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Deregulation - December, 2001 - Page Eight
Power Company’s Credit Rating is JunkThe Wall Street Journal – by Rebecca Smith – December 30, 2001
(12/20/01) - The credit rating of Mirant Corp. was downgraded to junk status by Moody's Investors Service Inc., making the power generator the latest in a growing list of energy companies to suffer from tightening credit standards following Enron Corp.'s collapse.
The action sends a clear signal to the market that Mirant's debt-reduction program, previewed to credit-rating agencies in recent days and expected to be made public today, was judged inadequate by Moody's. Mirant wasn't even on Moody's credit watch list. But Enron's demise has convinced credit-rating agencies that power trading is a riskier enterprise than they had realized.
Mirant Chief Executive Marce Fuller said she was "shocked" by the downgrade and was further "stunned" that senior debt was lowered by two full notches to Ba1 from Baa2. "There is no question that this is a whole new ballgame for this industry," Ms. Fuller said late yesterday, as senior managers huddled at the company's Atlanta headquarters and looked for new ways to placate increasingly demanding credit analysts.
Mirant has $1.5 billion in cash and credit facilities available, although the Moody's action means that Mirant will need to post "several hundred million dollars" of cash as collateral with its energy trading partners, according to Ms. Fuller.
Moody's said it took action in expectation of "moderating cash flows" for the company due to a "heavy debt burden" of nearly $5 billion. Although Mirant's debt-to-capital percentage stands at 65%, Mirant was given a creditworthy rating by Moody's and Standard & Poor's Corp. when it was spun off by Southern Co. in April.
Ms. Fuller said Mirant expects to receive net proceeds of nearly $1 billion from the sale of its interest in a German utility, Bewag, and now is seeing if there are additional "nonstrategic" assets, perhaps in New England, that could be sold to raise cash and reduce debt. "We'll contemplate anything at this point," including the sale of common stock, she said. Mirant's shares are trading at about a third of their peak value in May…
Until recently, Mirant had been regarded as one of deregulation's success stories. Mirant has roughly 15,000 megawatts of generating plants, including assets in California's deregulated market. Mirant has had aggressive growth plans. It intended to increase earnings per share by 20% a year and double its generating capacity by 2005 -- the message the market wanted to hear.
Like many power-generation companies, its growth targets now appear over-reaching, and Ms. Fuller said the firm intends to postpone or cancel some electricity-plant projects.
Enron Spotlights Void In RegulationsThe Wall Street Journal – by M. Schroeder, G. Ip – December 30, 2001
(12/13/01) - WASHINGTON -- A year ago, when most of the political world was obsessed with the deadlocked presidential election, Enron Corp. was quietly but aggressively lobbying Congress. Its object: a little-noticed bill shaping federal policy toward the complex financial instruments known as over-the-counter derivatives.
In 1989, the Houston energy giant, originally a utility that produced and transported natural gas and electricity, had begun shifting its focus to energy trading. It soon came to view the burgeoning market for derivatives -- financial instruments that derive their value from an underlying commodity or wager on the future -- as the key to its ambitious expansion plans. And it wanted as little government interference with that market as possible.
The company's lobbying campaign was so aggressive that staff members of one congressional committee asked a lobbyist for an Enron-led industry group to negotiate major aspects of the bill directly with regulators. In the end, Enron had provisions inserted in the law that blocked federal oversight of some of its major corporate product lines, such as energy and metals derivatives, and its EnronOnline energy-trading network.
Now, once-mighty Enron is in bankruptcy court. Its market value has plunged since last year to about $500 million from more than $77 billion. But one of the most striking features of its rapid decline was that financial regulators had little clue what was going on inside Enron. That's at least partly because Enron -- as much as any company in America -- had invested a lot of time and money over the past decade in keeping government out of its business.
Yesterday, the House Financial Services Committee belatedly jumped in. Lawmakers heard from Joseph Berardino, chief executive of accounting firm Arthur Andersen LLP, who said that Enron's collapse had created a "crisis of confidence" in the accounting profession. And they heaped criticism on the company and on Andersen, its auditor, for issuing financial statements they said failed to reflect the shakiness of Enron's condition.
Rep. John LaFalce, a New York Democrat, echoed the sentiments of many committee members when he called Enron's collapse a wake-up call. "How many more Enrons are out there, and what are the systemic factors that made this collapse and other future collapses possible?" asked Mr. LaFalce.
Yesterday, the Securities and Exchange Commission said it is considering new regulations this year to require more precise disclosures about companies' accounting policies. And federal energy regulators said they are planning new rules for energy-derivatives accounting.
The Enron debacle spotlights an enormous void in the nation's system of financial regulation, and it is rekindling a difficult debate over just how that gap should be filled.
Innovations in technology and finance have helped obliterate clear distinctions between banks, brokerage firms and newer hybrids, such as Enron, which built a privately run online trading empire that handled huge volumes of electricity and natural gas.
These days, it's possible for exchanges, which once required centralized trading floors crowded with traders, to spring up overnight in cyberspace. Meanwhile, financial regulators, hewing to decades-old divisions of authority, continue to keep a close watch on banks, brokerage firms and conventional exchanges, while leaving new entrants such as Enron to police themselves.
There now is a widespread consensus among policy makers that, at the very least, the nation needs stricter accounting rules that would force companies such as Enron to do a better job of disclosing their financial conditions. Other industry watchers would go further. Enron, they say, was one of the country's leading commodities markets. It had amassed a $19 billion portfolio of derivatives.
In many ways, the Enron debacle raises the same questions that arose three years ago, after the near-failure of hedge fund Long-Term Capital Management -- a private investment fund for wealthy individuals that made leveraged bets on financial markets. Long-Term Capital's misplaced wagers, many based on derivatives, almost triggered a meltdown in global markets during 1998.
In the months following that near-calamity, many policy makers, such as then-Treasury Secretary Robert Rubin, vowed to change the regulatory system to avert similar risks in the future. While they opposed tighter regulation for derivatives trading, they argued there was at least a need for greater disclosure in the derivatives market.
Since then, however, a broad industry coalition including Enron has worked with sympathetic regulators and legislators to beat back pressure for more oversight of over-the-counter derivatives. And in some cases, they have rolled back powers that regulators had had.
Most regulators and financial-industry executives insist that the financial system remains sound. The fact that Enron's collapse doesn't as yet appear to have been caused by its derivatives trading, or to have triggered a broader crisis, seems to bolster their argument.
Advocates of derivatives say the instruments give companies, investors and lenders a way to reduce their exposure to many kinds of financial risks. Indeed, that's the main reason for their popularity.
New types of derivatives have emerged in recent years, allowing traders to bet on electricity prices, telecommunications bandwidth and the influence of the weather, all of which Enron dominated. Enron also was a big player in credit derivatives, which act as an insurance policy against corporate bankruptcy by promising to pay back a lender's money in exchange for a premium.
The market for credit derivatives, which barely existed five years ago, has grown to an estimated $360 billion, according to the Office of the Comptroller of the Currency. And it says the nominal value of derivatives on the books of commercial banks soared to $51.3 trillion at the end of September from $6.8 trillion in 1990, with nearly $20 trillion of that growth coming since 1998.
Federal oversight hasn't kept up. The Commodity Futures Trading Commission regulates futures and, along with the Securities and Exchange Commission, options traded on exchanges, but not derivatives traded off-exchange, or "over the counter." The latter term describes trades that are privately negotiated between large financial institutions or corporations. How such derivatives are regulated depends on what kind of firm sells them. For example, bank regulators such as the Federal Reserve can scrutinize commercial banks' activity, while the SEC can examine that of brokers who conduct business in the U.S.
Enron -- which started trading natural gas, then expanded to electricity, metals and more-exotic derivatives -- fell through the cracks of this regulatory framework. As a publicly traded company, Enron routinely provided the SEC with general information about its finances. But it wasn't obliged to give the agency any detailed information about its OTC trading activities. In fact, the CFTC's only peek into Enron's vast trading operation was through a tiny registered futures affiliate, Enron Trading Services Inc.
EnronOnline, the electronic marketplace Enron launched in late 1999, also fell outside federal jurisdiction. The exchange came to control a quarter of all wholesale energy trades among U.S. utilities, independent power producers and other market players. In many ways, the Web-based trading system resembled its heavily regulated counterparts, such as the New York Mercantile Exchange.
But Enron and its imitators didn't fit regulations written for the likes of conventional markets such as the Nymex. Those exchanges bring many traders together and cater to a broad range of investors, both large and small. But Enron's marketplace was limited to big, sophisticated players.
Moreover, Enron jealously guarded its independence. While some companies voluntarily discuss their derivatives trading with the CFTC, Enron regularly failed to do so, say people familiar with the agency.
Enron spokesman Mark Palmer says the company's unregulated status was appropriate. "With a deep bilateral market of sophisticated buyers and sellers, that regulation was not needed," he said. Though Enron did some trading for its own account, Mr. Palmer disputes suggestions that his firm was similar to a hedge fund, adding that most of the $19 billion in derivatives contracts on its balance sheet were commitments to deliver, or take delivery of, natural gas or electricity.
In the roaring 1990s, with the deregulation movement at its zenith, few in Washington dared even to suggest more regulatory oversight of derivatives. One of the few who did was Brooksley Born, who President Clinton named to head the CFTC in 1996. Her comments in speeches and in a discussion paper about the need for more oversight and regulation of OTC derivatives triggered an uproar among derivatives dealers -- from J.P. Morgan & Co. to Enron. They quickly complained to Congress and other regulators that the uncertainty Ms. Born was creating could destabilize their markets.
The industry complaints got a sympathetic hearing from many politicians and regulators -- particularly at the Fed and the SEC -- who saw Ms. Born's campaign as a bid to expand her agency's authority.
At the industry's urging, then-House Banking Chairman Jim Leach, an Iowa Republican, called a private emergency meeting of the regulators in late June 1998, summoning Ms. Born from Georgetown University Hospital, where her daughter was undergoing knee surgery. The regulatory staff and lawmakers berated Ms. Born for more than two hours in a fruitless effort to persuade her to stop her campaign.
Three months later, the Long-Term Capital Management crisis erupted. "You are welcome to claim some vindication," Mr. Leach told Ms. Born at an October 1998 congressional hearing.
In the subsequent months, Ms. Born intensified her campaign for greater derivatives regulation. And she appeared to be gaining support. Several studies, task forces and panels were formed, recommending lenders perform better due-diligence when dealing with high-risk traders and that trading firms improve risk-management models.
A coalition of regulators, including the Fed, Treasury, CFTC and SEC, meanwhile, wanted to force hedge funds to make public more information about their holdings, a recommendation Rep. Richard Baker, a Louisiana Republican, incorporated into a proposed law. They also recommended extending the powers of both the SEC and the CFTC over unregulated affiliates used by regulated firms to conduct particularly risky trades. That could have brought Enron under the CFTC's jurisdiction, since Enron had a futures brokerage affiliate that was already registered with the agency.
An industry panel with Gerald Corrigan, a former president of the Federal Reserve Bank of New York and now a managing director at Goldman Sachs Group Inc., acting as co-chairman made several recommendations. One called on banks and Wall Street dealers to make a quarterly disclosure to their regulators of their 10 biggest exposures in each of several categories of risk. It also called for them to identity the parties on the opposite sides of those transactions.
Though some Wall Street firms, including Goldman, now meet informally with regulators to discuss their exposures, the panel's recommendations were never formally implemented. "There simply was not a consensus" among either regulators or dealers "that it was worth the time, energy and cost to do it," says Mr. Corrigan.
Meanwhile, the derivatives industry was fighting the push for more regulation. The effort was spearheaded by trade groups like the International Swaps and Derivatives Association and the Managed Funds Association, which represents hedge funds. Enron also joined the battle.
Over the years, the company had built a formidable lobbying machine, with a staff of 28 in Washington alone, most of whom have been laid off since the company's recent collapse. Enron also paid $2.1 million last year to about a dozen Washington lobbying firms to work on a range of energy and financial issues, more than double the fees it paid in 1997, according to the Center for Responsive Politics, a nonprofit group that studies the role of money in politics.
To date, the only significant changes in OTC derivatives laws have been those largely endorsed by the industry, such as removing legal obstacles to the creation of common clearing corporations for settling derivative trades among multiple parties. Another change, removing legal obstacles to two participants treating offsetting contracts with each other as a single position, is expected to be part of new bankruptcy legislation.
The reforms opposed by Enron and other derivatives traders were killed. Rep. Baker's proposed hedge-fund disclosure law died in the House Banking Committee. No one introduced any legislation to give the SEC or CFTC more authority over derivatives.
Some of Enron's political muscle comes from well-connected members of its team. In 1993, Enron named Wendy Lee Gramm, a former CFTC chairwoman and wife of Texas Sen. Phil Gramm, to its board. The collapse has put Ms. Gramm, who is chairwoman of the board's audit committee, in the hotseat. One of Enron's key outside lobbyists is Ken Raisler, a former CFTC general counsel and now a law partner at Sullivan & Cromwell in New York. Late last year, Enron hired Linda Robertson, a senior Clinton administration Treasury official, to head its Washington office.
During the last election, Enron made political contributions of $2.4 million, more than double the next-most-generous energy and natural-resource company. Republicans got 72% of Enron's contributions. For the same period, House and Senate agriculture-committee members, who oversee commodities trading, and other key lawmakers received $50,338, up from $38,256 in the previous election cycle.
All of this gave Enron unmistakable clout. In the fall of 1998, after the LTCM debacle, when Ms. Born was gaining support for her effort to press for derivatives regulation, Enron lawyer Mr. Raisler met with one of Ms. Born's supporters, CFTC Commissioner John Tull. Mr. Raisler asserted that Treasury wanted Mr. Tull to oppose Ms. Born's initiatives. Mr. Tull told Ms. Born about the meeting and that he was withdrawing his support at Treasury's request, according to people with knowledge of the meeting.
Mr. Raisler confirms he met with Mr. Tull. "I don't remember what we discussed other than that, I, on behalf of my clients, said we were dismayed at how Brooksley was handling herself during that period," he says. Mr. Tull, who has retired to his Arkansas rice farm, didn't return phone calls. Ms. Born said she couldn't confirm or deny the incident.
In late 2000, Enron won sweeping legislative guarantees against future regulation of its trading businesses. People involved in negotiating the Commodity Futures Modernization Act say that Enron representatives were fanatical about preventing any hint of derivatives regulation. Its refusal to budge put it at odds with some moderate members of its own lobbying coalition, including Goldman Sachs and Morgan Stanley. Mr. Raisler denied that there was any such split.
Enron was so forceful in pushing for energy and metals commodities to be exempted from oversight that the exemption provision was sometimes referred to by Capitol Hill staff as the "Enron Point." That and other Enron-friendly provisions made it into the bill.
Enron's Mr. Palmer says, "We were never shy about our views" on leaving OTC derivatives trading unregulated, but he added that many other market participants felt the same way. "Enron," he adds, "is a bit of a lightning rod."
Michael Greenberger, former director of the CFTC's trading and markets division, blames Congress for giving derivatives dealers a blank check to operate "opaque and nontransparent to the government as a whole."
So little is known about the operations of Enron and other derivatives players that its hard to predict the economic impact of their missteps. "You don't know the leverage of these things. They're playing with fire," adds Mr. Greenberger, now a professor at the University of Maryland law school. "One of these emergencies won't subside."
Electricity Should Not Be DeregulatedThe Orlando Sentinel – by Christopher Boyd – December 30, 2001
Dec. 10--When Gov. Jeb Bush appointed a special commission last year to draft a blueprint for opening Florida's electricity industry to competition, the prospects for major change seemed certain.
That was then. Fifteen months later, as the Florida Energy 2020 Study Commission prepares to release an exhaustive report Wednesday on restructuring, the drive to remove state control over parts of the tightly regulated industry has lost almost all momentum.
"It's unlikely that in the upcoming session of the Legislature that there will be any legislation related to the energy report," said Kim Stone, spokeswoman for House Speaker Tom Feeney, R-Oviedo.
Even the governor, who continues to back change in the electric industry, is vague about how quickly he would push for it.
"Competitive markets is our goal in both wholesale and retail, but taking a measured and well-thought-out approach is key to our success," Bush said in an e-mail to the Sentinel.
The prospect of loosening the reins on the electric business has few proponents. Even the plan's backers acknowledge that the time isn't ripe for moving ahead.
When Bush formed the commission and sent it on its fact-finding odyssey, the national mood was very different. Almost every state was pursuing a plan to restructure, or deregulate, the electric industry. Then California happened.
Last spring, the electrical delivery system of the country's most populous state nearly melted down and blame was placed squarely on a comprehensive deregulation plan.
Power outages and skyrocketing electric costs were blamed on California's deregulation plan. Even though defenders of restructuring countered that California made many mistakes in the way it crafted its overhaul, the association between deregulation and disaster was fixed in American minds.
Another blow came this week when Enron Corp., the energy conglomerate that was one of the loudest voices in the restructuring movement, filed for bankruptcy. Enron lobbied heavily for reforms in Washington and state capitals, and its fall into insolvency gave opponents a new rallying point: If Enron could collapse, how secure could a free-market power supply system be?
Walter Revell, who chaired the Energy 2020 Commission, said that a well-devised plan for opening the market to competition would avoid the California system and would safeguard the flow of electricity. "The world is restructuring, the country is restructuring and Florida needs to restructure, too," Revell said. "We worked on a 20-year strategic plan for energy that can work."
The committee confined its work to wholesale competition, the part of the power business involved in the generation of electricity. It would allow alternative, or merchant, companies to build plants in the state and sell their output to the incumbent utilities. In principle, that would lower costs as more efficient plants came on line.
Out-of-state electric companies favor the plan and the entree it would give them.
But Mike Green, Florida vice president of Duke Power and chairman of a group that represents six merchant companies, acknowledged that the 2020 report is complicated and the Legislature, which will deal with budgetary problems and redistricting in the 2002 session, might find it hard to digest. "We support the report in giving us the entry we want," Green said. "But the breadth of the report is so comprehensive that the Legislature will have a hard time swallowing the whole thing at once."
The incumbent power companies wrangled with the commission over the plan. They gave the committee's work a lukewarm endorsement.
Bill Swank, spokesman for FPL Corp., the parent of Florida Power and Light, said the 2020 report provides a good foundation for reform, but he suggested proceeding cautiously.
"The regulated system has served the people of Florida well for many years," Swank said. "For Florida, the energy picture isn't broken."
End Of Electricity Trading In Calif?Dow Jones – by Mark Golden - December 30, 2001
(12/5/01) - NEW YORK - California utilities commissioner Carl W. Wood sees a light at the end of the tunnel for the state's electricity crisis, but whether that light is the way out or an oncoming train depends on upcoming policy decisions on how to return the state's electricity industry to traditional, cost-based regulation.
In Wood's view, the way to avoid another crisis is to limit the prices that power generators can charge to fees based on their costs, to end for-profit trading of the state's power supply and to get the state's utilities back in the business of buying power, rather than having the state perform that function as it has been since January.
"My view is that we will wring all the vestiges of speculation out of the California electricity market," Wood said Tuesday at an energy conference in New York City.
"The power business should be a good business providing reasonable rates of return for investors," Wood said. "But it can't be a great business," as it was during from May 2000 to May 2001.
Wood stressed that the views are his own and not necessarily those of California's regulators, though he is a member of the Democratic Party majority on the California Public Utilities Commission.
Deregulation of electricity, Wood said, has been a complete failure, and the state would be gravely mistaken to make another attempt at it.
"No future energy cost savings or any other of the supposed benefits of deregulation could outweigh what we've lost over the past 18 months," he said. "And the California economy can't afford to take another hit."
Not Like Pork Bellies
Electricity shouldn't be treated as a commodity like pork bellies, Wood said. It's more like water or air in that the California economy, and the U.S. economy generally, rely on the cheap, reliable electricity that the regulated industry delivered for decades.
"You can't bring consumers to their knees," Wood said. "Unfortunately, as the California energy crisis showed, there are plenty of companies willing to do precisely that if it means higher profits."
Nevertheless, Wood wants power plant developers to build in his state. He said there will always be a place for independent power generators in California that provide consumers with a "reliable product at a reasonable price."
Wood's message, given the audience of predominantly merchant power executives and Wall Street energy investors, wasn't well received.
Harold Green, spokesman for privately held Panda Energy International Inc. in Dallas, said California could again be short of power this coming summer. The only reason western power prices were lower this past summer compared with 2000 is because the weather was so mild, he said.
California isn't getting the new plants built that it needs, Green said.
"I can get a plant built in Texas from inception to turning the switch on in three years," Green told Wood. "In California, I can't even get the permits in three years."
Green said his company is considering abandoning plants in California that it has been trying to build, and that other developers are coming to the same conclusion.
"They haven't learned a thing," Green told Dow Jones Newswires.
Green conceded, however, that in addition to bureaucratic delays, lower forward power prices have made building power plants in California less attractive.
In Wood's view, bulk power prices stabilized this year as a result of price controls belatedly instituted in June by the U.S. Federal Energy Regulatory Commission.
Western power prices began their steep decline in April, however, and have traded for six months at around $30 a megawatt-hour, well below the FERC cap of $91.