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Energy Trading & Marketing: The Evolution of the Deal

Energy traders and risk managers reengineered their business dealings to manage against unexpected political and financial risks posed by California and Enron in 2001.
Fortnightly Magazine - January 1 2002

America's top companies ranked Duke Energy at No. 17, which was the next largest power and gas trading concern after Enron (at No. 7 before its bankruptcy) and excluding the oil majors whose earnings are still the largest in the energy space.

Duke Energy generated revenues of more than $49 billion in 2000, has $58 billion in assets, and is the largest producer of natural gas liquids (NGLs) in the United States. Duke Energy has long believed that its corporate structure-having regulated and unregulated operations under one umbrella-is one of the reasons for its success. It's a corporate structure that many in the industry have recently shown a preference for (see , December 2000 issue, Frontlines).

"I think people before thought they could be a pure play generator and a pure play trader. We have recognized for years now [that] a better strategy is balancing assets, trading and growing our business across regions, not only in the U.S., but also across the world, and across commodities," says Padewer.

He believes people are recognizing that Duke Energy's strategy is more robust and can withstand a lot of different economic impacts. "As a consequence, I see a trend going back in that direction," Padewer says.

"Look at Constellation and look at Aquila. Even Enron said before they had trouble that they wanted to go back to assets. That is a general recognition in the industry," he says.

Padewer believes that one of the advantages of having a trading operation with generation assets allows the company to capture the extrinsic and intrinsic values of the plants.

"We call that the intrinsic value or the gross margin of the power plant which is simply the difference between the cost of fuel and the price of power. If you had enough gross margin, you justified building the plant. But over time we have found that we create a huge amount of value from the extrinsic value, not only the intrinsic value," he says.

"Remember, a power plant is a spark spread option. Any option has intrinsic value. The extrinsic value is trading the volatility. We see volatility still remaining strong. That component has become a larger component in the earnings of our generation. So, extrinsic value in our component still gives us the ability to justify building power plants going forward," he says, explaining how his company hopes to insulate itself from a possible overcapacity market in the next few years.

"[Furthermore], one of the issues that separate the pure plays and people like Duke is that a pure play generator-that doesn't have strong trading operations and doesn't understand the markets in a way a trading company does-can't extract that extrinsic value, by definition. That is the reason that some of the pure plays are getting into trouble." It appears a leader is born.


For example, Calpine is basically short natural gas and long turbines. In an environment where natural gas prices keep going up and there is overcapacity in various markets, Calpine is not going to do well, Williams says.

"The scenario that does not