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Deregulation - Page 16 - 2002
Energy Heads RollWall Street Journal by Mitchel Benson May 30, 2002
(5/29/02) - In the past two weeks, several of the top executives who built the nation's energy-trading business have lost their jobs. For veteran analyst Gary F. Hovis, it's not a sign of more disarray to come at companies such as Dynegy Inc., CMS Energy Corp. and Reliant Resources Corp., but a part of the process that will eventually help put them on the road to recovery.
"I think this is going to help the stocks and help the companies overall in the long run," says Mr. Hovis, who has tracked energy companies for 33 years and is now an analyst at Argus Research Corp.
Just two years ago, the merchant energy business was one of the hottest sectors in the U.S. economy. Now, it is plagued by disclosures of accounting and trading irregularities that buffed up balance sheets and reputations alike. Yesterday, Dynegy Chairman Chuck Watson resigned after heading his Houston-based company for 17 years. Last week, William T. McCormick, the longtime chairman of Michigan-based CMS Energy, stepped down. Both were succeeded by executives from outside the power industry.
Mr. Watson and Mr. McCormick aren't the only victims. Previously, top executives at Reliant Resources, another Houston-based company, resigned amid allegations that they engaged in practices that inflated their company's importance in the power-trading market -- the same practices whose disclosure preceded the resignations of the CMS and Dynegy executives. And at the end of last year, the bankruptcy of the sector's erstwhile leader, Enron Corp., resulted in the resignation or dismissal of almost all of that company's top brass.
For Mr. Hovis and other industry analysts, the departure of the pioneers of the power-trading market that emerged as a result of deregulation four years ago is a sign that the industry is settling down. They reckon these companies will be forced to adopt a more conservative business approach attuned primarily to the concerns of rating agencies and bankers.
In Dynegy's case, "the entrepreneur had to go, because of the difficulty for the company right now in dealing with the balance-sheet scrutiny and credit-rating problems," says Curt Launer, an analyst at Credit Suisse First Boston. Mr. Launer says Dynegy, like the other merchant trading companies, "now must rise to a new level of how do you run these companies as they mature into businesses which aren't having an easy maturity, and that's principally because of Enron."
It's not going to be easy for the new guard to find the right balance. Much of the growth at the merchant energy companies came from aggressively taking advantage of deregulation through acquisitions and expansion of their trading businesses. But today, new CMS Chairman Kenneth Whipple, a retired Ford Motor Co. executive, and new Dynegy interim Chairman Glenn Tilton, who is vice chairman of ChevronTexaco Corp., see their task primarily as rebuilding confidence.
In the short turn, that probably means paring debt, curbing trading operations and focusing on restoring the public image of the companies with investors. In the longer term, it's tougher to see how they will achieve growth, given the abrupt slowdown in energy deregulation and increased regulatory scrutiny of the power business since Enron's fall. "I'm not sure the people moving in have any real veracity in terms of what's going on in the business," says Mr. Launer. "It's changing dramatically."
Indeed, before Enron's fall, the industry emphasized fast growth and enjoyed high stock multiples and ample credit. Now, investors are demanding strong balance sheets, plenty of liquidity and greater transparency in explaining how profits are made, says John Whitlock, a credit analyst in Standard & Poor's corporate and government group.
The upshot of this is likely to be more mergers or partnerships, designed to carry the power traders through tough times. Three other energy companies that have come under financial pressure recently, Williams Cos. of Tulsa, Okla., Calpine Corp. of San Jose, Calif., and Atlanta-based Mirant Corp., have said they are looking for alliances or joint ventures to help with their credit, which is vital to any trading operations.
The industry's position is also likely to mean greater scrutiny of the executive suite, and more changes there. In the post-Enron era "everyone is washing their laundry in public," says Severin Borenstein, director of the University of California Energy Institute. Mr. Borenstein thinks that is because corporate boards are getting more hands-on. "Boards are now saying, `We want you to tell us and we'll decide. And if we find something that looks bad, we're going public with it,' " he says. "Active board members are supposed to be doing that."
One of the reasons the stakes are now so high is the proliferation of investigations and lawsuits focused on the industry and its executives. The trend started with the implosion of California's energy market in 2000, when strong demand and insufficient supply resulted in electricity prices shooting sky high. That, in turn, triggered a wave of federal and state investigations and lawsuits. Then, in late 2001, Enron's sudden fall amid allegations of accounting irregularities and possible fraud resulted in another round of inquiries, this time involving the Securities and Exchange Commission and the Justice Department.
Finally, allegations this year that energy companies had artificially inflated their trading volumes by selling power back and forth among themselves at the same price broadened those inquiries to even more companies. The result of all of this, said Dynegy's Mr. Watson in an interview last Friday before he resigned, is "a tremendous credibility crisis in our industry."
Whether the executive housecleaning will help soothe investors remains to be seen. Analysts point out that none of these investigations is likely to end soon, and there will be more noise to come. What's more, electricity demand isn't expected to pick up until the economy recovers more robustly. "There are too many negatives still out there that are still going to keep these stocks under a lot of pressure" during the next year, Mr. Hovis says.
Another Energy CEO Bites the DustWall Street Journal May 30, 2002
By Chip Cummins in Dallas, Jathon Sapsford and Paul Beckett in New York, and Thaddeus Herrick in Houston
(5/29/02) - Almost from the time he helped found what became Dynegy Inc. in 1985, Chuck Watson worked in the shadow of a better-known company not far from him in Houston: Enron Corp.
When Enron began ramping up its electricity trading in 1994, Dynegy followed with similar trades in 1995. After Enron took over an electric utility in 1997, Dynegy bought one two years later. When Enron launched an Internet-based commodities-trading platform in 1999, Dynegy was out with its own within months. And when Enron went into trading of capacity on high-speed "broadband" data lines, Dynegy again was right behind.
Then when Enron began to crumble amid disclosures of accounting irregularities, Mr. Watson pounced, offering last November to buy out his longtime rival and mentor for about $9 billion. He soon dropped the takeover bid, though, and began stressing how different Dynegy was from Enron. His company was a sturdy alternative to Enron built upon hard assets, not accounting monkey-business, he said. Dynegy even ran an ad campaign illustrating its openness. "How does Dynegy make sure its numbers are real?" it asked on its Web site. "By starting with real assets."
Yesterday, Mr. Watson's long run in Enron's shadow ended. With questions now arising over some of Dynegy's own practices, the board pressed for and accepted the 52-year-old executive's resignation as chairman and chief executive officer
Energy BubblenomicsWall Street Journal by Holman W. Jenkins Jr. May 30, 2002
(5/29/02) - By Space aliens probably have not taken over the minds of America's business leadership. But what else might explain the accounting foibles that seem to knock down one corporate citizen after another?
Problems seem to turn up wherever the press cares to look, and since the Enron scandal the media has cared to look particularly at the energy business. Last week, the respected CEO of CMS Energy, William McCormick, fell on his sword over "wash trades" -- or offsetting sales of power with other energy companies that had no economic substance but merely created the illusion that their trading desks were busy. Yesterday Dynegy's Chuck Watson resigned amid revelations about his own company's participation in these games.
Neither CEO was anybody's idea of a sleazeball. Mr. McCormick was once a hero for turning the stalled, half-built Midland nuclear plant into a highly profitable gas-fired generator, saving his shareholders and Michigan ratepayers billions. Mr. Watson had a similar stellar reputation as one of the founders of the natural gas trading industry and creator of a non-Enron that played the energy markets by building real assets, such as gas pipelines and power plants.
All this contributes to what CNBC variously calls the "trust gap" or "accountability gap." Investors are said to be fleeing stocks because of generalized perception that analysts, accountants, CEOs, regulators and the media are all letting them down.
Of course arraigning everybody for everything is tantamount to arraigning nobody for anything. What's more, the stock market is higher now than when Enron imploded, so obviously corporate America remains in decent odor in a few quarters. Dissatisfaction with market institutions arises from a narrower source, illustrated by the chart nearby.
What caused the bubble will occupy historians for decades to come. But stock prices guide the flow of capital in our economy and companies exist to produce the assets, strategies and disclosure the market will reward. If investors aren't going to assign reasonable valuations to companies, they shouldn't be surprised if they get wacky results. Much of what we're living through now, even in the energy business, has direct antecedents in the crazy prices paid for Internet shares.
One school of thought blames Alan Greenspan for flooding the market with liquidity after various foreign financial crises and in anticipation of a Y2K computer meltdown that never happened. Mr. Greenspan himself points a finger at unsatisfactory accounting for executive stock options as contributing to "at least some of the unsustainable euphoria that surrounded dot-com investing at its peak."
However you slice it, markets were bound to supply what investors were willing to pay for. And investors proved willing to pay astronomical prices for untried IPO companies that made a virtue of their novelty and profitlessness, claiming they were after bigger game, such as revolutionizing entire industries with the click of a mouse.
Out of this came Enron's rush to shuck its real assets and declare itself an online trading platform, rocketing its share price almost overnight from the mid-$20s to $90 a share. CMS Energy, Dynegy and others quickly responded with me-too online operations, aimed defensively at Enron, whose towering market cap seemed to portend upheaval in the industry. Ironically, these experiments now have sunk both companies' long-admired leaders over the relatively trivial matter of "brag-o-watt" trades ginned up for marketing advantage.
Still to be judged is whether exposure of such shenanigans represents anything more than a predictable cleaning up of failed companies and soured dreams. Any business's past accounting tends to look bad if its strategies don't pay off.
More to the point, a moment of realism about the public investor's role in the debacle is in order.
Everybody recalls the sad complaints of "old economy" CEOs. Yahoo was worth more than the entire U.S. auto industry. Gordon Bethune of Continental Airlines mused grumpily about taking his airline private, piqued at a market that placed a multibillion-dollar value on Amazon's Web site but didn't give two cents for Continental's building of a new terminal at Newark airport, a short cab ride from Manhattan.
That's the position operators of old-style energy assets like power plants, pipelines and utilities found themselves in too. Joe Stockpicker basically signs aboard for whatever the future holds, putting his faith in the market to correctly evaluate companies and push managements in the right direction to maximize their value. This system, with hiccups, works pretty well, but it needs good stock prices to work with. In one industry after another touched by dot-com valuations, the problem was bad stock prices.
Here, the regulatory apparatus has to take some of the blame. Washington has been selling small investors a bill of goods for decades, suggesting that Joe Stockpicker can and should think of himself as being on an equal footing with pros and insiders. Along the way regulators have made a fetish out of trying to exclude good information from share prices when it comes from the "wrong" source.
This is nutty and hardly serves the public interest. How quickly might the bubble have quashed itself if millions of shares of IPO stock had not been kept off the market by misguided insider "lockups?" Anyone paying attention at the time knew the problem was too much hot money chasing too few shares, turning stock prices into noise that CEOs were obliged to interpret as a signal.
Simplistic as it may sound, this was a root cause of the trouble that torpedoed two old-economy energy CEOs in the past few days.
Policing Energy TradersDow Jones by Arden Dale May 30, 2002
(5/28/02) - NEW YORK (Dow Jones) -- It's a tough job, but someone's got to police the electricity trading business.
The enforcer is the U.S. Federal Energy Regulatory Commission, the agency that created wholesale power markets. Energy companies and others say FERC is a competent cop who knows the beat, but critics say it has created a mess that may just get worse.
Electricity markets have been badly shaken in recent weeks by allegations of widespread trading fraud, and FERC's actions are taking on new gravity. What it does will have a big impact on which companies survive and how they do business.
"They've become judge and jury on what's happened in the past, and will set the tone on how the industry moves forward," said Steven Fleishman, managing director of power and gas research at Merrill Lynch & Co. (MER), an investment firm that maintains banking relationships with a number of electricity trading companies.
CMS Energy Corp., Duke Energy Corp., Reliant Resources Inc., Dynegy Inc., Mirant Corp., and Williams Cos. are among companies hit by recent moves FERC has made as part of an investigation it began in February into California's energy crisis of 2000 and 2001. Their share and bond prices have fallen, and a series of management shakeups has unfolded. William T. McCormick Jr., longtime chief executive of CMS, resigned late last week following disclosures that the company had engaged in numerous questionable trading deals. On Tuesday, Dynegy Chairman and Chief Executive Chuck Watson resigned after concerns had been raised about its trading activities.
FERC's critics say that if companies are gaming the market, it's because the agency set up a system that allows them to do so.
"It's in danger of creating a Rube Goldberg machine that nobody will understand, except the traders, and they will always be ten steps ahead of the best possible staff the FERC could buy," said John Hughes, technical director of the Electricity Consumers Resource Council, an association of large electricity consumers including Ford Motor Co., General Motors Corp., Intel Corp., and International Paper Co.. ELCON was one of the earliest backers of electricity industry deregulation, and has pushed the concept since 1976. Its members are deeply disappointed in the results so far, Hughes said.
Bad News Blizzard After Enron Memos
FERC on May 6 released Enron Corp. documents that detail strategies the company may have used to game the state's markets during 2000 and 2001. The agency then ordered around 150 companies to supply it with documents showing their activity in the state during the period. FERC last week asked companies to prove whether or not they've engaged in another kind of activity, known as "wash" trading, in which traders swap equal amounts of energy at the same price, apparently chiefly to increase reportable trading volume.
"The release of the Enron documents has promoted a more aggressive FERC," said California State Senator Joseph Dunn, D-Garden Grove, in an interview. "The biggest impact industry-wide of their release is that it has called on FERC once and for all to start doing its job."
Dunn, who has been investigating possible market manipulation during the energy crisis for over a year, said the agency has been compromised in the past because of its role as a creator of the markets themselves. FERC created wholesale power markets in the late 1990s with an order that directed utilities that owned transmission lines to let other companies trade power over them. Much of the negative fallout from those efforts is hitting the agency during the tenure of the current chairman, Pat Wood III. President George W.
Bush appointed Wood, a Republican, in 2001. He was formerly chairman of the Public Utility Commission of Texas. Last year, Wood announced his intention to form the Office of Market Oversight and Investigations to monitor the wholesale power market,
This April, Wood appointed William F. Hederman, Jr., formerly of Columbia Gas Transmission Corporation, to head OMOI. FERC said in an April 10 news release that OMOI will "help the Commission improve its understanding of energy market operations and ensure vigilant and fair oversight of those areas under Commission jurisdiction."
Because OMOI isn't yet functioning, FERC's California investigation is for now headed by Don Gelinus, a "veteran who flat out gets it," according to FERC spokesman Kevin Cadden.
Energy companies say publicly that FERC is up to the task of straightening out markets. Privately, they have long been wary of angering the commission. Many characterize Wood as an independent, strong leader, who has riled the industry with a number of initiatives, including the imposing of price caps in California. Despite their disagreements with Wood, or perhaps because of them, some think the chairman may have some of what it takes to help keep markets fair.
"We need to have a very strong market management arm, because competitors need to be able to compete on a level playing field," said Lynne Church, president of the Electric Power Supply Association, a group of independent power producers and other energy companies.
Church said that because pressure on FERC is so intense, it may be necessary "from a political standpoint" for the agency "to put a few heads out on stakes." Jim Owen, a spokesman for the Edison Electric Institute, a leading utility trade group, said he believes FERC "either does have or will have the ways and means to do this."
Some energy experts say the troubles the industry is experiencing now are just growing pains that many emerging markets feel at some time or another.
"Gas and electricity are very complex industries, and I think FERC is probably a fair arbiter of them," said Sharon Reishus, an associate director at Cambridge Energy Research Associates in Cambridge, Mass.
CERA is an independent research firm with clients that include utilities, financial companies, energy companies, and others. "If not FERC, who? FERC essentially created the market and is going to have to regulate it."
Trading Business is a Little Bit CrookedDow Jones by Kristen McNamara May 29, 2002
(5/23/02) - NEW YORK (Dow Jones) -- As long as wholesale power markets have rules, energy companies will try to exploit them.
That's not an entirely optimistic prognosis for regulators trying to restore credibility to the country's developing electricity markets. But while market gaming can't be stopped, energy experts said the hope is that regulators will become more adept at identifying and closing loopholes as markets mature.
As long as the rule breaking and bending occurs on a relatively small scale - which appears to be the case in most regions of the U.S. - the market operators will be able to declare victory, experts agreed.
"Any time you have rules and you have people whose profitability is tied to those rules, they're going to look for ways to press the envelope," Steve Sullivan, a spokesman for the New York Independent System Operator said. "As markets mature, some of those issues are fleshed out and they correct those problems."
Disclosures that Enron Corp. exploited California market rules to reap unearned profits during the western power crisis and later revelations that companies have engaged in revenue-boosting "round-trip" trades - illegal in other markets - have heightened concerns that the power trading business is a little bit crooked.
In addition to further undermining share and bond prices in the sector, such concerns have pressured regulators to act. The Federal Energy Regulatory Commission ordered about 150 companies to file reports this week describing whether they had engaged in strategies similar to those detailed in internal Enron memos released early this month. Most of the companies said they hadn't used such techniques.
Despite the intensity of the scrutiny, the infractions revealed thus far don't involve regulators' top concern - the ability of companies to exercise what's called market power.
While traders will always be able to exploit poorly designed rules, manipulating the country's electricity markets to significantly alter power prices - regulators' top concern - is harder than the headlines suggest, said Lawrence Makovich, senior director for electric power research at Cambridge Energy Research Associates, a Massachusetts-based research firm.
"It's not easy to manipulate a market, no matter what strategy or catchy name you put on it," Makovich said. "It's a very difficult thing to move."
In all but a few pockets, power supplies across the country are now sufficient to meet demand and to provide comfortable reserve margins.
To keep companies from gaining the power to move prices, market operators and regulators need to encourage the development of power plants and ensure diverse ownership of the assets, said Ken Rose, senior economist at the National Regulatory Research Institute at the Ohio State University.
Still, market gaming needs to be fought, experts said. The line between breaking market rules and taking advantage of their weaknesses is a fine one. And even after California, efforts to test that line are apparent in the regional markets that have evolved in the six years since the wholesale power industry was deregulated.
In Texas, six power companies are negotiating with state energy regulators to redistribute almost $29 million the companies collected during two days last August by overestimating the amount of power they needed to deliver to their customers and then collecting fees for delivering less than they had forecast. The gains came during the state's transition to a deregulated retail market, which opened Jan. 1. The companies said their inaccurate estimates were unintentional.
The Electric Reliability Council of Texas, which runs the power market and grid in most of Texas, has since changed the rule it says the companies exploited. Now, companies that schedule delivery of more power than they need to serve their customers must pay for causing congestion along the state's electric lines.
Market Design Key
In Pennsylvania, energy regulators are examining charges by Mid-Atlantic power-market operator PJM Interconnection LLC that PPL Corp. drove up prices in the region's daily energy capacity market early last year.
The state Public Utility Commission hasn't accused PPL of breaking the rules, but did say flaws in the market allowed for price manipulation. PPL said the price increases resulted from some poorly designed aspects of the market and the failure of some energy companies to cover their long-term capacity requirements in advance.
PJM has acted to fix its capacity-market rules.
Aggressive tactics in the western markets have attracted the most attention so far. But California didn't suffer prices spikes and rolling blackouts solely because power companies violated the rules, Makovich said. Fundamental market design flaws were also largely responsible for the problems, though it's too soon to tell how much each contributed to the problem, he said.
"The lesson here is that the rules really do matter," Makovich said. "They have to be set up anticipating that whatever rules you set up, people will try to game them."
To cover the times when the rules fail, market operators have created special units to monitor power transactions and head off or undo questionable transactions. In New York, for example a controversial policy allows the market operator to reduce bids in the day-ahead market that seem out of line with historical averages.
FERC, which is working on a massive effort to standardize rules governing U.S. power markets, has said market monitoring units will be a core component of the final design.
Ultimately, markets can function well if operators can keep gaming to a minimum, said Rose, the economist at the National Regulatory Research Institute.
"You don't expect perfection," Rose said. "If the impact on prices is relatively small, we're able to declare a victory."
Louisiana versus Duke EnergyAssociated Press - May 29, 2002
RUSTON, La. (AP) - Louisiana's Department of Environmental Quality will ask a state district judge for more time to file records in a challenge to permits the department granted for a planned merchant power plant in Lincoln Parish.
The citizens' group contesting DEQ's decision to give Duke Energy the permits required to build and operate the plant hasn't yet decided whether it will oppose DEQ's request.
Jim Hall of Greenwood Action Group of the Environment said he anticipates GAGE will make a decision this week.
DEQ's current record-filing deadline in the lawsuit is June 6, department spokesman Jim Friloux said. "We will write the court and ask the judge if we can have an extension," Friloux said.
The case is being heard in 19th District Court in Baton Rouge. DEQ is expected to ask for a 60-day grace period, its second one.
Lafayette lawyer Charley Hutchens, who represents GAGE, said he's in a "hurry-up-and-wait" posture until DEQ files documents.
"Until they lodge the record, there's not much to do," Hutchens said.
GAGE filed its petition for judicial review in January, charging that the permit review that DEQ did for the Duke Energy plant is "fatally flawed."
GAGE says Duke violated site-selection procedure, failed to use the best available technology in planning the proposed natural gas-fire plant and can't assure citizens that the plant won't jeopardize their only source of drinking water, the Sparta Aquifer.
The plant would use up to 200,000 gallons of Sparta water each operational day to cool its generating equipment.
Duke spokesman Brandon Maxwell said plans for the $200 million plant are "still moving along internally with the evaluation process."
"No decision has been made on the Ruston project," he said.
But he said the current energy economy has caused Duke decision-makers to be more "cautious in the evaluation process" for all of the company's proposed ventures.
"Because of the economy ... you'll see folks really scrutinizing the facts and details," Maxwell said. Still, the economic shift since the Ruston project's beginning two years ago "wouldn't terminate the project," Maxwell said.
Duke's proposed 640-megawatt plant, sometimes called a peaking facility, would run only in times of high demand, such as hot summer days.
California SchemingNew York Times May 28, 2002
(5/27/02) - It has been two years since the meltdown in California's energy markets began. Despite the intense interest generated by Enron's role in the crisis, however, we still do not have a full accounting of what went wrong. We need that information. States that may still wish to pursue the once-bright promise of electricity deregulation will require instruction on how to avoid California's errors.
Congress and the Federal Energy Regulatory Commission, which are best positioned to do this job, are preoccupied with Enron's market manipulation. The danger is that California will be seen as just one part of the Enron story the work of one rogue company instead of a complicated mess created by many different players.
The run-up of California energy costs in 2000 and 2001 bankrupted one utility, led to rolling blackouts and may yet cost Californians $30 billion in excess electricity charges. In the absence of a full accounting, people have constructed explanations that advance their own agendas. Vice President Dick Cheney first blamed the whole thing on the environmentalists, as well as shortages in natural gas. Gov. Gray Davis blamed the administration for its reluctance to impose controls on wholesale prices and to investigate market manipulation. Economists said things would have worked fine had politicians not meddled with their grand design. What's needed is for someone to cut through the explanations du jour and get at the truth.
The one thing everyone agrees on is that the power crisis was in large measure a crisis of underinvestment a booming state economy undone by the failure to build the power plants necessary to sustain that boom. Few plants were built in the 1990's when prices were low. Producers withheld new investments until they better understood the brave new era of deregulation which, as it turned out, nobody understood very well, least of all California.
In deregulating its power system, the state seems to have made every mistake possible. For starters, it forced utilities to buy power at market rates while capping what they could charge their retail customers. This devastated the utilities. It also sent exactly the wrong signal to consumers, who had no incentive to conserve. In addition, bedazzled by the prospect of allowing the free market to set wholesale prices, California refused to let its utilities sign long-term contracts to buy power from the generators. The utilities were thus left at the mercy of an extraordinarily tight spot market that, in turn, was highly vulnerable to manipulation by the clever lads at Enron.
On top of all that came a perfect storm of unforeseen events that hit with calamitous force. These included a drought in the Pacific Northwest that reduced California's hydroelectric power, a rise in the cost of certain pollution credits and a spike in natural gas prices. Mr. Cheney was certainly right about that one. What remains unexplained is why the rise in gas prices was so much higher in California than it was anywhere else.
Suspicions that some natural gas companies deliberately withheld supplies in anticipation of still higher prices have never been fully explored. Nor has the question of why one-third of California's available power mysteriously went off line in the winter of 2000-2001. Was it because older plants shut down for repairs? Or was it simply another instance of power providers gaming the market?
To everyone's great relief, the crisis eventually receded. Federal regulators summoned the courage to impose price controls, thus reducing incentives for manipulation. California's politicians summoned the courage to lift the caps on retail prices, which, together with a vigorous program of energy conservation, reduced demand. Yet the fact remains that the state has been badly and perhaps needlessly battered.
It is Washington's duty to find out why, and to devise the necessary safeguards. Electricity is a public necessity that must be managed wisely, not entrusted blindly to the market.
Energy Trading Jobs Lose LusterReuters by Carolyn Koo May 27, 2002
HOUSTON (Reuters) - Riding the power trading boom, almost 8 percent of business school graduates at Rice University last year took jobs with Enron Corp. , lured by first-year compensation of more than $100,000.
Just a few months later, the graduates of the Houston-based school were out of work and the luster of the once high-flying industry, still reeling from Enron's collapse late last year, is a bit tarnished. As a result, there is now a revival of interest in old-line oil companies such as BP Plc. , ExxonMobil Corp. and Royal Dutch/Shell for graduates of Rice's top-tier MBA program.
"This has been a year when the Shells and Exxons and BPs of the world have been interesting to our students because they have stronger balance sheets and are here for the long run," said John Miller, associate director of career planning at Rice's Jones School of Management.
"I wouldn't have said that two years ago," said Miller, who also lectures on risk management at the Jones School.
Hiring in general has fallen due to the economy, the Enron debacle, well as a number of local mergers (news - web sites), the Rice official said. This year, a bit less than 70 percent of graduates were placed, compared with 90 percent last year.
In the absence of Enron, Duke Energy Corp. , another top trading company, has become Houston-based Rice's leading recruiter this year, hiring 11 students. It's no accident that Duke is an investment-grade company and is perceived to have a strong balance sheet.
There are also more students taking sales and trading jobs at Wall Street firms than at energy companies. "That's been a little bit of a twist," he said.
REPUTATION AN ISSUE
With the collapse of Enron, once the dominant power trader, business school graduates are scrutinizing potential employers more closely and some are looking at industries outside of the energy industries that are the lifeblood of Houston.
"There are some concerns about whether a company is solid or not," said Stephen Brown, director of energy economics at the Federal Reserve Bank of Dallas. "It's an issue of reputation."
Like the boom and bust cycles Houston is famous for, record profits pumped up the prospects of such energy traders as Enron, Dynegy Inc. and Mirant Corp. , prompting a surge in jobs in the industry beginning around 1997.
New graduates and traders with more traditional Wall Street backgrounds alike were attracted by the challenge of working in the volatile power industry and by the competitive salaries.
Starting salaries at energy trading companies are as competitive as those at investment banks. Base salaries are in the $80,000 to $85,000 range and are boosted by signing bonuses in the tens of thousands along with guaranteed first year bonuses and stock options of $10,000 each.
But things have changed. In the fallout from Enron's collapse, other energy traders -- including Aquila Inc. , Dynegy, Mirant, NRG Energy Inc. and Reliant Resources Inc. -- have faced questions about their financial strength.
The major credit rating agencies have also downgraded, or threatened to downgrade, the debt of some of these companies to "junk" status, making it more difficult for them to borrow money, raise cash and operate their business.
ENERGY JOBS STILL POPULAR
At the same time, many energy traders have been less aggressive about recruiting students, often because of restructuring programs that put a premium on cutting expenses, including jobs.
"We're not hiring as much as we were in the past," said a Mirant spokesman, acknowledging that hiring is not a priority after the company cut 7 percent of its global work force earlier this year.
In contrast, risk management jobs are on the rise, which is not a surprise given the problems that have hit the industry.
"We have seen a pretty significant increase in hiring in the risk management field," said Ron Lumbra of recruitment firm Russell Reynolds, noting there are more jobs for people to assess the risk of trading with certain counterparties and the risk of having surplus power generation in certain markets.
Looking ahead, Miller said he will be watching to see what effect recent revelations about market manipulation during the California power crisis and trades that were done solely to artificially boost trading volumes will have on the career choices of the class of 2002 in the fall.
But Brown said interest in energy trading won't go away anytime soon.
"Some of the alternative careers that were real strong a couple of years ago, like telecom or high-tech, aren't quite as strong," he said. "So energy trading might be relatively more attractive among the careers that have developed over the last 10 years."
Deregulation: A Big Turn OffFinancial Times by C. Parkes, J. Earle May 24, 2002
(5/22/02) - The fall-out from California's energy crisis is spreading nationwide. The outcry over shortages, blackouts and soaring prices, blamed at the time on a hamfisted local experiment in liberalisation, has mushroomed into a national business and a political crisis.
It has cast a shadow of suspicion over the entire energy trading sector. It has blighted the reputation of the Federal Energy Regulatory Commission. It has helped to undermine public confidence in popular capitalism by discrediting the deregulation model as a workable policy.
As most now acknowledge, California's experiment, launched in 1998, was fundamentally misconceived. Fixing retail electricity prices while leaving wholesale rates floating freely was a recipe for disaster.
Catastrophe struck first last year when PG&E and Southern California Edison, the two largest investor-owned power distributors in California, were declared insolvent - unable to collect from consumers anything other than a tiny fraction of the soaring prices on the state's wholesale power exchange.
Since then, much evidence has surfaced to show that energy traders used the now-defunct exchange to exploit the market's weaknesses to the full. Whether their manoeuvrings were legal or not, or how much they contributed to California's difficulties, has yet to be determined from affidavits, congressional hearings and legal inquiries now under way at federal and state level.
The most dramatic revelations to date emerged some two weeks ago with the disclosure of Enron trading strategies with Hollywood-style codenames such as "Get Shorty", "Death Star" and "Fat Boy". They introduced the American public to the concept of "round tripping". The main feature of the round trip, also known as "in-and-out" trading, is that two or more traders buy and sell energy among themselves for the same price and at the same time.
The principal effect is to plump up trading volumes and make the participants appear to be doing more business than they really are. Another could be to raise benchmark prices for electricity, cranking up costs to distributors and consumers. This could be especially relevant to long-standing claims by Gray Davis, California governor, that the state was being "gouged" at peak periods, when wholesale prices rose as much as 900 per cent.
A key feature of the design of the state's spot power market was that traders offered units of electricity for delivery at a specific time. They were paid the highest price bid for the last units needed to power up the state grid at the time in question.
Since the release of the Enron memos, CMS Energy, Dynegy, Duke Energy and Reliant Resources have admitted some role in the round-trip business.
Reliant's disclosures included admissions that it had used similar tactics in the natural gas market, source of much of the fuel for electricity generators. EnCana, its Canadian partner in the trades, last month amended its books to remove revenues for 2001 of more than $700m attributable to round trips.
Since most of the participants in the wholesale electricity market also trade in gas, this raises the prospect of an even deeper examination and revision of the rules in the whole energy sector.
It provides another possible lead for investigators examining the volumes of documentation still coming from Enron and other large operators. Affidavits confirming or denying whether they, too, engaged in such practices were due to be delivered yesterday from 150 lesser traders.
Round tripping, illegal in securities markets, is not prohibited in wholesale power trading, which was in effect deregulated about three years ago. Still, as a senate committee heard last week, Enron was told in December 2000 by one of its own lawyers that its potentially "deceptive trading practices could violate criminal laws".
Illegal or not, some of the benefits to the players in this so-called "gaming" of the market are now clear. In the case of CMS, round-trip deals with Dynegy and Reliant inflated its power-trading volumes by 80 per cent and added a putative $4.4bn to revenues in 2000 and 2001. Dynegy, modelled on Enron, its crosstown Houston rival, conducted such trades "worth" $1.6bn (GBP1bn) in one day alone. Duke Energy , one of the top five power traders and the nation's leading operator in natural gas trading, said last week that such dealings added $1bn to its revenues over three years.
Even though direct links have yet to be established to California's ills, the evidence suggests that the booking of inflated revenues - even though the manipulations allegedly had no effects on net income - seemed likely to mislead investors in that they exaggerated the companies' financial well-being.
The price this year includes the bankruptcy of Enron, which in 2000 booked revenues of $100bn, a round of credit ratings downgrades, tumbling stock prices, cancellation of bond issues, re-stated profits and sackings. Reliant and CMS last week ousted several senior trading executives.
But the final reckoning is far from complete. The entire sector is under investigation by the Securities and Exchange Commission, Ferc, the Commodity Futures Trading Commission, and state regulators and attorneys-general in California and elsewhere.
The reputation of Ferc has also suffered since it emerged that it was warned traders were gaming the market in August, 2000 - long before the Enron memos were written - but did nothing.
While Mr. Davis has continued to direct most of his attacks at the energy traders, the commission, packed with Republican appointees, has come under withering attack from other quarters. Barbara Boxer, one of the state's leading voices in the senate, last week accused the commission of ignoring Democratic warnings while 30m Californians suffered power shortages. Maria Cantwell, a Democrat from Washington, which was also hit by soaring power prices, described the Ferc as the "only policeman on the street" standing by while a mugging took place.
For all the rhetoric, there is no clear accounting of the cost to the western states, beyond the "billions" cited almost daily in California. The Ferc is still considering a claim for $9bn in refunds, filed by the Sacramento state government last year, before any hard evidence of market manipulation emerged. David Freeman, the colourful chairman of the newly constituted California Power Authority, appeared to have pulled a number out of his signature cowboy hat this week when he declared to a senate committee: "We are probably entitled to close to $30bn."
That may smack of wishful thinking, especially since not one of the 15 hours of blackouts a week predicted for last summer by federal officials materialised. Yet the costs of the disruption were undoubtedly felt by the state's businesses and retail consumers who are now paying 40 per cent more for power than 18 months ago.
The contrast between today and the euphoric launch of California's grand experiment, when Enron executives promised statewide savings of $9bn a year, could not be starker. The free market in energy trading has collapsed. The process of re-regulation is under way, with the state purchasing power on behalf of two crippled utilities and struggling to renegotiate $40bn in long-term supply contracts under which prices were set at an average of about double current rates. The draft redesign of the market will include price controls.
For the rest of the US - which so enjoyed seeing the trendsetter state suffer - the episode serves as a lesson in dangers of less-than-meticulous drafting and application of deregulation laws. But for energy traders, the pain may not be over: the likelihood of slowing growth in the free market in power and the possibility of criminal charges emerging from the current investigations threaten to damage the entire sector beyond repair.
Texas-Sized Deregulation ProblemsThe Dallas Morning News by Charlene Oldham - May 23, 2002
(5/22/02) - The agency in charge of Texas' electricity grid operator heard Tuesday that it would have to make significant improvements to solve customer service delays that have nettled the agency for months. Any upgrades could cost Texas consumers and power providers more money.
The Electric Reliability Council of Texas Inc. has made progress in reducing problems related to switching customers to new service providers, but not enough progress to satisfy legislators.
The grid operator cannot eliminate the glitches that began with last summer's pilot program without making changes, according to the Feld Group, a Dallas-based technology consultant hired to evaluate the agency's system.
Even before Tuesday's report, agency executives had alerted state leaders that they could seek more money to make improvements. Recently, executives told legislators overseeing deregulation of the electricity market that they're performing a greater number of services than many other grid operators across the country but being paid less than their peers.
The agency received $94 million -- including operating expenses, capital spending and debt service -- in its 2002 budget from power companies and consumers. Most Texans pay about 22 cents a month, on average, to support ERCOT.
By comparison, New York's grid operator is allotted $105 million but performs fewer functions.
Even so, advocacy groups contend that consumers are being forced to pay for improvements to a system that worked fine before deregulation. And, the groups add, relatively few people have even shown interest in moving to a new power provider.
"Because there are few choices and a lot of confusion in the market, residential consumers are not switching providers," said Carol Biedrzycki, executive director of the Texas Ratepayers' Organization to Save Energy, based in Austin. "Additional costs for fixing the system should be billed directly to the industry."
In its report, the Feld Group said that the state's power grid operator should improve the way it communicates information and monitors transactions, bulk up its hardware and take the lead in solving information technology problems in a system that now includes about 100 market participants.
ERCOT has already added some servers and other hardware, said chief operating officer Sam Jones.
"The report basically confirms some of our suspicions," he said during an interview earlier this week." We needed confirmation from a qualified group ... that what [we saw] as problems were actual problems."
Legislators and consumer groups have blasted ERCOT for problems with switching customers to new power providers and issuing timely bills. In defending the agency, executives have said that responsibilities are different and more extensive than those of grid operators in other deregulated states.
Since ERCOT operates only in Texas, state regulators and legislators -- not the Federal Energy Regulatory Commission -- oversee the Texas agency.
"So when the state restructured its electric market, the state assigned ERCOT a lot of responsibilities," said Ellen Vancko, director of government affairs for the North American Electric Reliability Council.
For example, ERCOT serves as a clearinghouse for every service order in its territory, which covers 85 percent of the state. In other states, power companies exchange orders among themselves.
While the centralized model has resulted in service delays, industry experts predict that it will be beneficial to consumers in the long run. ERCOT oversight should prevent companies from switching customers or adding services to their bill without permission, for example.
"They are all new computer systems that have been designed and built over the last few years. And we are all working through what I would call basic start-up problems," said Tom Rose, vice president of public policy for TXU Corp. "But once we get it up and running, this independent entity will run all these transactions."
When CEO Wont Listen, Try the PublicNew York Times by David Barboza May 22, 2002
(5/21/02) - In a further sign of the tensions roiling the energy industry, one of the largest shareholders of the El Paso Corporation attacked the company at its annual meeting today, calling for it to overhaul its accounting practices and change the way it does business.
Oscar S. Wyatt Jr., the founder and retired chairman of the Coastal Corporation, which El Paso acquired for $10 billion last year, called on El Paso to change the way it reports profits, to revamp its accounting and to return to a more conservative approach to calculating profits.
''It is time for El Paso to lead this industry in a return to the principles of full disclosure and transparency in its earnings and its real debt and value,'' Mr. Wyatt said at a news conference after the shareholders' meeting in Dallas. ''Because of its strong asset base and dedicated people, El Paso does not need to follow the path Enron took.''
El Paso officials disputed Mr. Wyatt's appraisal of the company's accounting practices and insisted that El Paso was in strong financial shape and that it was required to follow mark-to-market accounting, which allows a company to book future profits immediately.
''Frankly, we don't agree with his questions or his allegations; we follow G.A.A.P. to the letter,'' said Norma Dunn, a spokeswoman for El Paso, referring to generally accepted accounting principles.
But in recent weeks, the shares of El Paso and other big energy marketers like Dynegy and Reliant Resources have tumbled amid questions about off-balance- sheet debt, bogus trades and their role in the California energy crisis.
Shares of El Paso, which rose 52 cents today, to $33.91, had peaked at nearly $75 a year ago. Wall Street analysts said the energy companies were being punished by investors because of continuing questions about their finances. But several analysts suggested that many critics were drawing too close a parallel with Enron.
Still, Carol Coale, an analyst at Prudential Securities, said that some of Mr. Wyatt's points were worth noting. ''It does call into question why corporations book unrealized gains as profit,'' she said. ''The individual taxpayer can't do that. If that's what he's griping about, I'm on his side.''
Mr. Wyatt, the 77-year-old Texas oilman who in 1990 flew to Iraq with John B. Connally to visit Saddam Hussein and returned with a planeload of freed hostages, is not just calling for El Paso to act; he wants industrywide change. ''The whole industry has a credibility gap,'' he said in a telephone interview.
Mr. Wyatt said he made his case to William A. Wise, the chief executive of El Paso, at a private meeting last week. He said he also told the company's board and its auditor, PricewaterhouseCoopers, about his concerns.
Mr. Wyatt has a reputation for being outspoken and engaging in colorful critiques of the energy industry. He came of age in the old energy market, analysts said, when volumes times price equaled revenue.
Now, he is calling on the company that swallowed up the Coastal Corporation to end several widely followed business practices that have emerged in recent decades, including mark-to-market accounting, the creation of special partnerships and the selling and revamping of contracts to generate immediate cash flow.
''The spread of unusual accounting practices -- versus a reliance on solid, tried and true traditional accounting methods -- have taken their toll on this industry,'' he said.
El Paso officials responded that the company had performed strongly over the last year and had successfully integrated Coastal into El Paso. Profits rose 23 percent last year, they said, despite falling gas prices, the Enron debacle and the effects of the Sept. 11 attacks.
''Our board believes everything we set out to accomplish, we met,'' Ms. Dunn said. ''I have to question what Mr. Wyatt wants to accomplish.''
Mr. Wyatt, who owns about four million shares of El Paso, based in Houston, said he was not motivated solely by personal interest because his wealth is not tied up in the company's shares. He said that in recent weeks some of his former employees, many of them longtime employees with large retirement holdings in El Paso, called him distressed about the decline in the share price.
''They all started calling me,'' he said. ''So I went to Mr. Wise and I didn't have any luck. So I went public.''