ENERGY DEREGULATION: A BIG TURN-OFF

OPINIÓN FINANCIAL TIMES
23 de Mayo de 2002

El escándalo del caso Enron, su posterior implicación en la crisis de California y por último su relación con la Casa Blanca, están haciendo que lo que en un principio era un "escándalo local" se haya extendido a todo Estados Unidos.
Todo ello ha conducido a una crisis política y financiera, en la que todas las empresas del sector están siendo investigas por las distintos organismos correspondientes como, The Securities and Exchange Commission, Ferc o the Commodity Futures Trading Commission, algunos de los cuales a su vez se han visto afectados en su reputación por no haber detectado estas irregularidades en su supervisión.

Esto ha servido al resto de los estados para ser más cuidadosos ala hora de establecer leyes para liberalizar el mercado.

TEXTO FINACIAL TIMES
The fall-out from California's energy crisis is spreading nationwide. The outcry over shortages, blackouts and soaring prices, blamed at the time on a hamfisted local experiment in liberalisation, has mushroomed into a national business and a political crisis.

It has cast a shadow of suspicion over the entire energy trading sector. It has blighted the reputation of the Federal Energy Regulatory Commission. It has helped to undermine public confidence in popular capitalism by discrediting the deregulation model as a workable policy.

As most now acknowledge, California's experiment, launched in 1998, was fundamentally misconceived. Fixing retail electricity prices while leaving wholesale rates floating freely was a recipe for disaster. Catastrophe struck first last year when PG&E and Southern California Edison, the two largest investor-owned power distributors in California, were declared insolvent - unable to collect from consumers anything other than a tiny fraction of the soaring prices on the state's wholesale power exchange.

Since then, much evidence has surfaced to show that energy traders used the now-defunct exchange to exploit the market's weaknesses to the full. Whether their manoeuvrings were legal or not, or how much they contributed to California's difficulties, has yet to be determined from affidavits, congressional hearings and legal inquiries now under way at federal and state level.

The most dramatic revelations to date emerged some two weeks ago with the disclosure of Enron trading strategies with Hollywood-style codenames such as "Get Shorty", "Death Star" and "Fat Boy". They introduced the American public to the concept of "round tripping". The main feature of the round trip, also known as "in-and-out" trading, is that two or more traders buy and sell energy among themselves for the same price and at the same time.

The principal effect is to plump up trading volumes and make the participants appear to be doing more business than they really are. Another could be to raise benchmark prices for electricity, cranking up costs to distributors and consumers. This could be especially relevant to long- standing claims by Gray Davis, California governor, that the state was being "gouged" at peak periods, when wholesale prices rose as much as 900 per cent.

A key feature of the design of the state's spot power market was that traders offered units of electricity for delivery at a specific time. They were paid the highest price bid for the last units needed to power up the state grid at the time in question.

Since the release of the Enron memos, CMS Energy, Dynegy, Duke Energy and Reliant Resources have admitted some role in the round-trip business.

Reliant's disclosures included admissions that it had used similar tactics in the natural gas market, source of much of the fuel for electricity generators. EnCana, its Canadian partner in the trades, last month amended its books to remove revenues for 2001 of more than $700m attributable to round trips.

Since most of the participants in the wholesale electricity market also trade in gas, this raises the prospect of an even deeper examination and revision of the rules in the whole energy sector.

It provides another possible lead for investigators examining the volumes of documentation still coming from Enron and other large operators. Affidavits confirming or denying whether they, too, engaged in such practices were due to be delivered yesterday from 150 lesser traders.

Round tripping, illegal in securities markets, is not prohibited in wholesale power trading, which was in effect deregulated about three years ago. Still, as a senate committee heard last week, Enron was told in December 2000 by one of its own lawyers that its potentially "deceptive trading practices could violate criminal laws".

Illegal or not, some of the benefits to the players in this so-called "gaming" of the market are now clear. In the case of CMS, round-trip deals with Dynegy and Reliant inflated its power-trading volumes by 80 per cent and added a putative $4.4bn to revenues in 2000 and 2001. Dynegy, modelled on Enron, its crosstown Houston rival, conducted such trades "worth" $1.6bn (£1bn) in one day alone. Duke Energy, one of the top five power traders and the nation's leading operator in natural gas trading, said last week that such dealings added $1bn to its revenues over three years.

Even though direct links have yet to be established to California's ills, the evidence suggests that the booking of inflated revenues - even though the manipulations allegedly had no effects on net income - seemed likely to mislead investors in that they exaggerated the companies' financial well-being.

The price this year includes the bankruptcy of Enron, which in 2000 booked revenues of $100bn, a round of credit ratings downgrades, tumbling stock prices, cancellation of bond issues, re-stated profits and sackings. Reliant and CMS last week ousted several senior trading executives.

But the final reckoning is far from complete. The entire sector is under investigation by the Securities and Exchange Commission, Ferc, the Commodity Futures Trading Commission, and state regulators and attorneys-general in California and elsewhere.

The reputation of Ferc has also suffered since it emerged that it was warned traders were gaming the market in August, 2000 - long before the Enron memos were written - but did nothing.

While Mr Davis has continued to direct most of his attacks at the energy traders, the commission, packed with Republican appointees, has come under withering attack from other quarters. Barbara Boxer, one of the state's leading voices in the senate, last week accused the commission of ignoring Democratic warnings while 30m Californians suffered power shortages. Maria Cantwell, a Democrat from Washington, which was also hit by soaring power prices, described the Ferc as the "only policeman on the street" standing by while a mugging took place.

For all the rhetoric, there is no clear accounting of the cost to the western states, beyond the "billions" cited almost daily in California. The Ferc is still considering a claim for $9bn in refunds, filed by the Sacramento state government last year, before any hard evidence of market manipulation emerged. David Freeman, the colourful chairman of the newly constituted California Power Authority, appeared to have pulled a number out of his signature cowboy hat this week when he declared to a senate committee: "We are probably entitled to close to $30bn."

That may smack of wishful thinking, especially since not one of the 15 hours of blackouts a week predicted for last summer by federal officials materialised. Yet the costs of the disruption were undoubtedly felt by the state's businesses and retail consumers who are now paying 40 per cent more for power than 18 months ago.

The contrast between today and the euphoric launch of California's grand experiment, when Enron executives promised statewide savings of $9bn a year, could not be starker. The free market in energy trading has collapsed. The process of re-regulation is under way, with the state purchasing power on behalf of two crippled utilities and struggling to renegotiate $40bn in long-term supply contracts under which prices were set at an average of about double current rates. The draft redesign of the market will include price controls.

For the rest of the US - which so enjoyed seeing the trendsetter state suffer - the episode serves as a lesson in dangers of less-than-meticulous drafting and application of deregulation laws. But for energy traders, the pain may not be over: the likelihood of slowing growth in the free market in power and the possibility of criminal charges emerging from the current investigations threaten to damage the entire sector beyond repair.

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