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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

to participate in markets where financial exposure to counterparts is diversified. "I feel the markets can function without Enron, but I feel that there will be massive pains. [Of course], you have a number of other players like Dynegy, Duke, Mirant, Williams, Koch/Entergy, which are as capable as Enron and willing to fill in that vacuum, take up that liquidity and grow and survive," says Risk Capital Management's Humphreys.

Williams explains that a new trend will emerge where dominant players will still exist, but more second-tier players will get more business. The reason for this trend, he says, is that people feel more comfortable spreading out the risk. Williams says he would rather, for example, have $5 million in exposure with 20 counterparts than have $10 million with 10 counterparts, adding that the market is encouraging business with counterparts that normally the market didn't focus on doing business with.

"What's going to happen in the next nine months is that Enron's volume is going down. The volumes will be dispersed among various players," he predicts.

"People went to EnronOnline because it was the first medium that really had good transparency and quick trade execution. It was useful because it provided pricing information for forward deals. No one thought it would take off last year because of the lack of diversification but it provided good price discovery. The trend is going towards a broader platform with multiple counterparts. The Intercontinental Exchange [ICE is an online exchange funded by several investment banks and energy companies] provides greater counterpart diversification."

Padewer, whose company has an investment in ICE, explains the diversification comes from the fact that the owners of ICE are seven separate companies (Duke, American Electric Power, Aquila, El Paso, Reliant, Mirant, and British Petroleum, or BP) that represent 40 percent of the market.

"Volumes have really taken off. ICE is becoming the dominant trading platform. But clearly we are seeing more liquidity, more counterparts, [and] we are seeing growth in that business. We are very excited about it. These two things go hand-in-hand," Padewer says.

"I think that the larger players will migrate to primarily online types of trading. I think the smaller, less sophisticated players are going to deal with brokers. I think brokers will still be an important part of the business," he says.

Of course, not all will be strictly online. "I can't see long-term contracts being done online. It will be done by relationships and by sophisticated structuring of optionality. Those are the things that we like to do for customers as part of our business. It will never be purely one or the other."

Price Spikes, Defaults, Financial Meltdowns: A Cry for More Regulation?

Kenneth Raisler, partner at the law firm Sullivan & Cromwell, rejects the notion that the Enron meltdown should invite regulation from a regulatory body such as the Commodities Futures & Trading Commission or FERC to regulate the over-the-counter and online OTC energy markets.

He does not believe that such bodies should set reserve limits for energy market players in much the same way the