With the number of players and volumes of energy deals slumping badly, large national industrial and commercial customers have fewer creditworthy parties to help hedge their portfolios, but for some of the energy service sector players this spells opportunity. San Diego-based Sempra Energy’s energy services firm pulled about half of it revenues and even more of its margin from hedging and related commodity services for large end-users this year, according to the company. For traditional traders, it is a different story.

“Maybe a quarter to a half of the trading for industrials has come back to other firms with good credit ratings, but volume [overall] is way off. We’ve lost a lot of volume [among our members],” said Gary Ackerman, executive director of the Western Power Trading Forum, a San Jose, CA-based group of about 30 energy players. “The number of counterparties is down, too, but that is the natural cycle you would expect in a down market, and that will continue for a few more months before we turn the corner in about six months.

“I think you will see some new entrants coming in from the financial community,” he added.

Sempra Energy Solutions, which only began showing a profit in 2001, now finds about half of its combined natural gas-electricity business is providing commodity supply with risk management to large commercial and industrial customers, Bob Dickerman, president of SES’s competitive businesses, said during an interview Wednesday with Daily GPI.

“The gas portion of our business has been fairly static for the past couple of years, while the power side of it has grown more rapidly,” Dickerman said. “It is obviously not a new technology for commercial and industrial customers to use risk management to hedge their gas exposure, which may be just the fuel cost to them or it may be gas for processing in which they are effectively hedging the margins in their business.”

While the current market meltdown in the energy sector has driven some of Sempra Energy Solutions’ business, Dickerman said they were embarked on the firm’s current strategy several years ago before Enron’s collapse and all that has followed. Over time, he noted, there have been “shifts in the way people buy natural gas.”

“Going back to the old days when gas had strictly a winter peak to it, people were more focused on hedging for the winter season, but when it became a dual-peak product caused by summer peaks from electric generation, it caused more of these [large industrial] companies to tend to hedge for a full year,” Dickerman said. “‘Hedge doesn’t necessarily mean locked-in at a fixed price; it might mean some other more sophisticated options or they are building optionality into their program, such as the right to convert from an indexed to a fixed-price deal. To some extent there has been a drive to do longer-term programs of at least a year, as opposed to seasonal on gas.”

Ackerman said that for now, trading is more a “share-of-the-commodity business” than ever because of the limited volumes being traded. “In order to get a deal, you have to offer up more than you would have to normally because there is just not that much action. It is a buyers market frankly, and not too many buyers are buying.”

On the power side, programs and products are newer and more complex, Dickerman said, causing companies and their suppliers to be more in joint learning modes.

“Power is obviously a much more complex product, and the customers need to understand what it is they need to buy, what they are paying for in such things as ancillary services and capacity charges, and they need to understand the regulatory structure with its potential exposure to exit fees or other charges a regulatory body might impose after the fact,” Dickerman said. “So that has been a learning experience for many customers, and for many marketers as well.”

Even with the emphasis on the supply/price side of the business and the greater margins at least for the time being, Dickerman said that half of Sempra Energy Solutions’ business is still on the demand side, helping large customers manage everything they have that uses energy. This can include the Sempra unit taking ownership of the energy-using and producing equipment.

“This past year was actually a big growth area in commodity, so if you asked the source of our margins, I’d say we made more margin on the commodity side than the demand side, but that can switch back in one year,” said Dickerman, adding that Sempra is on what he calls “an aggressive growth plan” that was started even before energy retail competition collapsed. Nothing that has happened in the market in the past year has caused Sempra to pull back from the strategy, he noted.

As an example, it has driven the Solutions unit more into the commodity side of the business, not with a trading desk, but with what Dickerman calls a “hedging and retail-pricing desk,” including back-office billing capabilities for large customers. With greater recognition, branding and creditability in the major regions of the United States, aside from the West, Dickerman said he expects the company’s growth to be “at an increasingly faster rate.”

Sempra Solutions’ evolution has been toward a hybrid company between a development operation and a pure trading company and the lack of counterparties and creditworthy players probably have contributed to that. “To the extent that we are replacing other retail marketers who have dropped off because they were affiliates of companies that closed down or affiliates of trading companies, that may be part of the story,” he said. “But part of the story also is that there is growth in demand for these types of services right now, so anyone who does them well should see their volume business increase.”

While Sempra Solutions is not interested in acquiring physical assets, like its sister company, Sempra Energy Resources, it is looking for customer books, capacity and storage for use in its commodity/hedging programs for large customers, according to Dickerman. And it has a complementary relationship with Sempra Energy Trading, the Connecticut-based energy and metals trading unit.

“They do the wholesale block power deals and the large-volume gas deals, and we buy a lot of our energy from them, and use them as our wholesale supplier on occasions. Generally, we don’t do what they do, and they don’t do what we do.”

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