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TEPA Panel: Current Retail Market Climate Not Sustainable, "Something Has to Give"
The combination of sustained low margins and continued new entry by retail suppliers is leading to an unsustainable market climate, several executives said during The Energy Professionals Association's (TEPA) annual conference last Thursday.
The current climate is, "not sustainable from a retail market standpoint," Rich Rathvon, Vice President of Retail Commodity Services for ConEdison Solutions, said.
"At some point, something has to give," Rathvon said.
Rathvon continued that the current environment is, "leading to shedding and allocating certain risks in contracts. So a fixed price contract is no longer a fixed price contract."
Margins have come down substantially more than REPs' ability to cut costs, Rathvon said.
"In a commodity business with low margins, you cannot cost cut your way out of this," Rathvon said.
Margin compression is putting pressure on companies to change rapidly, Rathvon added.
This means consolidation, or adaptation, such as by bundling services and adding value, Rathvon said.
Michael Sullivan, COO of Champion Energy Services, agreed that the climate is not sustainable and that, "things are going to change."
"When margins are compressed for a sustained period of time, you have capital obligations that aren't going away, and covenants with your banks and collateral providers that will prevent you from taking cash out. And cash is king," Sullivan said.
"So if somebody wants cash out of one of these REPs, they will capitulate," and sell the book, Sullivan said.
Sullivan said that platform sales are gone for now (though he thinks they will come back), but currently, those who are selling, are selling their books for pennies on the dollar
"If you have a good platform, then you can pick up these books and you can extract millions of dollars," Sullivan said.
"And that will be the new play," Sullivan said.
Not everyone shared the doom and gloom outlook.
While margins are a lot thinner than he'd like them to be, Jay Hellums, CEO of Frontier Utilities, said that, "It doesn't look so dark to us," noting that Frontier, a relative newcomer to the more competitive C&I space, is profitable in its expansion.
"That's why you do see new players coming in ... as long as this business is allowing new entrants to get a return on capital and grow, which it is for us, you're going to see players coming in," Hellums said.
Hellums did say he would like to see higher barriers to entry.
Rathvon said that the pressure from competitive intensity will not be isolated to retail suppliers, and that ABCs will begin seeing the same pressures.
"The ABCs I believe will begin facing that Adam Smith invisible hand of market competition as well, as the number of customers out there become fewer, and [ABCs] need to start differentiating and fighting other of your brethren for customers," Rathvon said.
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November 18, 2013
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Copyright 2010-13 EnergyChoiceMatters.com
Reporting by Karen Abbott • kabbott@energychoicematters.com
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