Fortnightly
Power Marketers: Let's Make a Deal
February 1, 1995By W. Lynn Garner
SIDE SUBHEAD
Everyone talks about them. But what do power marketers really look like?
Power marketers do not just want to belong to the electric industry; they want to change it forever. Their future depends upon it.
Over 80 entities applied to become power marketers last year, and the Federal Energy Regulatory Commission (FERC) has acted on approximately half those applications so far. Yet only a handful of companies currently are actively engaged in buying and selling electricity. Many are merely positioning themselves for the day when competition inevitably pushes beyond the $70 billion wholesale power market into the $200 billion retail market.
This sudden interest in power marketing can be directly attributed to the landmark Energy Policy Act of 1992, which amended Section 211 of the Federal Power Act and gave FERC authority to order wholesale wheeling if certain criteria are met. (For key FERC cases affecting power marketers, see Inside Washington, page 35.)
Most applications come from gas marketers, who see power generation as a lucrative market. But the applicants include brokers and financial firms, utility affiliates, independent entrepreneurs, commodity traders and manufacturers, and independent power producers.
Enron Corp. - From Gas to Energy
Last fall, Enron Corp. changed the name of affiliate Enron Gas Services Group to Enron Capital & Trade Resources (ECTR). The change is more than a formality, said Jeff Skilling, ECTR managing director.The old name became "too confining" for the evolving energy business. ECTR reflects the company's goal "to facilitate capital and trade in the underlying commodity," whether it be natural gas, electricity, or some other fuel.
That means providing full financial and risk management services as well as energy marketing. "We have no intention of entering the utility business," Skilling says. "Our business is as a facilitator."
Financial derivatives trading in natural gas now exceeds five to 10 times the physical market, and some industry analysts expect today's $200-billion electricity retail market to become a $1-trillion commodity power market by 2000. In the future, the risk of financing of new power plants will shift from ratepayers to the financial markets, according to Skilling.
ECTR is one of four operating companies under the restructured Enron Corp. umbrella. As a gas marketer, ECTR buys and sells 8 billion cubic feet (Bcf) per day in a total domestic market of about 50 Bcf. Long-term financial contracts involve another 12 Bcf per day. ECTR, which employs about 1,400 people worldwide, is the largest supplier of natural gas to the electric generation industry in North America, and is aggressively pursuing new ways of financing to the energy industry.
As interstate pipelines shed their traditional roles as gas merchants and became merely transporters, akin to common carriers, in the 1980s, Enron decided it wanted to be "a major player in gas marketing," Skilling said. To do that, Enron found it necessary to expand beyond its traditional pipeline markets. Today, Enron's largest regional gas market is the Northeast, although Enron's huge pipeline network serves the Midwest, West and South.
According to a study by Ben Schlesinger and Associates, the number of gas marketers skyrocketed from 51 in 1986 to a peak of 350 in 1991, followed by a shake-out and consolidation in the industry.
There has been "tremendous consolidation" as the gas market has matured, and large companies with economies of scale have been the driving force, Skilling said. ECTR's biggest gas customers are the gas utilities, but it also sells to independent power projects, cogeneration facilities, industrial customer and electric utilities.
Skilling sees two major themes emerging in today's natural gas industry. One, because of regulatory changes, "the power grid and the gas grid will be more closely meshed together," Skilling said, with similar products and services in the gas industry emerging in the electric industry. Second, gas utilities are hiring marketers such as Enron to sell services and products to customers on their distribution systems, creating an emerging end-use market for natural gas that is somewhat analogous to retail wheeling on the electric side.
Skilling believes power marketing will experience an "almost identical evolution" to gas." An ECTR affiliate, Enron Power Marketing Inc., received its power marketing approval in December 1993, and has been negotiating interchange power agreements, a lengthy process, ever since. Enron signed its first such agreement in March 1994 with San Diego Gas & Electric Co.
While the FERC has seen "an avalanche" of power marketing applications, there has been relatively little buying and selling so far. "It's a building process," Skilling said, and the pace should quicken in the first and second quarters of 1995 as more agreement are negotiated.
Skilling believes the power industry must go through several stages, including the development of a cash market and forward contract market, which includes a new electricity futures contract. In three years, Skilling believes, the power industry will resemble the gas industry in terms of a deregulated commodity market.
Heartland Energy - An Electric Affiliate
Only a handful of utilities have applied to set up power marketing affiliates, with most taking a wait-and-see attitude. The nation's first utility-affiliated power marketer, Heartland Energy Services Inc. had to jump through several hoops to prove there would be no self-dealing or collusion in order to obtain regulatory approval.
Company officials believe it will be worth the effort.
In terms of corporate hierarchy, Heartland Energy operates as a subsidiary of Heartland Development Corp., the affiliate controlling all of the unregulated businesses of WPL Holdings, Inc. The parent company's regulated affiliate is Wisconsin Power and Light Co. (WPL) in Madison, WI, serving southern and central Wisconsin and northern Illinois.
Richard Friedman, Heartland Energy vice president who helped create the new entity, said the power marketing subsidiary should have an advantage over some newcomers in terms of having adequate capital to finance projects and in having personnel with a "deep industry knowledge," many of whom came with Friedman from the utility side.
"Without substantial backing, it will be difficult to get utilities to sell you millions of dollars of power and be able to pay them back in a couple of months," Friedman said. So far, the margins on marketing transactions have been relatively thin, but the cash flow requirements are large, he said.
Since Heartland, at least two other utility-affiliated marketers have been approved by FERC: LG&E Power Marketing Inc., a subsidiary of LG&E Energy Corp., and InterCoast Energy Co., a subsidiary of Iowa-Illinois Gas and Electric Co. Approximately 10 utility-affiliate applications have been filed so far.
Heartland's approval process took about a year. Heartland received approval from the Federal Energy Regulatory Commission last August to buy and sell electricity at market-based rates. The application was filed in the fall of 1993, but discussions with FERC staff actually began the previous summer.
There were numerous hurdles to clear. First and foremost, WPL had to file for an open-access transmission tariff to meet FERC's comparability standards before FERC would grant authority to Heartland to buy and sell electricity at market-based rates.
While Heartland is permitted to buy transmission service from WPL, it may not buy or sell power from WPL without seeking specific approval from FERC. Heartland files quarterly reports that are required of all power marketers.
WPL had to demonstrate it held no market dominance in generation, and FERC accepted the state commission's safeguards on WPL Holdings intended to prevent cross-subsidization among affiliate ratepayers. There is no overlap in personnel between Heartland Energy and the WPL utility.
"I see it as the price of entry," said Friedman. FERC is concerned with self-dealing abuses, he said, but over time some of the restrictions may be relaxed. For example, in the natural gas industry, some independent power producers affiliated with gas distribution companies have been permitted to make sales to those distributors.
Heartland Energy is focusing not only on its core markets in the upper Midwest, but also on the southeastern United States, which Friedman sees as "natural extension" of the Midwest, in terms of the presence of several large multi-state utility systems such as the Tennessee Valley Authority.
To date, Heartland Energy has negotiated about two dozen interchange agreements with more to come, Friedman said. The primary customers have been large-size municipal cooperatives and in some cases, bulk-power utilities.
Heartland is not actively pursuing WPL customers, but because neither company can talk to the other, occasionally both companies have submitted bids on the same projects, Friedman said. "We were not created to focus on WPL's indigenous customer load," Friedman said. "There's plenty of opportunity elsewhere in the country. We're trying to take a national approach."
Heartland Energy's services are not limited to power marketing. It was incorporated in the spring of 1993 as a marketer of natural gas and propane. The company also serves as a broker and consultant.
While some more aggressive power marketers have petitioned FERC to order wheeling across a reluctant utility's transmission system under a revised Section 211 of the Federal Power Act, Friedman disdains the effort.
"We have standing joke. A 211 [filing] is equivalent to dialing 911," Friedman said. While FERC has recently approved the first of such filings, Friedman views it as a "hostile act" and "a peculiar way to start a relationship" with utilities.
-LG
SIDEBAR
A Marketers' Role Call
The number of electric power marketers is growing rapidly. From a total of 9 in 1992, the ranks had grown to 55 by the end of 1994, with additional 26 applications pending before the Federal Energy Regulatory Commission as of that date.
The largest contingent of power marketers have origins in the natural gas business, showing affiliations with gas marketers or pipelines. Some electric and gas utilities have started power marketers to market surplus generating capacity outside franchised utility service territories. Several independent power producers (IPPs) have also entered the market, making up about 10-15 percent of the group.
The field is rounded out by "Wall Street" firms (investment bankers, commodity traders, etc.) that seek to provide customers with a full array of financial risk management products.
Fuel Marketers:
Catex Vitol Elec. Inc. Boston
Citizens Energy Corp. Boston
Citizens P&L Corp. Boston
CMEX Energy Inc. Dallas
Eastern Power Distr. Inc. Alexandria, VA
Eclipse Energy, Inc. Houston
Electric Clearinghouse Inc. Houston
Gulfstream Energy LLC Houston
Hadson Elec. Inc. Dallas
Howard Energy Co., Inc. Wauwatosa, WI
Howell Gas Mgmt. Houston
Industrial G&E Albuquerque
KCS Energy Mgmt. Servs., Inc. Edison, NJ
KCS Energy Mktg. Servs, Inc. Houston
Kimball Power, Inc. Kalamazoo
Rainbow Energy Mktg. Bismark, ND
Texas-Ohio Power Mktg., Inc. Houston
Texican Energy Ventures Inc. Birmingham, AL
Texpar Energy, Inc. Waukesha, WI
Utility-2000 Energy Corp. Calgary, Alta.
Vesta Energy Alternatives Tulsa
Fuel Transporters:
Associated Power Servs. Inc. Tulsa
CNG Power Servs. Corp. Pittsburgh
Coastal Elec. Servs. Co. Houston
EDC Power Mktg. Inc. Dallas
Enron Power Mktg. Inc. Houston
Equitable Resources Mktg. Co. Houston
Koch Power Servs., Inc. Wichita
Midcon Power Servs. Corp. Lombard, IL
NorAm Energy Servs., Inc. Houston
Transco Power Trading Co. Houston
Valero Power Serv. Co. Houston
Independents:
Acme Power Mktg., Inc. Washington, DC
American Power Exch., Inc. Palm City, FL
Aston Energy Corp. Houston
Camelot Energy Servs. Brookfield, WI
Chicago Energy Exch. Chicago
Continental Energy Servs. Northville, MI
D C Tie, Inc. Washington, DC
Dahnke, RJ & Associates Sheboygan, WI
Ford Motor Co. & Rouge Steel Co. Dearborn, MI
Howell Power Sys., Inc. Houston
Imprimis Corp. Centerville, IA
JEB Corp. Pine Bluff, AR
Kaztex Energy Servs. Inc. Brookfield, WI
Mesquite Energy Servs. Inc. Houston
Mid-American Resources, Inc. Dallas
National Elec. Associates LP Houston
National Power Exch. Corp. Knoxville
National Power Mgmt. Co. Falls Church, VA
N. Amer. Energy Conserva., Inc. New York
Petroleum Source & Systems Atlanta
The Electric Exch. New York
Torco Energy Mktg. Chicago
IPP Affiliates:
AES Power Inc. Atlanta
Calpina Power Mktg. Inc. San Jose
CRSS Power Mktg. Inc. Houston
Destec Power Servs. Co. Houston
Pace, CC Energy Servs. Fairfax, VA
Tenaska Power Servs. Omaha
Utility Affiliates:
Aquila Power Corp. Omaha
Cenergy Inc. Minneapolis
Continental Power Exch. Inc. Atlanta
Heartland Energy Servs., Inc. Madison, WI
Illinova Power Mktg. Inc. Decatur, IL
InterCoast Power Mktg. Co. Davenport, IA
LG&E Power Mktg. Inc. Fairfax, VA
PowerNet GP Boca Raton, FL
Wholesale Power Servs. Plainfield, IN
Wall Street Firms:
AIG Trading Corp. Grennwich, CT
Citizens Lehman Power Sales LP Boston
Electrade Corp. New York
Engelhard Power Mktg. Inc. Iselin, NJ
J. Aron & Co. New York
Louis Dreyfus Elec. Power Inc. Scottsdale
MG Elec. Power, Inc. New York
Morgan Stanley Capital Grp. Inc. New York
Category Unknown:
Black Creek Hydro, Inc. Bottell, WA
Direct Energy Inc. Palm City, FL
Energy Resource Mktg., Inc. Houston
Power Exch. Corp. Newport Beach, CA
By Sam C. Henry, principal consultant, at Mesquite Trading Co., Houston, TX, a registered Commodity Trading Advisory firm specializing in energy markets, and risk management.
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