Ann de Rouffignac
HOUSTON, Oct. 8, 2001 — UK utility giant Centrica PLC is preparing to make a push in the deregulating Texas electric retail market, believing it will succeed despite the departure of some other big names from the market.
The British Gas PLC affiliate said it was prepared to sell electricity to consumers within days of Shell Energy Services Co. LLC’s decision to throw in the towel, after weeks of indecision on when a pilot project would get off the ground.
Centrica, which does business in other US markets as Energy America and in Texas as Republic Power, claims its retail energy experience in Britain and Canada will ensure success in an increasingly treacherous residential US retail electricity market.
Republic Power Pres. Don Whaley says Republic will hit the market hard in January with electricity product offerings. The goal is to acquire several hundred thousand customers by the end of 2002. Within 3 years, he hopes to capture a 10% market share.
Centrica asked for authority to market electric services to residential and small commercial customers in all deregulated areas of Texas, including the previous service territories of Reliant Energy Inc., Houston; TXU Electric, a unit of TXU Corp., Dallas; Central Power & Light and West Texas Utilities, units of American Electric Power Co. Inc., Columbus, Ohio; and Texas-New Mexico Power, a unit of TNP Enterprises Inc., Fort Worth.
But the company says its primary focus will be on key metropolitan areas of Texas, specifically Dallas-Fort Worth, Houston, and Corpus Christi. One of Republic’s strengths is its existing and functioning back office systems to bill customers. Its sister company in Toronto is already billing 900,000 gas customers and 500,000 electricity customers.
“We can piggyback off of those systems and expertise at first,” Whaley says. “As we grow, we will have to expand those capabilities though.”
At least 30 companies have registered with the Texas Public Utilities Commission to offer service. But fewer than a handful are marketing their product because of problems that occurred with switching customers to new providers at the Electric Reliability Council of Texas.
The Texas retail electricity market got off to a shaky start when a pilot project was delayed because the grid operator was having trouble with computer systems needed to operate the market. Retailers said they feared customer bills wouldn’t be accurate. Shell Energy, one of the most successful in signing up customers, abruptly withdrew from the retail market because it was developing too “slowly.”
With about 18 million energy customers, Centrica’s core business is its retail gas and electricity services under the British Gas and Scottish Gas brands. In addition to the UK, Centrica operates in Canada, where it has 866,000 residential gas customers and 485,000 residential electricity customers. In the US, Centrica has had the most success with retail gas services in Georgia, Michigan, Ohio, Maryland, and Pennsylvania, where it serves a combined 375,000 residential customers.
“There are not too many players in the Texas market as big as us who are retailers,” Whaley says. “Retail is not for the faint of heart or pocketbook.”
Centrica reported income of $485.7 million on revenue of $14.6 billion for the last full fiscal year. Created in 1997 when British Gas split into Centrica and BG PLC, Centrica owns and operates gas supply, energy services, retail utility businesses, and gas production operations off England.
In Texas, Centrica hired Whaley to be president of Republic Power and senior vice-president of its North American unit Direct Energy Marketing Ltd. Whaley is a familiar industry figure in Texas; he was a vice-president of Shell affiliate Coral Energy LLC, Houston, and before that was a vice-president of TXU Energy Trading Co., a unit of TXU Corp., Dallas.
Republic Power didn’t participate in the retail market pilot project, launched 7 months before full competition was expected to begin. “There’s no real advantage to being first here,” Whaley says. “Instead there is an advantage to being able to make an offer and back it up.”
Delays in the pilot program put participating retailers like New Power Co., Purchase, NY, and Shell Energy in the difficult position of explaining why they couldn’t deliver power to customers by the June 1 start date, Whaley says. But Republic Power was not surprised or “put off” by the delays with the pilot. “No one could have expected the pilot to go off without a hitch,” he says.
Whaley believes the company will have a late entry advantage because the kinks will have been worked out and the public will be more aware of its ability to shop for electricity. He says there is still a lack of public understanding of what restructuring means and how to go about shopping for electricity.
“There is some missionary work to be done,” he says. “Look how long it took the public to appreciate the break up of Ma Bell. The learning curve is slow.”
Nationwide, the retail market has proved a bigger challenge than most imagined. Some states that passed legislation to introduce competition into the retail market have put these plans on hold. The number of companies offering electricity to consumers in the states that do have retail competition continues to shrink.
Retreat from the retail market has been a growing phenomenon since 1998, says energy consultants Xenergy, Burlington, Mass. Companies that left the market completely or abandoned residential sales numbered just 8 in 1998, increased to 15 in 1999, and jumped again to 21 in 2000.
“It wasn’t customers who said they hate the retailer,” says Tom Michelman, a principal with Xenergy. “It was retailers saying they couldn’t afford to do business.”
Whaley says Republic Power will succeed in the residential retail market even though it’s been rocky for others. “There are a number of people in the business. But that doesn’t make them retailers,” Whaley says.
Texas has got the formula right so competition can flourish here, he says. There are no rolling blackouts, the system is sound; reliability is not an issue, and if a consumer does nothing, he can still get a discount, Whaley says.
In the UK, Centrica sells a variety of household services to its electric and gas customers, including services similar to those offered by the American Automobile Association, telecommunications, and consumer financial services.
In Texas, the company plans to use a similar retailing pattern beginning with electricity. But first, Republic Power is conducting marketing studies and surveys to discover what services customers are interested in besides electricity.
Scale is “critical,” Whaley says. Once the first customer is acquired, costs for each additional customer fall. Selling other products and services to those same customers adds little to the cost structure.
With excess generating capacity in Texas and electricity prices falling through the floor, Whaley says, Republic Power isn’t worried about procuring power to serve its Texas customers. Declining natural gas prices have also contributed to lower power prices. “We are a for-profit business. If it behooves us some day to contract or own capacity, that’s what we will do,” he says.
If there were one thing he could change about the Texas market, Whaley says, he wouldn’t allow the utility affiliates to compete outside their territories. He thinks conditions might be ripe for an oligopoly in which a few large companies dominate the market. “They will be potent competitors with their legacy,” he said.