November 6, 2013 / 11:27 PM / in 4 years

U.S. power companies struggle to profit: executive

HOUSTON (Reuters) - Power companies operating in competitive U.S. power markets are struggling to make money under rules and regulations that were not designed for the rapidly changing electricity landscape, a top power company executive said on Wednesday.

The logo of French group GDF Suez is seen on a building in the financial district of La Defense, near Paris August 1, 2013. REUTERS/Benoit Tessier

Abundant natural gas that has lowered fuel prices, mandates for more renewable power, and outdated market rules have squeezed profits for merchant power generators - all but eliminating prospects for new investment, Stefaan Sercu, chief executive of GDF Suez Energy Marketing NA Inc, told the Reuters Global Commodities Summit in Houston.

“This is an industry that is not making money,” said Sercu. “If your returns are less than your average weighted cost of capital, you are in trouble. And that’s where the industry - overall - is.”

Sercu is responsible for commercial optimization of GDF Suez’s North American assets, which include a diverse mix of renewable fuel, gas, and coal generation totaling 13,000 megawatts and a retail business serving commercial and industrial customers in 12 U.S. markets.

The North American unit of Paris-based GDF Suez GSZ.PA also owns and operates an LNG receiving terminal in Massachusetts serving New England and a natural gas distribution network and pipelines in Mexico that serve 400,000 customers.

In competitive U.S. power markets, companies like Suez are dealing with market protocols ill-suited to address fundamental market changes brought about by lower natural gas prices, stricter environmental rules and financial compliance regulation.

“I would say the industry is falling apart,” said Sercu.

Even in regulated markets, where power prices are set by regulators, Sercu said utility profits are threatened by low growth in electric demand and improving economics for distributed generation where customers can invest in solar panels to reduce reliance on the grid.

Sercu, who has been outspoken in the power-market reform debate in Texas, said rules in competitive markets must evolve.

“As fundamentals change, it’s a continuous tuning,” Sercu said. “If we don’t have a right balance between scarcity pricing, the right incentive mechanism for reliability, for flexibility, efficiency - all the key things that keep a system going - we are going to be in trouble.”

Sercu also said increased federal scrutiny of energy market activity has boosted costs and risks for market players.

U.S. regulators, especially the Federal Energy Regulatory Commission (FERC), have become more aggressive in pursuing alleged electricity and natural gas market malfeasance over the last few years.

FERC has issued more than $1 billion in fines since the Energy Policy Act of 2005 significantly increased the penalty the commission can impose. The 2005 Act was part of the federal government’s effort to crack down on market manipulation after Enron Corp’s spectacular collapse.

But the government’s increased enforcement activity has pushed some big players out of the power markets, especially banks that provided much needed liquidity, Sercu said.

“The cost has gone up a lot. The scare factor has gone up a lot and the operational cost has gone up to comply,” Sercu said. “The risk of noncompliance has also gone up and so a lot of people, including quite a bit of the banks, have left and now liquidity is a big concern.”

Dodd-Frank regulation has increased trading costs “because everything now has to go through the exchanges,” Sercu said.

GDF Suez is constantly reviewing its presence in the U.S. power markets.

“We are evaluating which markets work, which markets don’t work and where we have a competitive advantage,” he said.

Before the company will consider further investment, “we really need to start seeing some structural improvement.”

In Texas, “we are developing (projects), but we are not going to pull any triggers until we see a more structurally sound design that also reflects the value of the attributes we bring to the market.”

(For other news from the Reuters Global Commodities Summit, click here)

Editing by Terry Wade and Bob Burgdorfer

Our Standards:The Thomson Reuters Trust Principles.
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