The Utility Sector: A Wall Street Takeover?

Financial players bring credit depth to energy markets, but will they play by the rules?

The center of gravity for energy marketing and trading activity is moving from Houston to Wall Street. Some major financial institutions already have plunged into the market, while others are testing the waters, gearing up to participate in a bigger way. Already their impact is being felt, and it is most definitely welcome.

"Financial players are providing a significant portion of the liquidity in the market-on the order of 30 to 40 percent," says Richard Hunter, managing director with Fitch Ratings in New York.

Financial companies that are trading gas and electricity contracts include commercial banks like ABN Amro, Bank of America, Citigroup, Deutsche Bank, JP Morgan, and UBS; hedge funds, including Citadel Investment Group, DE Shaw & Co., and Susquehanna International Group; and investment banks, like Goldman Sachs, Morgan Stanley, and even Merrill Lynch (which sold off its energy trading organization to Allegheny Energy in 2001 and was sanctioned by the Securities and Exchange Commission for its Enron dealings). According to sources at Merrill, the firm established an oil and gas trading desk in April 2003, and hired several people to conduct trades.

While some firms are taking tentative steps into the energy markets, others are making bigger investments. Goldman Sachs and Morgan Stanley, in particular, are putting money in the ground by acquiring hard assets in fuel and electricity. Most recently, in October 2003, Goldman Sachs agreed to acquire Cogentrix Inc. in a $2.4 billion deal that includes 26 power plants generating 3.3 GW of capacity.