Adopting a portfolio approach to credit risk is the answer.
How times have changed from the "good old days" of credit risk management. No longer can credit managers hide behind the false comfort that they only approve transactions with companies that pay their bills.
The real, painful reform has only just begun.
It has been almost a year since Enron imploded into bankruptcy, but rather than solve problems, the event has only brought uncertainty-credit rating downgrades, a drop in investor confidence, and heightened scrutiny from the Congress, the Securities and Exchange Commission (SEC), the Federal Energy Regulatory Commission (FERC), and the Commodity Futures Trading Commission (CFTC).
S&P, Moody's, and Fitch tell why credit issues now rule the energy sector.
This year saw energy companies forced to make some grim choices-issuing new stock in falling markets, angering investors with dividend cutbacks, selling prized assets at fire sale prices. Some blame it on the rating agencies-the bond kings-who imposed tougher credit standards after the fall of Enron.
Dung Deal
Power plants choose that most renewable of fuels.
Power from pig poop. Sounds like a skit from Saturday Night, but it's not. In July, a bona fide dung-fired power plant came online in that most proper of nations, Great Britain. And according to the firm behind the project, Farmatic UK, the plant could be the first of many in Britain.
Dung-fired power plants are also popular in Germany and Denmark, which each has about 20 large-scale plants operating.
William J. Froehlich has been appointed director of the re-established Office of Administrative Litigation at the Federal Energy Regulatory Commission (FERC). Froehlich has been an attorney with FERC since 1975. As the head of the office, Froehlich will report directly to FERC Chairman Pat Wood III and the commissioners.
It's the Grid, Stupid!
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.
Grid system operators now hold the cards. That means a bidding war for talent and a new wave of mergers.
TBy issuing new rules for a Standard Market Design (SMD) for wholesale power, the Federal Energy Regulatory Commission (FERC) in all likelihood will usher in a new wave of utility mergers. But the pattern will differ from what we have seen in recent years.
The deals will center on the transmission sector, and take a horizontal shape, rather than vertical.
Why hedging can make sense, even for companies covered by weather-normalized rates.
Weather risk management is growing, but utilities may be losing out.
A recent survey suggests that the number of transactions involving financial derivatives to hedge weather-related risks grew by 43 percent against the prior year for the twelve months ended March 31.1 Yet regulated utilities continue to show reluctance to embrace weather derivatives.
Even the volatility is volatile. And that can play havoc with hedging.
Jeff Skilling resigned from Enron over a year ago-after power prices in markets serving California had fallen 90 percent in three months.
But in July, Bank of America won approval from the Treasury Department to offer cash-settled electricity derivatives-with a former Enron regional director at the head of the desk.
So what has changed, and what hasn't?