You've heard talk lately about the convergence of electricity and natural gas. That idea has grown as commodity markets have matured for gas and emerged for bulk power.
But some...
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Enron's End Run
Marriage of convenience eyes retail market.
By Richard S. Green and J. Michael Parish
Enron's proposed entry into the electric energy business is a "wake-up call." Open competition will continue to accelerate, and new, aggressive players will seek ways to become involved as the energy and energy services businesses converge.
A combined Enron/Portland General Corp. (PGC) would join PacifiCorp, Pacific Gas & Electric Co., and Puget/Washington Energy as a substantial company operating in the Pacific Northwest, with clear ambitions to operate nationally. Enron/PGC might be able to drive prices down by exploiting differentials between electricity and gas prices, and could also challenge current players in the wholesale electric power markets in the Pacific Northwest. Those companies may find themselves under pressure to get into or expand their presence in the gas business.
Indeed, some analysts have suggested that even regional "pure utility" companies may not be large enough to survive in a fully competitive market. Smaller electric utilities and local gas distribution companies will have to consider how to respond to potential competition from these and other large companies in the years to come, by offering more services or by expanding through strategic alliances or business combinations.
Enron/PGC bears some resemblence to the proposed combination of Utilicorp United with Kansas City Power and Light Co. (KCPL). In both cases, a corporation that has pushed into entrepreneurial nonutility operations, both domestically and internationally, seeks to combine with a strong, traditional, domestic utility company.
The proposed Texas Utilities/Enserch, Houston Industries/NorAm, and Puget/Washington Energy combinations, in which electric utilities seek to add natural gas capabilities, reflect this trend from the other direction.
California Markets
The deal also represents, by far, the least expensive way for Enron to access the enormous and soon-to-be-deregulated California market, while retaining control of the combined entity. The acquisition will not dilute Enron stock on an earnings-per-share basis, and leaves PGC shareholders with only 22 percent of the new company.
By acquiring PGC, Enron will obtain low-cost generation and transmission operations very close to the California-Oregon Border (COB) delivery point for NYMEX electricity futures contracts, without owning any California utility assets or becoming subject to regulation by the California Public Utilities Commission. Close proximity to this delivery point could give the combined company a strong platform from which to market electricity into California, with billions of dollars of profit potential.
Enron's access to both electricity and gas resources will likely increase its ability to engage in arbitrage between electricity and gas pricing, and its proximity to the NYMEX COB contract delivery point could give it substantial influence in the market for electricity and gas for physical delivery as well as in the emerging electricity futures market.
The combined Enron/PGC could engage in "spark spread" (gas-for-electricity) arbitrage and swaps more effectively with a strong physical presence in both markets. The gas to electricity conversion price is calculated by multiplying the price of gas by the "heat rate" of the designated generating unit, and the price of electricity at the designated location is deducted from this product to determine the spread. Other companies
