Established Wall Street firms with extensive liquidity, risk management experience and financial sophistication are eyeing a move into the faltering energy trading business, in which consolidation is looming, according to a former interstate pipeline credit risk analyst, now with Deloitte Touche in Chicago.

“Most of my clients are trading companies, and I can tell you we’re definitely going to see some consolidation,” said Justin Bowersock Thursday at an energy symposium in San Diego, looking at California’s gas/electric developments so far this year. “We’re going to see some of the sophisticated financial services institutions enter the energy trading market.”

Bank of America and at least two other large national financial services firms are prepared to make a big play there at a “Wall Street level,” Bowersock said. “They have all of the tools needed,” he added.

“They see major arbitrage opportunities in the power and gas markets, so we’re definitely going to see some of these folks enter the market,” said Bowersock, noting that it will be accompanied by consolidation and the creation of a clearinghouse, a concept he said Deloitte Touche is pushing with a number of established energy traders, such as Mirant and others.

“They’re looking at possibly setting up a clearinghouse operation with an RTO (regional transmission organization),” he said, noting he just spent six months working with an RTO, but has some reservations about whether they will be sophisticated enough to take on this role.

“The advantage of a clearinghouse model is that it can potentially reduce a lot of the credit risk, and you get multi-lateral advantages if you’re credit-worthy,” Bowersock said.

He said that many of the firms pushing for reforms are ones that have “subpar” credit ratings right now as a result of the fallout post-Enron and post-California. He added that credit conditions are “abysmal” nationally — not just in California.

“The California crisis set things in motion, but Enron really, really hurt the market generally, and obviously the energy industry, particularly,” said Bowersock, adding that most major energy companies are not liquid, and they are too heavily leveraged, so they’re going to continue to be downgraded.

Among the top 10 energy companies there is something like $25 billion in debt that will need to be rolled over in the next 18 months, Bowersock said.

“This is $25 billion these guys may not be able to pay or get new loans on. This has been driving about $15 billion in asset sales that have been announced so far. Deals have been announced for about $9 billion in asset sales, but selling the rest may be very tough.” He said it is truly a buyers’ market.

As a result, major private equity firms such as KKR and Chicago-based Madison Dearborn are developing energy units and moving in to buy assets at potential fire sale prices, he said.

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