Settling (thankfully) into a lull

By Pam Boschee

There seems to be a sense of things finally settling down in our industry. This isn’t to say all issues are being resolved and all is right with our world, but a lull seems to have mercifully blanketed our “business as unusual” mode of the last year or so.

I don’t know about you, but I’m welcoming the lull; it doesn’t portend disaster to me. It’s a pleasant change from the frenetic, Boris and Natasha (from the Rocky & Bullwinkle cartoons of years gone by) type of sneaky, underhanded (and often bungled) goings on we’ve been witnessing this year.

Our real world sometimes had a more sinister twist, but my early disbelief eventually transformed into a jaded what (or whom)-will-go-wrong-next perspective.

Although not exactly doing a 180, our state of affairs seems to be easing into an even keel.

As far as the investment lure of regulated utilities, Barron’s had some not-so-bad things to say about this in early November. They characterized utility stocks as offering investment values. Although conceding that the Standard & Poor’s (S&P) Electric Utility index is down 22 percent in the past 12 months, underperforming the S&P 500 by five percentage points, Barron’s gave a sort of thumbs-up to old-fashioned regulated electric utilities.

Barron’s said they have predictable revenue streams, since trading isn’t a big piece of their revenue (and certainly won’t be anytime soon), they pay reliable dividends, and their valuations look historically cheap. Utilities with stable earnings and dividend yields might soon look more attractive relative to the market yield and relative to U.S. Treasuries.

On the generation side, the boom that started in 1999 is trailing off into a muted, but continuing buzz. S&P predicted in early November that new power plant construction is expected to continue with 41,000 MW expected to enter service in 2003 and 4,000 MW in 2004.

The cyclical nature of boom/slow build will most likely continue. Over the long term, U.S. power demand is increasing rapidly, with the Energy Information Administration (EIA) forecasting 1.8 percent average annual growth in electricity sales through 2020. EIA forecasts that 1,300 new power plants will be needed over the next 20 years.

It’s anyone’s guess as to whether there will be any method to the madness that ultimately leads to the required supply.

And, of course, electricity pricing will continue to follow the balance of supply and demand. Right now, the lack of volatility must be downright boring to the adrenaline-chasers out there.

Of course, this brings me to the scattered remains of the trading side of our industry–a clear case of adrenaline overdose. Having the advantage of hindsight and distance, I yearn to shout, “What were you thinking?” as I read of the trader shenanigans that went on at far too many trading floors across the country.

However, even here a lull (maybe it’s numbness) is palpable. Decimation will do that–it results in an eerie calm after the storm.

Williams admits a “few” of its natural gas traders fibbed when providing information for published price indexes. Apparently, more fibbers such as these were sipping their coffee while eyeing the trading floor price tickers at American Electric Power (AEP) and Dynegy. AEP showed five traders to the door, presumably with dishonorable discharge papers, on October 9. Six of Dynegy’s fibbers were axed on October 8, and seven more were going to be disciplined. (Perhaps these seven merely aided and abetted the fibbing.)

Williams has cut its capital commitment to energy trading by a third, and the lowering of its credit rating below investment grade prevents the company from securing long-term energy trading contracts.

CMS Energy recently said they may have some fibbers as well, declaring they would take “appropriate personnel disciplinary actions.” The company also announced an internal review confirmed the unit engaged in bogus trades designed to bolster revenue and trading volume.

Their solution? In a recent press release, CMS Energy said it is “pursuing strategic alternatives for CMS Marketing, Services and Trading.” This includes a “complete exit from wholesale gas and power trading.”

A new twist to potential volatility in the power market comes from the National Regulatory Research Institute, whose credibility stems from the fact that the National Association of Regulatory Utility Commissioners established it in 1976 at the Ohio State University. NRRI provides regulatory research and service.

NRRI concluded that FERC’s NOPR on standard market design could affect retail prices through its proposed transmission congestion revenue rights (CRRs). CRRs could permit speculation, which in turn could increase transmission prices.

Speculation in transmission trading–beware of the newly dismissed power trading fibbers who may be prowling around looking for work.

NRRI’s senior economist, Robert Graniere, said, “The approach FERC is taking could work if the U.S. electricity industry indeed was competitive. But a growing body of evidence demonstrates that the industry is subject to significant market power abuses.”

Graniere may be right, but I’m relegating CRRs to the “things to be considered in the future” category.

Like I said, I’m welcoming the lull. After all, the holiday season will soon be holding our collective attention. A small dose of boredom and complacency–even if temporary–sounds like an ideal “strategic alternative” for me. elp

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