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The Utility Sector: A Wall Street Takeover?

Financial players bring credit depth to energy markets, but will they play by the rules?
Fortnightly Magazine - January 2004
  • period, and not everyone was satisfied that the final rules addressed their concerns satisfactorily.
  • Slow Progress. Delay in forming regional transmission organizations (RTOs) contributes to a sense of unease over the industry's long-term future.
  • Environmental Risk. Emissions rules could skew prices for power. Under the Clean Air Act, many coal-fired power plants will face the choice of installing selective catalytic reduction equipment, buying emissions credits, or mothballing.

"Companies potentially will be turning off coal-fired machines that they might otherwise turn on, and that will cause more volatility," Murphy says.

On the other hand, if changes to the Environmental Protection Agency's New Source Review policies survive the current federal court battles, the mandate to clean up or shut down may not be as pressing in 2004 and 2005 as it would have under the old rules. This factor, combined with the Bush administration's Clear Skies initiative and corresponding efforts to enact global warming legislation, make environmental regulation a decidedly unknown quantity.

Congress spawns even more uncertainty. When Senate Democrats blocked the omnibus energy bill (H.R. 6) with a filibuster in November, they left many questions unanswered-including such politically safe questions as tighter reliability standards for utilities and extended tax credits for renewable energy. But perhaps more importantly, the industry is left wondering what will happen with the Public Utility Holding Company Act (PUHCA), which H.R. 6 would have repealed.

"PUHCA is an arbitrary trade barrier, frankly," says Doug Dunn, a partner with Milbank, Tweed, Hadley & McCloy in New York, and chair of the firm's power and energy practice. Large foreign utilities have largely stayed out of the U.S. power market, he says, because they feared the effects of PUHCA regulation.

Repealing PUHCA would open the market not only to foreign utilities, but also to "other potential players, whether financial firms or big oil companies, that have deep pockets but haven't wanted to become ensnared in utility regulation," Gates says.

Whether or not PUHCA's repeal would open up new opportunities for financial players, its current state of limbo represents a stumbling block for possible market entrants

At this writing, Senate leadership was planning to revive the energy bill in early 2004, in hopes of defusing opposition by stripping out the controversial section on liability for the MTBE fuel additive. Thus PUHCA repeal may retain good chances for passage in the new year.

Merchant Makeover

Despite lingering uncertainties, current trends seem to favor the participation of well-capitalized energy traders. With any luck, these firms will help to revitalize the anemic markets with greater credit depth, trading volume, and price transparency.

That's good news for traders, but it brings little hope to decimated merchant power companies, which are caught between a looming debt load and a negative spark spread. Debt restructuring offers a reasonable short-term solution for some, but in the long run the real solutions may prove more dramatic. Think bankruptcy and asset liquidation.

"We're not seeing the consolidation that might help the industry," says Rigby of Standard & Poor's. "Until plants start getting knocked down, you'll still have this capacity problem. Almost every