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Gas Marketers: Oblivious to All the Fuss

New mega-marketers, niche players emphasize opportunity.
Fortnightly Magazine - January 1 2002

and then turned it loose," he says.

Risk Management Before the Fall of Enron

While end-users are advised to keep an eye on the conduct of their suppliers, analysts are urging trading companies to assess the financial standing of their trading partners. To facilitate futures and swaps transactions, energy trading companies extend credit to one another. The agreements are contingent on a partner maintaining an adequate credit rating. Aquila Energy, for instance, significantly lowered its exposure to Enron as soon as the company took a credit ratings plunge.

Entergy-Koch's Larson says his company has been "very diligent about managing risk" and that it focused on credit risk long before Enron's troubles. "We monitor who we do business with. We have a strong risk management culture at Entergy-Koch."

Henwood's Porter agrees that industry players were prepared for what happened with Enron based on the turmoil in Midwest power markets during the summer of 1998. "When Federal Energy Sales defaulted, they [marketers] said,

'Wow, this can happen.'" Federal Energy, a Rocky River, Ohio, power marketer failed to pay on a series of wholesale power contracts during a June 1998 heat wave and later filed for bankruptcy.

That summer's power shortage had a ripple effect on several companies in the Midwest, including FirstEnergy Trading and Power Marketing and Springfield (Ill.) City Water, Light and Power.

Despite claims by marketers that Enron's troubles have had little impact on the functioning of the overall North American gas market, some are blaming concerns about Enron's credit for higher-than-expected gas prices that hit the market in October. Apprehension about conducting a deal with a company that controls 25 percent of the market certainly could diminish liquidity in the market, analysts say.

Prior to rumors circulating in early November that Dynegy would come to Enron's rescue, cash prices at Henry Hub hovered in the $3.05/mmBtu range. After the Dynegy story began circulating, cash prices at Henry Hub had retreated to the $1.95/mmBtu range by the end of November. "Any time you lose a major marketer, there are concerns about liquidity," Gurley says.

Enron's downfall could have far-reaching effects beyond market liquidity, explains Will McNamara, an energy analyst with Scientech. "There is a larger issue at play here as well, and that is Enron's impact on the energy market as a whole," McNamara says.

As the major player in the trading sector since the mid-1990s, and one of the primary pushers for deregulation across the country, Enron's fall is having ripple effects across many sectors. "I've seen new reports that suggest Enron's problems will cause states that already had questioned the prudence of deregulation to further delay or terminate their plans to commence with electric competition," he added.

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