Are banks better at trading power than utilities?
Bank of America's recent request to FERC to be allowed to trade power was yet one more reminder that a whole new class of companies are quietly positioning themselves to dominate what's left of the energy trading space after the departure of traders like Enron and Aquila.
As a result, many energy executives are wondering whether these newcomers will bring greater liquidity, transparency, and discipline to a market that has lacked all three in the last year. Some even quietly hope that the banks might restore a level of credibility and prestige that has been lost amid disclosures of sham trading and market manipulation.
One energy trader describes the current state of energy markets: "There have been significant market impacts. People are behaving differently. There is a lack of liquidity at many locations now. There is declining participation and fewer creditworthy counterparts. But I don't think our process has changed."
The head of energy trading at a Wall Street investment bank I spoke to on a recent trip explained the new phenomenon as a natural evolution of the market:
"You first had the small and large independents-the federated types like a 'Spark Energy' and Enron. Then you had utility affiliates like Cinergy, Aquila, and Duke. Then you had the merchant independents… and now we have Wall Street-the fourth wave."
Furthermore, he believes that neither energy companies nor utilities were ever well-suited to be trading in the first place.