Vicky A. Bailey, a member of the Federal Energy Regulatory Commission, has left the FERC to serve as president of Cinergy Corp.'s PSI Energy Inc. unit in Indiana. Bailey served on the Indiana...
Retail Power: Double Down or Fold?
Utility retail is at a crossroads. Energy executives must decide which path to follow.
There are only two routes to creating or maintaining shareholder value in competitive retail electricity marketing: double down to grow the business significantly or fold and divest the business from its portfolio. Utilities and their competitive retail affiliates should determine today which of these two strategic bearings they wish to follow. The tentative middle ground of hold is simply a way to postpone the inevitable and erode shareholder value.
Despite the problems facing existing players and new entrants to the retail electricity markets, this may actually be the best time to expand operations and influence the retail market development process. There are short-term market conditions that favor aggressive entrants. These are coupled with longer-term structural market forces that we believe will provide aggressive but selective retail players the opportunity to create significant shareholder value.
In terms of its business profile, energy retailing in many regions has undergone a genuine transformation due to the introduction of competition. The concept of energy retailing as a competitive business function has been evolving over the last 15 years. The concept of a competitive retail function within the energy delivery value chain has spread throughout the developed world. The number of gas or electric retail customers served by a competitive supplier has grown to over 35 million worldwide. With over 150 million customers in the United States and Europe still served by regulated suppliers, there is plenty of room for growth. In fact, the North American growth targets of just one company, Centrica, call for more than doubling its number of customer-product relationships to over 10 million customers by the end of 2003. Already, Centrica has nearly 20 million retail gas and electric customers in Europe and North America. With this solid and growing base of business, Centrica is well on its way to becoming the dominant energy retailer globally.
All of the logic that has been used over the past 15 years to call for the emergence of an energy retailing business remains valid, despite California and the Enron excesses. The benefit of replacing regulated monopoly service with competitive markets has been demonstrated in such industries as banking, telecommunications, aviation, and trucking, so we accept the end state of energy market restructuring will be a much smaller monopoly service-local pipes and wires distribution-and competitive providers of virtually everything else. Despite some issues (such as low-income service in the Georgia natural gas market or fuel adjustments to the price-to-beat in Texas), it is hard to imagine an end state without a vibrant and competitive retail component, given the success of competition in other industries and the success of competitive retail elsewhere in the world. Therefore, we conclude that there will be an energy retailing industry, barring a major regulatory intervention caused by an externality not currently visible. The question remains: Will this segment of the industry achieve sustainable profits? As the retail energy market emerges in each country, the profitability of the business routinely goes through a life cycle. Successful early