Barbarians at the Gates
FERC... SEC... CFTC...Congress ... Ratings Agencies... Stockholders... Bondholders... Private Equity Investors?
No one has yet quantified or qualified the devastation to industry reputation , electric competition, or energy companies' future earnings power caused by the current round of energy trading scandals that is shaking the industry to its core.
But it may not be necessary to spend much time on the task. One can easily deduce where another round of FERC hearings on California market manipulation, SEC probes on "round-trip" or "sham" trades, new congressional and CFTC investigations on energy trading, more ratings agency downgrades, and huge investor selling could lead.
The endgame could be Draconian levels of utility regulation at the state and federal level. It might even stifle altogether electric competition initiatives by state PUCs and FERC. It certainly has led to an investor backlash. And if the industry is not careful, it may tarnish forever the image and prospects of a competitive power market.
Of course, we have seen it all before, with Enron and in other industries that have been jolted by scandal.
The solution to an industry-wide crisis could be to let those companies that are found guilty of "criminal behavior" and "market manipulation" fail as businesses.
Some say the current scandal in the industry may lead to greater amounts of consolidation. Certainly, those with tarnished reputations would seek to partner or sell to companies that have unblemished reputations and high-profile brand identity.
Also, these troubles come to the delight of private equity investors watching in disbelief as billions of dollars of assets come on to the market at fire sale prices from outfits such as Mirant, El Paso, Williams, and NRG.
Lehman Brothers predicts that the average price paid for plants will decline by 25 percent to 35 percent this year from 2001's $530 per kilowatt for non-nuclear assets.
In addition, a report released early this year by the EIF Group, a member of Dresdner Kleinwort Capital, says there is an unprecedented buying opportunity in the U.S. market for private equity during the next 12 to 18 months, as plant cancellations are expected to stabilize the oversupply situation forecasted for certain regional markets.
And there may be some investor groups that may see value in buying an energy company outright, such as the leveraged buyout (LBO) of MidAmerican Energy Holdings Company and TNP Enterprises in 2000. But most bankers warn that the LBO option may not be right for all companies.
Meanwhile, in the first Perspective column, guest writer Mark T. Williams, a visiting scholar at Boston University, offers a historical perspective of why such "round-trip" trades could have occurred and key recommendations to prevent such practices from going unchecked in the future.
I hope you enjoy this issue, which takes an investigative look into the trials and tribulations going on in the merchant sector.