Don Diaz, Contributing Editor
Convergent evolutionary theory suggests nature produces replacement fauna for once successful extinct species. Present day apex predators such as the big cats, bears and wolves, supplanted super-predator dinosaurs. It appears that convergent evolution (albeit man-made in this case) still holds true in the online trading of gas and electricity.
Formally super-apex players such as Enron, Dynegy, and El Paso Corp. and other well-known, now trite trading names represent the extinct fauna of the sector. Their improvident trading/collaboration schemes now seemingly a relic of a prehistoric era.
Enron’s vacant, never used, second-generation trading floor was designed to hold 2,000 trader of gas, electricity, oil, and other markets which it hadn’t even invented yet (see the failed trading house’s attempt at creating a forward curve for broadband) would have surpassed in scale anything a Wall Street house could have ever dreamed of. Much like the dinosaurs, Enron, its former sector contemporaries, and the trading environment they founded are fading into history. Its demise and departure of the building (successor UBS Warburg has also been forced to scale back its energy speculation and hedging operations and has never shown an interest in the cavernous trading space), along with similar sector exits, have acted to lure new market participants.
The way of the dodo
Enter the new traders of gas and power; moving in to meet the markets’ need to manage the risks of fluctuating prices. Wall Street investment banks, insurance firms, and oil giants are converging to fill the void left by the defunct trading entities. Wary of the sector’s sins of the past; these new trading operations are adhering to must stricter capital, and debt to equity requirements, shunning the hyper-leverage instruments of the recent past (which have provided junk bond ratings for the likes of El Paso Corp., et al). As a result, the sector is showing signs of recovery, but bold predictions of online energy trading growing ten-fold (as Cambridge, Massachusetts-based Forrest Research Inc. forecasted in July of 2001) by 2005 have all but vanished. Replacing them are somber statements that new energy trading entries such as Bank of America (NYSE:BAC), Goldman, Sachs & Co (NYSE:GS), Morgan Stanley (NYSE:MWD), American International Group (NYSE:AIG), and ChevronTexaco (NYSE:CVX) will act to stabilize the much-beleaguered sector, restoring consumer doubts of credibility. These firms will also provide liquidity to the capital-starved energy trading markets, fostering the long-term health of the sector.
No poachers allowed
Forthcoming federal regulation that will provide for the wholesale power market to function on a national platform should also furnish the ailing sector with some much-needed benchmarks for accountability. The Federal Energy Regulatory Commission’s (FERC) “Standard Market Design” will permit consumers to shop for the best bargain among electricity suppliers throughout the country. The FERC also recently held a joint conference with Commodity Futures Trading Commission (CFTC) in order to address credit issues facing the energy markets. Likely solutions may include the utilization of CFTC-regulated clearing facilities, which would ensure against trading volume fabrications that have haunted the market as recently as last fall. Transactions of energy contracts and their derivatives would be handle in much the same manner as currently employed for other commodity contracts and derivatives. Under this plan, clearing services such as those provided by the New York Mercantile Exchange (NYMERC) and the London Clearing House (LCH) would add or modify previously unregulated trades to their already existing energy clearing models.
Online energy trading will continue to evolve along the path of convergence leading toward greater market stability. New sector members with solid balance sheets will proceed to obtain greater amounts of market share, aided by federal regulation crafted to bolster this process of transition. Partnerships between energy firms and traditional financial institutions will further the ongoing consolidation shaping the future of the sector.
Diaz is an independent industry analyst with 15 years experience in the financial and energy markets.
