noted that residents are exposed to daily news stories about ongoing criminal trials of former traders in the energy industry.

“Things are better,” but the fallout has impacted companies “in a lot of different ways.” Credit requirements are “still very significant,” and companies still are dealing with regulatory uncertainty. “The industry is slowly turning around, but there is still a substantial amount of leverage.”

Stauffacher said the Federal Energy Regulatory Commission was “pushing in the right direction…” but “states are a mixed bag.” He is encouraged by the progress in California, adding it “may come back sooner than expected.” Some markets remain overbuilt, he said, and there is a “danger in market recovery out five to 10 years. We could miss some of the signals. There is still much to be done on the regulatory front to get power to the demand side. FERC ‘gets it,’ but it’s still a minefield.”

Jones added, “we’ve seen the low…it will get better from here.”

©Copyright 2004 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.