Retail markets and the energy service sector aren’t dead by a long shot, despite perceptions by many energy industry observers to the contrary, according to a couple of industry participants in the West. Although its year-end 2002 financial report is still a month away, San Diego-based Sempra Energy’s retail energy services company is expecting to announce a year of solid growth, according to Bob Dickerman, president of Sempra Energy Solutions, who is unabashedly bullish on the retail sector.

As Dickerman pointed out last week in an interview with NGI, the recent traumas in the industry, and particularly trading, may have spelled some added opportunities for his competitive energy company, which is part of Sempra’s unregulated “Global Enterprises” business unit.

Sempra has zeroed in on large national industrial and commercial customers that now have fewer creditworthy suppliers and risk management companies to turn to for help. As a result, Sempra Solutions pulled about half of its revenues and even more of its margin from hedging and related commodity services last year, according to Dickerman. 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.”

Sempra Energy Solutions, which only began showing a profit in 2001, now finds about half of its combined natural gas and electricity business is providing commodity supply with risk management to large commercial/industrial customers, Dickerman said.

“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,” he said.

“The earnings have not been publicly released, but I will tell you directionally that we had a very good year. The numbers [when released Feb. 20] will tell you how much ahead of plan we were, but I will tell you it was a very good year for us. I am looking forward to that coming out.”

Dickerman said that it is a fallacy (widely shared in the industry) that the retail market is dead. ” If you do it right, you can make a lot of money in it.”

Sempra Solutions’ business unit is now starting the third year of a five- or six-year strategy that anticipates more hedging services built around providing commodity to big energy users. While the current market meltdown in the energy sector has driven some of Sempra Solutions’ business, Dickerman said the unit was embarking on its 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 deal. To some extent there has been a drive to do longer-term programs of at least a year, as opposed to seasonal.”

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 buyer’s market frankly, and not too many buyers are buying.”

On the power side, programs and products are newer and more complex, Sempra’s Dickerman said, causing buyers and suppliers to be more in joint learning mode.

“It 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 and price side of the business and the greater margins at least for the time being, Dickerman said that half of Sempra 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.

With greater recognition, branding and creditability in the major regions of the U.S., aside from the West, Dickerman said he expects the company’s growth to be “at an increasingly faster rate.”

He shies away from calling Sempra Solutions’ evolution as being toward a hybrid between a development company and a pure trading company, although the lack of counterparties and creditworthy players he says probably have contributed to the firm’s growth in business.

“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.”

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