Energy traders and risk managers reengineered their business dealings to manage against unexpected political and financial risks posed by California and Enron in 2001.
Richard Stavros is executive editor of Public Utilities Fortnightly.
The rules of energy market survival changed forever in 2001. California, one of the biggest U.S. energy markets, and Enron, the biggest domestic energy trader, were both humbled by gyrating prices and blackouts in the Golden State, and financial misadventure dethroned the once-crowned king of energy trading.
These twin events sent shockwaves through the very foundation of the energy trading and risk management establishment, which found it was caught ill prepared to handle the financial repercussions of the California crisis and the Enron financial debacle.
"We look at political risks around the world. We look at political risk in South America, Europe, everywhere. Two years ago, we didn't expect California to be the political risk it became," says a still disbelieving Harvey Padewer, Duke Energy's group president, energy services.
"The lesson in California is that it has a big crisis if they don't let market signals work. If they don't allow and encourage power development, they are going to be right back where they were. I think clearly over the long-term the federal government has to understand that price caps really limit market signals," Padewer says.
But while many energy traders and risk managers have since quantified, calculated and curtailed their financial exposures to the California crisis, many are still at a loss to explain what the impact to the industry will be as a result of Enron's financial woes.