With three teenagers in the house, our home stays in nearly constant turmoil. We seem to careen from crisis to crisis. My teens, in their rush to grow up, create a swirl of anxiety in their wake. When I think I have one of the kids figured out, some event upsets the family dynamic, and we are all caught up in the next brouhaha.

The power industry has seen its share of anxiety too. Most of our Alka-Seltzer moments can be attributed to the move to deregulate or, more accurately, to give customers choice. So as we move into 2004, I investigated the move to competition to see if any companies are actually making a profit selling electricity to customers. I also looked into my crystal ball to predict what form customer choice might take five years hence.

The first customers to gain choice were in California. But choice hit the shoals, and California legislators were forced to put deregulation on the back burner while their governor focuses on the state's billion-dollar deficits.

I recently met with Kansas City Power & Light President and CEO William H. Downey, who is also president and COO of parent company Great Plains Energy. We were talking industry trends, and Downey told me Great Plains had earlier taken a majority position in Strategic Energy. This retail energy company was now returning tens of millions of dollars in profits. Wow, a retail company making money! I decided to dig a little deeper.

Strategic Energy came into being as an energy consulting firm back in 1986. Based in Pittsburgh, the company first served retail customers in 1997 under Pennsylvania's Pilot Retail Program. The business has grown over the years and now serves more than 44,000 customer accounts. In 2000, Strategic Energy expanded its retail offerings into Massachusetts, California and New York. Since then, it has added service to Ohio, Texas, New Jersey and Michigan.

Alex Galatic, Strategic Energy's director of marketing, challenged my belief that deregulation was spearheaded by large industrials who had historically subsidized other utility customer classes. Galatic believes the large industrials could always pay more for expert witnesses and attorneys in rate cases. Likewise, he recognized that residential customers always had consumer advocates looking after their interests. This left commercial customers with rates significantly higher than the cost to serve. Galatic finds chain stores, restaurants and government institutions make out the best under deregulation. Strategic Energy focuses on this customer class with load aggregation and offers to lock in prices where it can offer savings.

Strategic Energy is the second-largest energy retailer in the country, topped only by Constellation New Energy (formerly New Energy Ventures). Constellation New Energy has an interesting history. It was formed in California as a comprehensive energy services company. When the company hit hard times, it was sold, first to AES and then to Constellation Energy Group.

I talked with Constellation New Energy CEO Clem Palevich, who was at AES when his company purchased New Energy Ventures in 1999. He was charged with the buildup of the company, but he had to make some tough decisions. Palelvich got out of the energy services and distributed generation businesses. He decided that to sell electricity profitably, the company must sell a product that is more than a commodity. By working with suppliers and customers, Constellation New Energy could leverage the “load shape” into a fairly complex value-added product. In essence, Constellation New Energy is an electricity cost manager for its customers.

Constellation New Energy is not shy about courting big companies, claiming almost half of the Fortune 500 companies as customers. “Our customers want price certainty, and they also want to save money,” says Palevich. “Our customers can choose from a variety of products and services, and they aren't going to give that up to go back to the utility cost structure.” Palevich believes that open access, liquid markets, fair rules and market-based rate setting are key ingredients that must be in the mix if companies are to offer customers a choice.

Many hold California as an example of why deregulation won't work. Not Palevich. “In California, everyone is reporting that electricity deregulation is dead. Not so,” he exclaims. “California retail customers told legislators that if the state went back to the regulated way of doing business, they would move out of the state.”

Constellation New Energy's industry is active in 15 states, the District of Columbia and two Canadian provinces. Palevich sees competitive electricity markets in much of New England, New York, the Mid-Atlantic states, the Midwest and Texas.

How Palevich Sees Deregulation Today

“Most of the states with retail will stay with retail. Most of the states that were moving toward competition are continuing to move. In fact, retail has never ever lost momentum. Since the California crisis, we've seen a 200% increase in the migration of customers to alternative suppliers. For example, in 2001, New Energy provided 1600 MW of electricity to customers. Today, it has contracts to supply more than 6000 MW of peak load. New Energy has been making real profits for several years and the performance of New Energy is seen as a home run for its parent Constellation Energy. New Energy is a part of the growth story Constellation shares with Wall Street.”

What About Residential?

Both Strategic Energy and New Energy are focusing on C&I markets where there is money to be made. But what about residential customers? Galatic believes we will see “plenty of cases where residential customers can save money, but it won't be easy.” New systems would be required to handle millions and millions of customers, but Galatic expects it is just a matter of time. There are some retail companies out there trying to make a go of the residential business, but to date, making profits from small consumers has proven to be a hard business.

Neither Galatic nor Palevich pretend that we will see smooth sailing in retail. Both see a robust wholesale market as key to the success of retail. Galatic sees problems looming in areas where local utilities are allowed to own significant generation, particularly when they are paid for capacity credits or ICAP. The hope on the federal level was that ICAP would encourage new generation to be built, but it hasn't worked that way. Galatic sees ICAP as yet another form of ineffective regulation, stating, “More generation has been built in regions without ICAP than in regions with ICAP. He believes that customers would be better served with new generation that is built to meet the need as dictated by forward power markets.

Retail companies must keep a close eye on Washington, particularly as it relates to regional transmission organizations. Palevich believes it is critical that retail companies have access to the components that make up an electricity market, stating, “Where there is no ISO, it is difficult to send electric power to our customers.” He would like to see the industry evolve further to create a market that doesn't have seams between individual utilities or regions. He acknowledges the move at FERC to push markets to RTOs, but this movement has been blunted by the stalled energy bill and the resistance of southern and northwestern states.

Continued successes in retail will drive additional states to move into retail. The movement toward retail choice is inevitable. Strategic Energy and New Energy will not go away. Customers with choice will not give up that choice. Get ready for a long and drawn out battle as the states and the federal government posture for control. The epic movement to retail will be difficult, but choice is here to stay.