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Utility Valuation: Shedding Light on the Black Box

Experts debate how energy companies should be valued in the wake of electric restructuring and Enron.
Fortnightly Magazine - April 15 2002

matter that much. You have to just manage the risks. That is why he doesn't necessarily agree with the recent industry convention that energy-trading companies have to have assets, and cannot be a pure play.

"In a perfect world," he says, "I don't see any difference. In today's market, trading organizations are being devalued more because investors are skeptical over how good the risks are really hedged. Enron showed that it really wasn't hedging its risks but hiding deals gone badly.

"[A trading organization is viable] to the extent that you can give investors confidence that you can manage risks. In the long-term, I don't really see any difference between owning a contract and owning a power plant as long as the contact is with a credit worthy owner of a power plant. So, I'm not sure accounting changes are necessary. I think better judgment is necessary."

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