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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

vigilant about demanding collateral in trades, anticipating the possibilities of default and trying to be more aggressive to make sure they have cash or securities on hand in case of default.

"At the same time, there is also the other liquidity crisis, which is that Enron was the only market maker in a lot of different areas. I was out in Calgary last week and talking to some folks who were saying, 'What are we going to do about our Rockies' power position?' There was no one out there except for Enron that was willing to offer anything of length in the Rockies in electricity. These folks thought that they had a market that they could go back to and reverse their positions if they ever thought they wanted to. But now they are stuck with these five-year plus positions. They can no longer liquidate. They are now viewing these risks differently in looking at these trades as things that cannot be offset but risks that have to be warehoused."

Shimko also says the only way to truly unload the position is to unwind the position with Enron. "But if Enron is not in a position to do so, than you are stuck," he says, explaining that setting up a hedge for that position would be useless because if Enron eventually defaulted on its contract, "you wouldn't be hedged at all."

Managing the Risks: The New Frontier

Mark Williams, vice-president of global risk management at Edison Mission Marketing & Trading, says there is a higher level of sophistication in regards to what goes into credit and market risk analysis. There is particular emphasis on not just standard credit ratios, but also on the understanding of the volatility of market prices and how that influences both credit exposures and market exposure, he says.

"The level of sophistication and analysis that is being done on the credit risk and the market risk side has been elevated because there is a tighter link between market price movements that affect credit events. Because of the speed in which these companies can go from investment to junk status, there is a lot more emphasis on really understanding cash flow and standard type ratios, and stressing under certain scenarios how these various balance sheets and income statements would hold up."

Duke Energy: The New King?

With the bankruptcy of Enron, the industry is now looking for a new leader and role model. Some have started looking at Duke Energy to pick up the torch from Enron in the areas of electric competition advocacy and lobbying, as well as looking to the company for leadership on overall wholesale market development, design and innovation.

"We continue to believe that wholesale deregulation needs to happen in this country and think that it is a good thing for ratepayers and consumers," says Harvey Padewer, Duke Energy's Group President, Energy Services, who says his company has consistently lobbied and will continue to be an advocate for competitive markets. Could Duke Energy be that leader?

In terms of revenues in 2000, Fortune's list of