This  is  a very good  synopsis of  how  retail markets  are  responding  to  
US power peaks this summer
---------------------- Forwarded by Margaret Carson/Corp/Enron on 07/31/2000 
08:21 AM ---------------------------


webmaster@cera.com on 07/27/2000 10:22:50 PM
To: Margaret.Carson@enron.com
cc:  

Subject: Weathering the Summer Price Volatility and Highs--How Will Retail 
Marketers Fare? - CERA Alert




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CERA Alert: Sent Thu, July 27, 2000
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Title: Weathering the Summer Price Volatility and Highs--How Will Retail 
Marketers Fare?
Author: Biehl, Behrens, Reishus
E-Mail Category: Alert
Product Line: Retail Energy Forum ,
URL: http://www.cera.com/cfm/track/eprofile.cfm?u=3014&m=1291 ,

Alternative URL:
http://www.cera.com/client/ref/alt/072700_16/ref_alt_072700_16_ab.html

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This summer retail marketers have been confronted with extraordinarily 
difficult market circumstances for both gas and power. So far this summer, 
average weekly power prices have risen above $100 per megawatt-hour (MWh) in 
several markets--almost double many of the standard offer levels. This 
differential between market prices and standard offers has made it almost 
impossible for retail marketers to offer customers an attractive service 
proposition in many areas of the United States open to competition. 
Similarly, in the gas market this summer (May through June) prices at the 
Henry Hub have averaged $3.92 per million British thermal units (MMBtu), well 
above the average of $2.62 per MMBtu during the same period last year. In 
some cases, the volatile gas and power markets this summer are proving lethal 
to retail marketers that chose to ride the spot markets rather than properly 
hedge their purchases and who lack the balance sheet strength to carry the 
burden. In addition, som!
e retail marketers have experienced difficulty with contract fulfillment by 
their wholesale suppliers, even when the retailer may have felt secure going 
into the summer. As a result of these market conditions, a few marketers have 
even relinquished their customers, returning them to the utilities who are 
the default suppliers.

Retail marketers serving these difficult markets (which include the West, 
PJM, and New England) are approaching the current situation with a number of 
different strategies, including

*  selling either part or all of their customer base

*  continuing to serve their existing customers but not renewing their 
contracts and planning to exit the market

*  turning customers back on utility service

*  continuing full steam ahead

The irony of this situation is that high prices over the next few years may 
actually help increase consumer awareness about competitive energy supplies 
and may even cause utilities under unrecoverable price cap rates to question 
whether they should remain in the merchant business. Uncertainties whether 
retail marketers can withstand these conditions and regulators and other 
interested parties will tolerate a sustained period of both high and volatile 
prices or if instead they will step in and adjust the rules in the name of 
protecting retail customers.

In this briefing CERA examines the question of whether one possible fallout 
from this summer's high and volatile energy prices will be increased 
consolidation among retail marketers, as retail customers (and/or businesses) 
begin to be actively bought and sold. We also examine the implications on 
retail markets of recent federal legislation supporting the legality of 
electronic contracts. In addition, we focus our first regional analysis on 
the regulatory developments and retail activity in the Northeast states and 
Canadian provinces--one of the most dynamic regions in terms of retail energy 
activity.

Retail Metrics

Trading Retail Customer Bases: Avenue for Building Market Share

Although the impact of volatile and high energy prices this summer may be 
bleak for many retail players, for a new entrant and/or contrarian buyer, 
this could be an excellent time to pick up customers "on the cheap" and build 
market share. In the past month there have been three notable cases of retail 
energy companies buying retail customer bases from other companies--in some 
cases just the retail customers have been purchased and in other cases whole 
retail energy businesses have been purchased. Examples include

*  North American market entry strategy. Centrica, an energy marketing 
business in the United Kingdom, purchased Direct Energy, an energy marketing 
business in Canada that also has a joint venture with Sempra called Energy 
America. Through its acquisition of Direct Energy, Centrica acquired 820,000 
Canadian gas customers and 27.5 percent ownership interest in Energy America, 
a US company that has 450,000 gas and power customers (see Table 1). In 
addition to gaining access to the largest retail customer base in North 
America, Centrica was able to buy a company with significant experience in 
various North American retail markets.

*  Gaining critical mass for an IPO. The New Power Company (a joint venture 
between Enron, IBM, and AOL) recently acquired over 300,000 gas and power 
customers from Columbia Energy Services as a way to quickly build market 
share before an initial public offering, for which a request has recently 
been filed with the Securities and Exchange Commission.

*  Building market share. Energy America acquired 50,000 gas customers from 
Titan Energy, an energy marketer in Georgia, after the latter filed for 
bankruptcy.

In the two cases of bankruptcy, mass-market gas customers were purchased in 
the range of $44-$112 per customer. It appears that purchasing a base of 
retail customers is a cheaper form of buying market share than purchasing an 
entire company or division. For example, Centrica paid between $480 and $645 
per customer in its purchase of Direct Energy's business. This metric is 
somewhat misleading, however, as the purchase of Direct Energy also included 
upstream gas assets.

The three recent transactions join the list of retail customer acquisitions 
over the past year or two (see Table 1). These transactions are generally 
occurring for three common reasons: either as a result of a retail marketer 
bankruptcy (e.g., Titan Energy and Peachtree Gas), because companies are 
changing their strategic focus (e.g., NiSource/Columbia Energy and PG&E), or 
as a market entry tool (e.g., AES, Centrica, New Power). CERA expects many 
more players to consolidate and exit the business this year, particularly in 
the aftermath of the summer market.

The idea that the current climate might offer a good buying opportunity for 
retail customers has not been lost on the market. While existing retail 
markets are struggling to make ends meet, the number of marketers requesting 
certification has increased in some places such as Massachusetts, where it is 
expected these new entrants will attempt to purchase other marketers' 
businesses.

Table 1 shows extreme differences in prices paid for retail customer bases 
(on a total-cost-per-customer basis), since a wide variety of factors 
contribute to the cost of a customer and/or a retail business. CERA does not 
suggest that this table provides an apples-to-apples comparison on the cost 
of a customer. In terms of just pure customer acquisition costs there can be 
significant regional differences in the value of a customer owing to average 
use per customer and local market conditions. For example, a residential gas 
customer in Georgia will likely use far less gas than one in Michigan and 
should be valued differently as a result. Other factors such as buying 
habits, load size, existing contracts, and future potential growth in the 
market need to be evaluated to determine the proper valuation of customers. 
In addition, a myriad of factors can affect the value of a retail company, 
including what other capabilities, assets, and other factors are part of the 
deal, separat!
e from the customer base and underlying contracts.

Retail Market Share Consolidation Could Be the Trend over the Next Year

Although the buying and selling of retail customers through aggregators was a 
common feature of Ontario gas restructuring, this tactic has not been as 
prevalent in the United States for two reasons. Marketers have been 
distrustful of the methods of acquisition of other players and are therefore 
skeptical about the loyalty of customers if they were to be acquired through 
a purchase. Additionally, many have felt that they could acquire customers at 
a much lower cost than by purchasing an existing customer base.

This historical reluctance to buy retail customer bases seems to be changing, 
and will likely continue to change in the future. Over the past few years 
there has already been a maturation of many of these marketers and of the 
rules that they must obey. In addition, as larger name companies enter the 
retail markets, the risk associated with buying a customer base that had been 
acquired through questionable means has been drastically reduced.

With the emergence of significant players such as Enron, Centrica, and Shell 
into the retail market,  further customer buyouts will occur as these and 
other large players work to gain enough scale to make the retail business 
significant to their bottom line. The new breed of retail marketers may be 
better capitalized to play the short-run game of building market share as 
well as the long-run game. As a result, these players may be able to achieve 
scale in a market where no single company has achieved significant scale to 
date. In addition, many of these companies have strong wholesale marketing 
capabilities to support their retail marketing capabilities, inform their 
contracting practices, and help shield them from being on the wrong side of 
volatile markets.

Market Developments

New Law Removes the Wet Signature Barrier, but Lack of Uniform Rules Persists

The regulatory requirement for retail energy marketers to obtain written 
("wet") signatures from end users wanting to switch their energy service 
provider has posed a major cost barrier to marketers that already face high 
customer acquisition costs. As a result, a number of competitive energy 
marketers have exited markets with wet signature requirements. This cost 
barrier will be lowered in October when recently passed federal legislation 
takes effect--sparking renewed interest in the affected markets as well as 
guaranteeing that in the states scheduled to open, electronic customer 
sign-ups and transactions will be legally binding.

In late June, President Bill Clinton signed into law the Electronic 
Signatures in Global and National Commerce Act, which will take effect 
October 1, 2000. This law overrides state regulatory rulings and laws that 
have required wet signatures. However, although the news is a step forward 
for marketers, the issue is not entirely cut and dried.

*  The Act confirms the legality of electronic transactions, while giving the 
states broad authority on how to implement and judge requirements for these 
transactions.

*  It stipulates that parties engaged in transactions must both agree to 
conduct commerce electronically. This act neither mandates electronic 
commerce nor allows it to be mandated if not agreed to.

*  The Act follows on an earlier act titled the Uniform Electronic 
Transactions Act (UETA), which was proposed last year by the National 
Conference of Commissioners on Uniform State Laws. For the states that 
adopted this earlier Act, the latest Congressional legislation allows them to 
adhere to the UETA. States that have not implemented the UETA will be under 
the jurisdiction of the new federal legislation, which is slightly more open 
to interpretation than the UETA.

What does this legislation mean at the state level? Unfortunately, this Act 
did not come in time to have a significant impact on the states that have 
troubled marketers (e.g., Arizona and New Jersey). Prior to the passing of 
this new legislation, Arizona adopted its own version of the UETA in April. 
Almost concurrent with the federal legislation, New Jersey recently approved 
an Internet pilot program to allow marketers to use electronic signatures to 
switch customers beginning in September. The program will be open to 350,000 
customers (10 percent of the market) and will last for six months before 
reevaluation by the Board of Public Utilities (BPU). However, in lieu of the 
federal legislation, the BPU will vote in August on lifting the program cap. 
It remains to be seen if either the pilot or new rules will be sufficient to 
lure back the marketers (e.g., KeySpan, DTE, Conectiv) that pulled out of New 
Jersey over the past year, citing the state's wet signature rules as one of!
 the primary reasons for their exit. Given the high use and ownship of 
personal computers in the residential market, as well as customer interest in 
being able to shop for suppliers over the Internet (about one third of 
customers surveyed in New Jersey supported Internet sign-up), we expect this 
recent ruling could jump-start marketing to the mass market this fall.

This legislation will have the most significant impact in states that have 
not opened to competition or ruled on wet signatures. Although benefiting all 
marketers by increasing their options, this Act benefits pure e-commerce 
players the most. The cost of acquiring customers over the Internet can be 
substantially less than other forms of customer acquisition such as mail 
(whose costs include paper and postage) or door-to-door sales (which involves 
high labor costs). Since many consumers will continue to remain without 
Internet service for the midterm, another implication of the ruling is that 
it will drive further customer segmentation by different types of marketers.

The implementation of the electronic signature law may signal the advent of 
the Internet as a favored marketing tool over the more traditional means of 
marketing to customer through paid advertising, direct mail, or door-to-door 
sales. Since the Act does not require states to accept oral communication as 
legally binding, many states will continue to require written or electronic 
signatures. "Slamming" and "cramming" remain the concern of many state 
regulators, resulting in rules that disallow oral transactions as a means of 
signing customers.

The cost of acquiring customers over the Internet can be substantially less 
than other forms of customer acquisition such as mail (whose costs include 
paper and postage) or door-to-door sales (which involve high labor costs). 
This will help divide the retail market into players serving different 
customer segments. One set will continue to acquire customers that do not 
have Internet access through traditional methods, whereas the other set of 
retail players will acquire and conduct business over the Internet, typically 
gaining higher income customers.

Though there can be little question that states will eventually have to allow 
marketers to transact and acquire customers over the Internet, the 
state-by-state rules governing electronic transactions are likely to continue 
to be nonstandard. Although the intent of the law as it is written is to 
nullify state wet signature legislation in all but a few cases, there could 
be some confusion over its interpretation at the state level. One area to 
watch will be how states interpret one of the law's few exceptions--that 
customers must be notified in a nonelectronic format when their utility 
service is being terminated. Some regulatory agencies may take that to mean 
that when consumers switch away from utility service, some form of 
communication must be sent to the consumer, and potentially a regulatory 
commission could require marketers to bear some or all of these costs.

For more information, see the following hyperlinks:

*  Uniform Electronic Transactions Act (1999) (promoted by the National 
Conference of Commissioners on Uniform State Laws):
http://www.law.upenn.edu/bll/ulc/ulc_frame.htm

*  Electronic Signatures in Global and National Commerce Act (signed into law 
by President Clinton): http://thomas.loc.gov/cgi-bin/query/z?c106:S.761.ENR:
Regional Analysis--Northeast Market

The attention being given to the high-priced summer market of 2000 is masking 
what could be seen as small steps forward for competition in the Northeast. 
Despite headlines about retail players exiting some markets and customers 
being returned to system supplies, state regulatory activity is proceeding 
apace this year, and there continues to be a steady influx of new players 
that are waiting for certification in states such as Massachusetts and New 
Jersey. Still, this has not been a banner year for retail activity in the 
Northeast (see Figure 1 and Table 2).

Regulatory Front

The region has more competitive retail power markets open than any other in 
the United States. Of the nine states in the Northeast, only New Hampshire 
and Vermont have not been opened to competition, although both states are 
moving forward to break the political impasse there. Maine and Connecticut 
have opened since January.

Although natural gas competition got off to an early start in the region, it 
now lags electric access, with only New York, Pennsylvania, and New Jersey 
technically open to gas competition to all customers. Over the next year, the 
only state that is expected to take any significant step forward on the gas 
front is Massachusetts, as the Department of Telecommunications and Energy 
(DTE) is likely to rule in favor of opening the market to all customers by 
the end of the year.

There has been a decrease in the number of customers in some utility 
jurisdictions that are competitively buying gas and power in the Northeast 
since March, particularly in Pennsylvania and New Jersey. Since March the 
number of customers switched to retail marketers has dropped from 612,000 to 
547,000 for gas and increased somewhat for power from 680,000 customers to 
801,000. Although new competitors continue to petition for the right to serve 
in a number of northeastern states, in a few of the newly opened access 
states, retailers have been slow to step forward with competitive offers. 
This is particularly true for offers directed to residential and small 
commercial customers.

Wholesale Volatility

Market share of retail players in the Northeast has always remained highly 
fragmented, and utility affiliates retain the bulk of deregulated market 
share. This is poised to change over the next year, as some of the early 
retail marketers experiencing difficulty under the current market conditions 
pull back, leaving room for new entrants on the sidelines. In many of the 
states, wholesale prices this summer dramatically exceeded the level of 
competitive offers in the marketplace, exceeding $100 MWh in some cases in 
New England. A few retailers caught without a secure supply of wholesale 
power were forced to return their customers to the provider of last resort 
service. It will be important to watch these markets in the fall to see if 
customers return to these marketers and/or whether the regulators adjust the 
rules to prohibit this kind of behavior and/or fix the rules that perpetuate 
this discrepancy between the standard offer and market price.

Until the wave of new supply resources are built and brought online in these 
markets, high and volatile prices are likely to be a characteristic of this 
market. It remains to be seen if retailers will have learned the lessons from 
this past summer, however, and go into the next peak period with firm supply 
contracts as well as arm themselves with the marketing savvy to take 
advantage of customer aversion to high and fluctuating prices with offers of 
a stable price, while providing the marketer with a significant margin above 
the wholesale price.

The story is similar for gas, as CERA expects strong gas prices in the 
Northeast to continue for the new few years, until increased supply comes 
into the market. High prices will continue, owing to tight storage 
inventories and increased demand for gas for power generation, with last 
winter's volatility likely to be repeated in upcoming winters.

Canada

The largest Canadian market in the Northeast is Quebec, as Ontario will be 
covered as part of our Midwest regional analysis. The Quebec gas market is 
the only northeastern Canadian gas or power market fully open to competition. 
There is no investigation into power competition in Quebec at this time. It 
is likely that Quebec will wait and see how opening of the Ontario power 
market plays out next year before taking any action, just as it watched and 
repeated the Ontario gas market experience.

Greenfield gas distribution companies are being built in New Brunswick and 
Nova Scotia, which will be served by Sable Island gas supplies. The 
regulatory focus there is to encourage hooking customers up to gas system 
supplies, not necessarily to promote retail competition.



**end**

Follow URL for PDF version of this Monthly Briefing with associated tables 
and graphic.



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