The new Power Players Playing field:
POWER POINTS: Wide Spreads In Pwr Beckon A-Rated
Players
By MARK GOLDEN
A Dow Jones Newswires Column
NEW YORK -- Banks, hedge-funds, and creditworthy utilities and trading companies can see a lot of
money on the table of the broken U.S. power market, and, according to industry sources, they are
preparing to take it.
With Enron Corp. (ENRNQ) and Aquila Inc. (ILA) - two of the country's former top three traders - now
out of the game and many formerly heavy hitters playing diminished roles, trading volumes have dried up.
As in any market, the lack of liquidity widens the difference between the best bids from potential buyers
and the best offers from potential sellers.
In that wide spread lies the market's self-correction: A big profit opportunity for traders with A-rated credit.
Several such players are launching new power trading desks, while others are ramping up operations. RWE
AG (G.RWE), privately-held trader Louis Dreyfus, hedge-fund manager Citadel Investment Group, TXU
Inc. (TXU) and Bank of America Corp. (BAC) have gotten the most talk, but some other, surprising
companies are getting mentioned, too.
"When a market is dislocated, that's when you want to get into it," said R. Martin Chavez, chief executive
officer of Kiodex Inc., an energy risk management technology firm in New York City.
Until late last year, utilities, independent power producers and energy trading companies had low
requirements for credit and usually transacted with the best price. Now, an A-rated participant doesn't have
to be the best bid or best offer to get hit. Sellers will sell at a relatively low price and buyers will buy at a
relatively high price if the deal is with one of the few creditworthy traders active. Grabbing that arbitrage
over some long-term power deals means serious profit. It's a big arena, too, since Americans spend some
$220 billion on electricity annually.
"It's an amazing opportunity," said Chavez, who worked with Goldman Sachs' (GS) energy group before
Kiodex. "You don't have to be the first mover, but you have to be an early mover."
Bank of America and UBS Warburg have already entered the market. UBS' difficulties in integrating its
many former Enron traders aside, no wonder the banks are trying: Goldman Sachs made about $1 billion on
its four-year power production and trading venture with Constellation Energy Group (CEG) - a deal The
Economist said "may just be one of the most lucrative ever in investment banking."
Goldman, of course, knows the market favors buyers again. It has kept its power team together, but the group is trying to decide whether it
needs power plants to back up its trading operation. Another joint-venture with a power producer is a possibility, but it may just depend on
supply options.
Hedge funds see the same opportunity. That's why Citadel Investment Group was in talks to do a joint venture with Aquila's trading operation.
Though the deal failed, Citadel is interviewing laid-off Aquila traders, according to Aquila. Earlier this year, Citadel hired several former Enron
traders.
Hedge funds D.E. Shaw and Paul Tudor Jones are also looking seriously at electricity trading, according to one source, and former Enron gas
chief John Arnold has started a hedge fund to take big speculative bets on energy-price directions.
Generally, though, hedge funds and investment banks won't hire more than a handful of experienced senior traders from Houston, according to
Chavez. Funds and banks in New York have already interviewed many energy traders, but they weren't too impressed, Chavez said.
Apparently, it is harder to teach quantitative analysis to an energy trader than it is to teach electricity to an experienced hedge-fund manager.
As a result, most Houston alumni will wind up managing portfolios for trading companies or utilities with merchant operations or the buyers of
independent power plants - if they are lucky. If they aren't so fortunate, but want to stay in the industry, they will take jobs with smaller,
regulated utilities or regional market operators at a fraction of their former potential compensation.
"Six months ago, it was difficult to convince a candidate that their market value has diminished. We would have offers on the table at less than
their previous compensation, and they weren't ready to accept that," said headhunter Scott Brownholtz, managing partner of Mpower Search
Group in Sacramento.
"Now, a solid offer from a solid company is typically accepted immediately," said Brownholtz.
Among trading companies, Louis Dreyfus may be moving fastest, even though its talks with Aquila failed, too. Nevertheless, the company has
hired Paul Addis, who built American Electric Power's (AEP) very successful trading operation, and David Delaney, Enron's former top trading
executive.
"They're going to build a big shop," said Brownholtz of Addis and Delaney.
Other trading companies expanding power trading, or at least kicking the tires, according to sources: Cargill, ConAgra Foods Inc. (CAG) and
the trading arm of American International Group (AIG).
AEP, for its part, continues to grab market share, as does Duke Energy (DUK), FPL Group Inc. (FPL) and TXU. RWE has opened shop in
Houston, and Suez' (SZE) is said to be expanding its U.S. unit Tractabel, which for years has been a modest but successful operation.
Some creditworthy utilities aren't interested in becoming big traders, but want to manage their inherent risks and maybe make a little money on
their regulated portfolio. Progress Energy Inc. (PGN) has already brought a lot of experienced Houston talent to Raleigh. Utilities such as
Dominion (D), DTE Energy (DTE) and Cinergy (CIN) can now afford top talent formerly with Aquila, Calpine Corp. (CPN), Dynegy Inc.
(DYN), Williams (WMB), etc.
Still, it could take three years for power trading volume to get back to its peak hit in the summer of 2001. The new cast is moving cautiously
and quietly. The checks and balances that an A-rated credit company have, by definition, slow the move. And for now, getting a lot of
attention about a new U.S. power-trading operation probably wouldn't be well received by investors.
-By Mark Golden, Dow Jones Newswires; 201-938-4604; mark.golden@dowjones.com |
