Retail energy markets entail a unique set of risk management challenges.
David A. Foti works at Accenture and is a frequent contributer to Public Utilities Fortnightly. He may be contacted at firstname.lastname@example.org. Martin F. Nellius is vice president, supply acquisition, for Entergy Solutions Supply Ltd. He has worked in the energy industry for 21 years, and is responsible for various retail operations including power procurement, portfolio management, and risk mitigation strategies for Entergy Solutions Supply.
The emergence of unregulated retail energy has spurred the formation of a number of new entrants who hope to reap the benefits of a promising new market. Serving the deregulated retail market entails unique risks that energy marketers have not had to concentrate on in the past, specifically full requirements consumption risk, tariff risk, and certain operational risks such as mass-market billing. Successfully dealing with these risks will require a focused risk management initiative but should result in a competitive advantage for those retail energy marketers that are able to execute effectively.
Retail energy marketing was truly born when California opened up its $20 billion1 power market in 1998. The initial rush to capture market share resulted in such schemes as free power give-aways and unholy alliances with Amway. The initial enthusiasm waned when retail energy providers (REPs) found that they were unable to offer significant discounts to the utilities' standard offer due to the mandated Competitive Transition Charge (CTC) pass-through. As the economics became clear, marketers either rethought their business plans or left the market altogether.2 For example, Enron Energy Services abandoned the residential market in late 1998 after racking up big losses on advertising programs to entice customers to sign up.