If anyone ever asks about what you read in this column, tell them you heard it somewhere else.
Of course, I don't really mean that. Let me put it another way: The FORTNIGHTLY gets invited here and there with the understanding that some things will end up in print, and others not. And while I never quote anyone if they were holding a fork or a glass, I do my best to bring back the inside story.
Virtual Capacity
A while back I heard a story from the general counsel of a major East Coast electric utility. Talking about obstacles that have sprung up in his business, he complained: "Power marketers are buying up our reserve generating capacity at nonfirm rates and turning around and selling it back to our own customers at firm rates. How do they think they can get away with that?"
Well, the power marketers may have found a way. It's called leveraging. Or hedging.
Just like the junk bond kings of the 1980s, who launched leveraged buyouts to gobble up unseen asset value in much bigger companies, the power marketers have found an edge. These alchemists take standby and make it firm. They've apparently discovered that the sum of all local reserve capacity in the United States far exceeds what you would need to supply all U.S. electric needs if you ran the national grid as a single company. So how do you create your own virtual national utility? Just lock up enough nonfirm reserves with just the right mix of hedging contracts. That's what's going on when, during any 24-hour period, some commodity futures markets customarily trade many times the value of a commodity than could ever be consumed on any given day. What better proof that electric utility mergers are just lying around waiting to happen?