Financial analyst Curt Launer of Credit Suisse First Boston has called on FERC to exercise “extreme caution over the next few months” in its regulatory rulings to avoid sending the already-embattled energy market into a further tailspin and compounding the uncertainty on Wall Street.
In a Dec. 17 letter to Chairman Pat Wood, Launer indicated that broad-based initiatives by the agency, such as sweeping changes to accounting regulations or proposals that would result in the “de facto” divestiture of energy affiliates, “could add to the current atmosphere of near hysteria” in the industry and financial district. Further, he wrote that continued litigation of cases stemming from the energy problems in California would add fuel to the fire.
“Now is a time for stability and I urge the Commission to act with extreme caution…in carrying out its obligations under the Natural Gas Act and Federal Power Act,” Launer said. “In light of the Enron debacle and the destabilizing affect it has had on the industry and its access to capital markets, the investment community is looking to the Commission to avoid taking steps that would further destabilize the sector.”
The Federal Energy Regulatory Commission at its meeting last Wednesday asked for comments on whether it should require approximately 1,200 power marketers to file financial reports on their derivative and hedging positions. The move came in a notice of proposed rulemaking (NOPR) primarily designed to update the Commission’s financial accounting format for regulated utilities. Wood said the NOPR did not promote “sweeping” changes, but rather was a “clean-up” initiative.
The changes proposed for FERC’s uniform system of accounts for utilities would reflect changes made since 1993 by the Financial Accounting Standards Board (FASB). The NOPR would minimize the differences for companies filing financial accounting reports with FERC and other financial agencies such as the Securities and Exchange Commission.
Its proposed changes for utilities would set a regular method for reporting hedging and derivative positions on an annual basis. It also would allow utilities to use mark-to-market accounting for these transactions and report other financial positions on a fair market value basis. The commissioners noted that the financial reports are filed annually and that in the past utilities have not been major players in the hedging and derivatives market. That may change, however, staff said in recommending the new system.
In granting certificates to marketers, FERC has traditionally issued waivers of financial reporting requirements since they are collecting market-based rates. Utilities charging cost-based rates are subject to full reporting requirements.
Based on a recent visit to Wall Street and on talks with state regulators, legislators and industry leaders, Wood said last Wednesday that he believes the Commission’s role now is to provide “clarity and direction [to the market], and lead where appropriate.” He questioned, however, whether FERC might be overstepping its jurisdiction in it attempts to monitor marketers’ finances. “Is this agency — in this reporting requirement — moving from a rate-oriented, customer-protection type role that we’ve had for years, to one of more providing counterparty, investor information that can be used to assess the creditworthiness of companies? I am very open to being told that’s another agency’s job to do…..and I might actually agree with that.”
The commissioners all endorsed the idea of providing more clarity to the market in light of recent events, but noted they are simply asking whether FERC should take further action regarding marketers. Wood indicated that closer scrutiny of marketing companies might come from another government agency.
Wood said he had heard opinions that requiring this type of reporting, adding in more transparency, might help stabilize the market, rather than leading to re-regulation as some have claimed. “If it’s us that should do it, fine. If it’s the Securities and Exchange Commission that should do it, fine, or CFTC (Commodity Futures Trading Commission), fine. But, it is timely to ask this question.”
In the wake of the implosion of Enron, Launer said equity holders — including the 10 largest natural gas, power and independent power producers — have lost approximately $22 billion since Nov. 1. The figure, he said, excludes the $10 billion lost at Enron.
All in the top echelon of energy companies have all been affected: Calpine Corp., Dynegy Inc., El Paso Corp., Mirant Corp. and Williams Cos., he said. During the period between Nov. 27 and Dec. 14, Launer noted Dynegy shares declined 39% in value, Williams fell 16%, Calpine dropped 43%, and Mirant plunged 37%. El Paso shares tumbled 17% during the same period, after dropping significantly earlier in the year when the California investigations were under way, for a total loss in value of 39% since May.
“Even more significantly, Moody’s Investor Services has downgraded the debt of several major energy companies to near or junk bond status,” and it has warned of further rating cuts that would cause “great instability in the market,” Launer told Wood. “Investors and rating agencies such as Moody’s and Standard & Poor’s appear to be rushing to get ahead of reactionary measures from Washington.”
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