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Conditions Favorable for REP Consolidation in ERCOT; M&A Interest Grows

July 22, 2008

As seen in the Green Mountain-W Power and Light transaction, conditions are ripe for consolidation in Texas, Rob Potosky, executive vice president at Affiliated Energy Group (AEG), told us.

Potosky, no stranger to REP M&A as one of the leaders on last year's sale of Dynowatt to Accent Energy, confirmed that AEG, which offers various consulting and procurement services to REPs, has seen greater interest from market participants looking to buy. In addition to current

ERCOT players, retailers from outside of Texas, including energy companies from Canada and Europe, have been evaluating opportunities to purchase books, Potosky reported. "It's an attractive time to come into Texas," Potosky noted, adding that the sheer volume of competitive REPs (C-REPs) means more opportunities for buyers.

Aside from the natural trend towards consolidation in a market with over 100 licensed REPs, the impetus for M&A has been volatile and high wholesale prices, and the associated credit burden imposed on some REPs, which contributed to five mass transitions since May.

But with a calmer wholesale market, REP exits should be more orderly, such as W Power and Light's, without the need for a mass transition.

Market participants have seen a "dramatic" change in ERCOT MCPEs since May, as instances where MCPE exceeds $200 have decreased, Potosky pointed out. Although there remain blips in MCPE now and again consistent with the energy-only nature of the ERCOT market, they're much more rare than in the spring, and don't last as long.

Potosky attributed the calming to both ERCOT changes (such as lowering the shadow price cap and adjustments to the Closely Related Elements list), as well as changes in market participant behavior.

Although REPs may have had a reprieve from extremely volatile MCPEs, Potosky noted that there are "still issues" in the market, referring to REPs which may have signed heat-rate supply deals to back fixed-price retail contracts.

As long as the price of natural gas remains high, there will be pressure on some REPs to exit, Potosky explained, but such exits should be more like "organized fire sales," as opposed to this spring's drastic mass transitions.

REPs beholden to one wholesale supplier are at a higher risk of being forced to exit the business, since that supplier's demand for more security or decision to terminate its supply arrangement could send the REP into the balancing market, forcing the REP to quickly post the requisite credit with ERCOT. Wholesale suppliers have been increasingly interested in stepping in and taking over a REP's book, dependent on the types of contracts and retail prices in those agreements, Potosky added.

One factor impacting the speed of any potential consolidation is the range of products offered by a REP, Potosky observed. REPs with several types of retail contracts take longer to acquire, since working out supply procurement for acquired customers will need to encompass varied products.


 

 

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