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Constellation Watching for Impact on REPs from Extreme Summer; Sees Developments as Positive for Consolidation, Margin Expansion

September  21, 2011
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Constellation Energy sees the potential fallout from this summer's extreme heat in ERCOT, particularly on less capitalized REPs, as favorable for market consolidation and margin expansion, Senior Vice President and CFO Jonathan Thayer said at a Bank of America Merrill Lynch investor conference yesterday.

Addressing the energy only market design in ERCOT, Thayer said that, to the extent that such a design brings increased volatility or opportunity for volatility in the market, it needs to be actuarially priced into the products that retail providers sell.

"What has occurred in Texas is marketing firms have in a low gas price, low power price environment perhaps under-priced that actuarial exposure, and we're going to be seeing the ramifications of that as large participants [that are] load serving entities report in the third quarter," Thayer said.

"We'll particularly see that in perhaps some of the less capitalized marketing firms as settlements are due, whether they have the capital wherewithal to sustain the losses that they may have sustained; [it] will be interesting to watch," Thayer added.

"What one would expect is, much like in a hurricane event in Florida or in the Gulf, you typically see the largest market participants both aggregate share, but also price margins higher as risk is priced back into the system," Thayer said.

"So without commenting on scale of impact on us, certainly as a large market participant we did feel the extreme weather and the cost of managing that, but in terms of the business and the market going forward, in that ERCOT environment, we view this as very much a long-term positive in terms of market consolidation and margin expansion," Thayer said.

Speaking on the same panel, Exelon Corporation President and COO Christopher Crane addressed the ERCOT energy only market design by stating, "We continue to look at ERCOT in Texas and are wishful about some capacity design that could give the signals to develop ... [we are] not overly hopeful but wishful, and think there has to be some market construct adjustments to allow that."

 

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