In early February, Atco Ltd. announced it was getting back into the natural gas retail market. The company quit the sector 12 years ago, selling its million customers to U.K.-based Direct Energy for $90 million. That deal, which company president and CEO Nancy Southern says was made because Atco wasn’t properly staffed to retail energy products, included a non-compete clause that kept Atco out of the space for a decade. Since that ended in 2014, Atco has been looking to get back into it. And now it is, with the newly christened Atco Energy, which sells electricity, natural gas and green energy.
The timing is challenging, with a depressed economy, low natural gas prices, a provincial climate-change plan that is roiling the market, and dozens of competitors including heavyweights like Direct Energy, Enmax and Epcor. But Southern says there’s opportunity. Natural gas retailing is infamous for poor customer service – it’s right up there with the telecom sector on the list of things people complain about. Direct Energy in particular has a long history of combat with customers. Southern thinks Atco, with Alberta roots and vertical integration, can deliver lower costs and better service (with no door-to-door sales). And she sees opportunity for acquisitions.
Atco has long been a mainstay in Alberta business circles. Founded in 1947, the family-controlled, publicly traded company has its hand in a variety of international ventures, including modular construction, electricity transmission, pipelines and natural gas distribution. It also has an ownership position in 15 power generation plants in Alberta, B.C., Saskatchewan, Ontario and Australia. It has seen a decline in its business in the last couple of years, one that can largely be attributed to low oil prices. Revenues for 2015 were $4.1 billion, down from $4.6 billion a year earlier, but the company remains profitable, with earnings of $293 million in 2015.
When I spoke with Southern, she was in Mexico City for a meeting of Atco’s directors and senior officers. The company is building a pipeline there and closing in on a deal to build a cogeneration facility for one of its large refineries. She says Atco Energy has seen significant take-up in rural areas, especially in the North and Edmonton. Calgary is tougher. “Enmax is a strong player with a strong presence and a strong brand,” she says. “We’re experiencing more competition there.”
There are about 30 natural gas retailers in the province, although the market is dominated by the big three – Direct Energy, Enmax (owned by the City of Calgary) and Epcor (owned by the City of Edmonton). Southern says Atco Energy will have a couple of competitive advantages. First, the company generates a lot of electricity from its coal-fired power plants, and so can take advantage of vertical integration. It is also trying to distinguish itself with ancillary services and products. You can get online cooking classes through the Blue Flame kitchen and special offerings for energy devices like efficient lightbulbs and solar panels.
Aside from the big three, the players in natural gas retail have small market shares. Southern sees opportunity for consolidation. “That’s going to be a natural move, whether it’s us or Enmax or Epcor or Direct Energy,” she says. “Our marketplace in Alberta is large enough, but it’s not that large to have that many players.”
Atco is getting into the market during a time of upheaval in the wider energy industry. The provincial government’s Climate Leadership Plan imposes a price on carbon emissions and commits to shuttering the province’s 18 coal-fired power plants by 2030, moves that will fundamentally shift the nature of the industry. Atco, through Atco Power, owns two of the biggest coal plants and is already seeing a drop in business. Both Enmax and TransCanada have recently cancelled power purchase agreements with Atco’s coal-fired plants.
Both companies cited the government’s climate-change plan as the reason they had the right to terminate the agreements, although low electricity prices might also have prompted the moves. “We’re quite long on natural gas in Alberta and we’re quite long on electricity,” Southern says. “The price of natural gas is helping the price of electricity become lower and that has, in effect, made the coal plants ineffective because of carbon pricing.”
To help negotiate the coming upheavals, the province recently hired Terry Boston to lead talks with generators and the provincial grid operator about the phase-out of coal-fired power. Boston is the recently retired CEO of Pennsylvania-based PJM Interconnection – which co-ordinates power grids in 13 U.S. Midwest, Northeast and mid-Atlantic states, and his appointment has been welcomed by industry. That doesn’t mean there isn’t going to be a lot of pain for some parties. Alberta Economic Development Minister Deron Bilous said the government expects a deal in place by the end of September, when Boston’s final report is due. “There’s a lot of uncertainty around carbon pricing and what the regulations will be and how the government is going to manage that,” Southern says. “That remains to be seen.”
Pipeline in the Sand
Alberta has a unique, province-wide natural gas system, and it’s full of happy monopolies
Things in rural Alberta are different. There, 120,000 kilometres of pipeline – enough to circle the Earth three times – owned by 82 co-ops, municipalities and First Nations carry natural gas to 124,000 very spread-out customers. “No other province has infrastructure like we have,” says Lyle Kuzik, executive director of the Federation of Alberta Gas Co-Ops, the umbrella organization for the 82. “If you live in rural Alberta, you can get natural gas just about any place.”
If you don’t think that’s a big deal, Kuzik has something to say. “The people who started this venture, we can all be very thankful for it. I went through it all, and I’m not that old, even. We had coal in our house when I was a kid. Then my dad put in heating oil and then natural gas. The coal and heating oil were just horrible.”
In keeping with Alberta’s well-known penchant for the free market, each of these 82 entities is a monopoly. That’s because, 50 years ago, the provincial government gave natural gas franchises to specific distributors and gave them a monopoly in that area. It was deemed necessary because of the high cost of developing infrastructure in rural areas: you need a certain number of customers to make it feasible. So the private sector players – Atco Gas and AltaGas, primarily – can get only so far into the hinterlands.
There are rules in place to deal with annexations as cities and towns grow, and there is a process to buy a co-op, but Kuzik doesn’t think it’s in the cards. The membership would have to agree, he says, and they’re not interested in selling. “The big thing is we have 82 points where we have staff,” he says. “If we have a leak or a customer without gas, we can have someone there pretty quick because we’re in the area, and basically all our servicemen know who the customer is.”