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Power Marketers: Let's Make a Deal

Fortnightly Magazine - February 1 1995

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