Despite the danger of a consumer backlash to soaring energyprices this winter and the potential for reregulation, the CEO ofThe New Power Company, the self-proclaimed first national retailenergy marketing company, believes the future is bright for hiscompany as it enters its first winter in operation.
New Power CEO Eugene Lockhart admitted yesterday at aWashington, D.C. press briefing that many state regulators are veryconcerned about high prices mainly because of the “consumers’mind’s eye. [Consumers] will relate these increased prices toderegulation and they are not related at all. They are related moreto supply and demand economics from the generation and drillingstandpoint. Prices would even be higher over time if there weren’tcompetitive players trying to offer a better deal,” he said.
“Do we think there is going to be meaningful reregulation? Ireally don’t think so. I’ve talked to regulators now in manystates. Those states that have deregulation in the books arelooking for sustainable marketers who will come into those statesand offer value propositions that have not been offered before. Wehave the marketing skills and the balance sheet necessary tocompete in these markets for a very long time.”
New Power was started earlier this year by Enron Corp. and formedkey partnerships with IBM and American Online (see Daily GPI, May 17). The company now has 150 employeesacross three locations: its home base in Greenwich, CT; an operationscenter with 350 employees in Charlotte, NC; and a branch office inHouston where 30 people handle New Power’s risk managementrequirements. All of the 30 Houston employees came from Enron. Thecompany started retail marketing in October in northern New Jersey andPhiladelphia (PSE&G and PECO territories) and since then completedan acquisition of Columbia Energy Services, which included 300,000customers in nine states. In total, New Power currently has 340,000customers in those states. Last week, it was awarded Pennsylvaniautility PECO Energy’s default supplier position, which will give NewPower the opportunity to add another 299,000 customers next year.
“We would expect by the end of the first quarter or the secondquarter to have about three-quarters of a million customers andeasily achieve over one million customers next year,” Lockhartsaid. That would make New Power the largest unregulated retailmarketer of gas and electricity.
New Power plans to enter nine additional utility territoriesnext year, including the rest of Pennsylvania, the rest of Ohio,Texas and “believe or not” California. “We would expect to see theCalifornia situation will by market forces resolve itself in thecourse of the next nine months.”
Lockhart said New Power’s approach to the California marketwould be a lot different than Enron’s approach. Enron exited themarket four years ago after a poor showing and a bad outlook forthe retail market there.
“What Enron learned… was that it is not a B-to-C company; itis a B-to-B company and a great B-to-B company,” he said. “But inorder to be a B-to-C company you have to understand how theconsumer thinks, what kinds of messages are going to work, whatkind of pricing structure is going to work. You have to make itsimple. You have to make it dead easy.
“I think you’ll see us going into the California market with aprice-certainty message. We’ll save people money, but I know whatthey really want out there is price certainty and we’ll be able todo that from a multi-year contract perspective. We’ll alsoconstruct products that give them benefits, maybe airline miles ormaybe discounts at Home Depot or Wall Mart. What we’ll also be ableto do is have them tailored to their home or business profile.
“That was number one. Number two is that when Enron went intoCalifornia the Internet didn’t exist,” he noted. Lockhart said 30%of New Power’s sales already come over its own web site and 60% ofthe people who visit the site end up being New Power customers.”It’s literally three clicks. It couldn’t be easier, and that wholetechnology did not exist when Enron was in California.”
One advantage New Power has over other retail marketers,according to Lockhart, is its risk management expertise. He saidthe current market price situation actually should work in NewPower’s favor because of the way retail prices are set and becauseNew Power completely hedged all of its energy sales in the fallwhen prices were much lower.
New Power models residential load in each territory by type andsize of home or business and then examines the forward prices inthe retail markets. “If you take a look at the forward markets inthese territories, they are all backwardated in varying degrees…In the gas markets, we use the [regulated utility’s] gas-costrecovery rates or posted gas rates. Usually those are lag-effectedprices… And because they are basically taking lagged spot marketprices and we are using backwardated markets on a forward basis,there is an improvement in margin there and a fully hedgedposition.”
As a result, the current increase in gas prices “perverselycould work in our favor because as the commodity costs increase,[utility gas cost recovery rates] increase,” he said. Over thecourse of next year, retail marketers actually will have anincreasing price with which to compete. “That represents a prettygood opportunity for us.”
He said New Power operated at a 10.8% margin in the thirdquarter after giving retail customers a 20-25% discount in theircommodity prices. Although the company has not made a profit yet— the net loss in the third quart was $69.9 million — he saidit would do so by the end of 2002.
Lockhart would not say whether New Power intended to buy anotherlarge package of small retail customers as it did with ColumbiaEnergy deal earlier this year, but he did indicate the companywould be involved in some core customer auctions by utilitiesentering deregulation. “If there are good deals out there, we’lltake advantage of them. Are we building our business model arounddeals? No. Our basic business model is built on marketing.”
New Power hopes to grab a 5% market share in the territories inwhich it operates within five years. Lockhart estimated 90% of thehouseholds in the United States by the end of 2005 would be locatedin territories that would be partially or totally deregulated inboth the gas and power markets.
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