Shell tackles US retail electricity market

With an eye to the long term, Alan Raymond, CEO of Shell Energy Services LLC, has set his sights on the $300-billion US electricity market.

Using Georgia, Ohio, and Texas as a springboard, the Houston affiliate of Shell Oil Co. is waiting for other states to open to competition and allow consumers to choose gas and electric suppliers. It’s a slow state-by-state process that recently bogged down after California’s well-publicized bout with blackouts, bankrupt utilities, billions of unpaid power bills, and political grandstanding.

Since then, states such as Nevada and Montana have backtracked on deregulation. But Raymond, a career Shell executive who previously held management posts at Shell Products Co. and Shell Chemical Co., takes such market gyrations in stride.

“Maybe it’s good that California slowed things down,” he says. “We can take a good hard look at what didn’t work there and what it will take to make it work.”

Formed in 1998, Shell Energy Services grew out of Shell Oil Co.’s search for new business opportunities in the 1990s. Companies can make acquisitions, invent something new, or look for a “discontinuity” in the environment that produces opportunities that weren’t there before, he explains. Deregulation was a discontinuity.

“It [deregulation] had legs and the potential to be big enough to make a difference for Shell,” he says. Selling natural gas and electricity are branches on Shell’s “tree of experience” of selling gasoline and operating convenience stores, Raymond says. “We have been in energy and retail for a long time.”

Shell, one of the largest national gas and electricity retailers, has the powerful advantage of a globally recognized brand name. Raymond said consumers “know our name. It’s a strong brand name and that plays positively for a retail strategy. Consumers know we will be there.”

A consultant once told Raymond the company was “lucky” it didn’t have to spend exorbitant sums to establish a brand name in the retail electricity business. Raymond replied Shell has invested large sums in the brand, but the investment has taken place over 100 years.

Texas push
Up to now, Shell Energy has focused its efforts on retailing gas in Georgia, gas and electricity in Ohio, and electricity in Texas, which is attempting to get a pilot program off the ground in anticipation of the market opening to full competition in January.

As individual states opened up for competition, Shell Energy assessed the business climate, regulatory structure, and economics to determine if market conditions afforded opportunities for both consumer savings and company profits. Shell decided not to operate in Massachusetts, Pennsylvania, New Jersey, and California for reasons Raymond declined to discuss.

But, in Texas, Shell Energy was among the first companies to seek approval as an electricity retailer. Shell is winning customers for the pilot retail program in Texas the old fashioned way — by offering a secure supply of electricity at a lower price than the local utility. The company doesn’t require a contract and will not penalize a residential customer for switching to another provider.

In Texas, crucial rules are still being decided that will determine how much profit competitors such as Shell will make and how much money consumers will save. If consumers don’t save money, there is no point to deregulation, Raymond says.

“In the initial offering, the only attraction is price,” he concedes.

Texas should avoid the supply crunch that led to California’s blackouts, Raymond says, because it appears the state’s electricity supply will stay ahead of demand. However, in a competitive market there is the risk supply will slip and a shortage will result.

The prospect of a dip in supply stimulates construction of new plants, sometimes resulting in oversupply. Competitive markets are often on a “roller coaster,” Raymond warns. “The PUC should raise a warning flag in time to get plants built. We need the proper incentives to build and maintain reserve margins in Texas,” he says.

These could be in the form of tax or regulatory incentives. For example, generators could be required to maintain a certain amount of reserve if they wanted to sell power in Texas. But Raymond is more concerned about the concentration of ownership among Texas generators and the risk of market power.

Power under contract
Shell Energy doesn’t own power plants in Texas and must buy from generators. Because the Texas electricity grid is mostly isolated from the rest of the nation, there is little opportunity to import or export power, putting electricity buyers at the mercy of in-state generators.

“The PUC and the legislature will have to keep a close look on the power of the generators,” he says.

Concentration of ownership is of concern to Shell, but the ability of the company to supply its needs is not an issue. Coral Energy, a large gas and electricity trading and marketing company, is a Shell affiliate.

“As long as you have the ability to stand behind the contracts in the market, it makes no difference if you own the assets or not,” Raymond says.

Moreover, the company just contracted with Calpine Corp., San Jose, Calif., for a 5-year supply of power to serve its customers when the Texas market opens in January. Calpine will supply up to 3,000 Mw of capacity, energy, and other generation services necessary for Shell to function in the Texas market.

No matter what the market structure for generation, Raymond predicts Texas will be an uphill battle for retailers. Residential participation in the pilot has lagged. Statewide, about 80,000 participants have enrolled in the pilot out of 250,000 eligible.

Raymond blames the disappointing statewide participation on uncertainty caused by problems in California, higher electricity prices that have made people more fearful of change, and a pilot program that wasn’t well publicized.

Under Texas law, if utilities lose 40% of their local service territory customers, the market is declared competitive. If they don௿½t lose 40%, the utility affiliate can pay a fee of up to $150/customer to keep them. “That௿½s a powerful position to be in. Give me that deal,” says Raymond.

In 2007, price protection and regulation will cease. State regulators can declare a “victory” for competition, even if utility affiliates still have a 60% market share or more, he says.

The state retail electricity pilot program was due to begin June 1, but that date has been rescheduled to July 31. In filings at the Public Utility Commission Shell suggested the pilot be delayed until the state’s independent system operator’s computers function with fewer errors.

Now it’s a question of whether consumers will be well enough informed to shop for electricity when the entire market opens in January. At that time, marketing affiliates of the utilities can keep all their customers. It will be up to retailers to woo them away.

Because a percentage of the population will never be interested in switching suppliers, Shell Energy and other retailers will have to attract customers from the segment inclined to shop for electricity.

To date, Shell appears to be making inroads with that group. The company has not disclosed how many customers it has signed, but in filings with Texas regulators Shell said it believes it has the most customers of any participating marketer.

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