Energy Trading Losing Its Zap
By Rocky Mountain News
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There is no shouting, no hands frantically waving "buy" or "sell" signals across the room.
A buzz is still evident, but it's a quieter, more focused sort of noise.
Such is the life of an electricity trader today - post-Enron, post-corporate accounting scandals, post-California power crisis, post-Sept. 11.
"It's certainly not as wild and exciting as it was last year," said Kelly Krattenmaker, Xcel vice president of trading, marketing and supply. "We're still making a little money, but business has slowed and we've ramped it down some."
Minneapolis-based Xcel's trading operations for both electricity and natural gas are in downtown Denver.
Colorado's dominant utility, first as Public Service Co., then New Century Energies and eventually Xcel, geared up its trading operations in the late 1990s to take advantage of the movement to deregulate the U.S. electricity sector.
As states began to deregulate electricity sales, Xcel enjoyed millions in profits that it split between its ratepayers and shareholders. Last year, Xcel's power trading operations made $225 million in profit, $93 million of which was returned to its Colorado electricity customers in the form of reductions on their bills.
Now, many companies are getting out of the business altogether. The list of former energy traders is long: Enron Corp., Dynegy, Aquila Inc., Williams Cos. and Reliant Resources. Just last week, El Paso Corp. of Houston announced it would quit the trading business and take a charge of $400 million to $600 million in the fourth quarter.
Tom Imbler, Xcel's director of energy trading, said the turnaround from last year is "as dramatic as any event I've seen in all my years doing this."
Xcel doesn't yet have numbers for this year, but Imbler said "my expectation is that there will be little contribution (to Xcel profits) from trading margins in 2002."
The catastrophic fall of the power trading business would have been inconceivable just a year ago.
As power deregulation began to take hold in California, Arizona and other Western states in the late 1990s, traders were buying and selling electricity from state to state as if they were hauling a trainload of grain from Chicago to Los Angeles.
Last year, power markets were booming and electricity traders were making astronomical margins on their deals. In May of 2001, electricity traded as high as $555 a megawatt-hour at Palo Verde, Ariz., the most actively traded power hub in the western United States.
Today, electricity is trading for about $25 to $30 a megawatt- hour. (A megawatt-hour roughly equals the amount of electricity it takes to power 1,000 homes for an hour during an off-peak period.)
The demise of market maker Enron Corp., this year's poster child for corporate scandal, was almost unthinkable.
But then a "perfect storm" of factors - power generation shortfalls in California, a drought in the Pacific Northwest that cut hydropower generation, and dramatically increased demand in the West - led to California's rolling blackouts and revelations that energy traders such as Enron took advantage of that state's power crisis.
In the wake of Enron, energy trading companies have been accused of sham trades and illegal accounting, and many are under investigation by the Federal Energy Regulatory Commission, the Securities and Exchange Commission and the Justice Department.
"Because of Enron and companies that were pure speculative traders, everybody got hit really hard," said Mike Wilczek, senior markets editor at Platts, a global energy information company.
"The basis for deregulation - to make a more efficient market - is being looked down upon now," Wilczek said. "Wall Street doesn't want to finance it. We've seen a tremendous drop in liquidity in wholesale electricity trading (since Enron)."
Xcel's Krattenmaker admits his company's reputation has been hurt because it has been lumped in with Enron, Reliant and others being investigated for market manipulation in California.
Xcel earlier admitted that it engaged in "round-trip" energy trades with Reliant in 1999 and 2000, where it bought and sold power to Reliant for the same price. But Xcel said the trades weren't done to massage company revenues or affect power prices.
"The definition of 'round-trip trade' has evolved to the point where it implies an intent to manipulate," Krattenmaker said. "If you use that definition, Xcel didn't participate in any round- trip trades.
"In retrospect, do we wish we hadn't done it? Absolutely," he said. "Look at all the grief it caused us."
Fortunately for Xcel Energy, which is not under investigation for market manipulation, its power trading unit's focus was never the same as Enron's.
Enron made speculative power trades based on where the company thought energy prices would go. Xcel does very little speculative trading, Krattenmaker said.
"We're a physical asset and we're a utility," said Xcel's trading manager, Kyle Smith. "If you look at Enron, they were more of a market mover. Plus we're a regulated utility, which puts us in a lot different situation than Enron."
Colorado and Minnesota still regulate electricity sales, as do all 12 states in which Xcel has utilities.
And unlike Enron traders, the majority of Xcel's 50-plus electricity traders and analysts are still working today, even if they can't make the huge margins on trades that they did last year.
"We made modest staff cuts, mostly through attrition," Krattenmaker said. But because Xcel's main goal is to provide low- cost power for its utility customers, the company's traders still perform a vital function, he said.
Xcel traders are trying to buy the cheapest electricity they can, either to power its customers' homes or to sell to someone who will pay more for it than Xcel did.
"If we can buy electricity cheaper in Montana and bring it into Colorado, that's what we'll do," Krattenmaker said. "We're always looking for cheaper energy to buy than we can produce ourselves."
That might mean that Xcel is producing electricity in Colorado that is being sold to Arizona, while Coloradans are using electricity generated in Montana.
Confused? That's why Xcel hires traders and analysts to watch the markets, Krattenmaker said.
"We understand how to traffic transmission across the grids," said Xcel senior trader Lance Titus, who came to Denver from Wall Street. "If Xcel didn't have a trading staff, it would be a small fish in a big pond and wouldn't be able to reach further into the (market)."
Trading director Imbler added, "It would be irresponsible as a large utility to not have a market presence and just be a price taker."
Xcel's "eyes" on the market have simply changed their focus, Imbler said.
"In 2001, we'd be up selling power at 2 a.m. for $200 a megawatt- hour," he said. "This year, we'll be up at the same time, only we'll be buying power for $5 a megawatt-hour."
On the bright side, Xcel might be able to benefit from the hole left by the large energy traders now leaving the market, Krattenmaker said.
"There may be some opportunities for us with the big players falling out," he said. "But we're not going to go gung-ho to take their place."
The question power traders, and the electricity industry in general, now face is whether deregulation will ever again be in vogue.
Wilczek of Platts said industry analysts "still can't imagine going back to regulated, monopoly utilities running everything. FERC is still pushing for a level playing field for generators, traders, all the different market players."
But, he noted, "all the black marks on power trading . . . have hurt the good side of things as well. It's become very complicated, so how long (deregulation) is going to take - who knows?"
