Security Issues May Move to the Forefront of the Energy Debate

The energy industry managed to maintain operations while in a state of alarm last week following the horrific terrorist attacks that destroyed the World Trade Center, damaged the Pentagon and left hundreds dead in western Pennsylvania. While no damage was done to energy infrastructure other than to those distribution lines in close proximity to the attacks in New York City and Washington, DC, the experience will serve as a wake-up call to the government and the industry that energy security and reliability issues for once shouldn't take a back seat to other matters.

"Energy is one of the critical infrastructure services that the country is going to have to take a real hard look at," TXU Corp. CEO David Biegler said in an interview with NGI on Friday. "I think we are going to see a lot more emphasis on energy security again, security on supply and [on transportation]... A great deal of work was done over the last several years, starting with President Clinton's critical energy infrastructure work and the task force on the ability of our infrastructure to resist terrorist attacks. We also have the National Petroleum Council report, which recently addressed the vulnerability of the oil and gas industry to terrorist attack. I think you are going to see those reports, which weren't ignored but didn't have enough attention paid to them, be dusted off and a lot of the points that were raised in there brought to the forefront in a lot of discussions."

Biegler said that unlike most other critical infrastructure industries, the energy industry does not have the authority sanctioned by the government to collaborate on anti-terrorist activities, and that needs to be changed.

"You have the family of airlines being able to collaborate on anti-terrorist activity, which stands to reason. But the energy industry has no such clearance from the government," he said. "The government is petrified of antitrust issues as they relate to the energy industry and prohibits energy companies from collaborating. One of the recommendations of the National Petroleum Council study was to work with the government to allow some security discussions to happen. Can you protect every bit of energy infrastructure in America? Obviously not, but you can do an awful lot in the way you run your business and even more if you can collaborate with other companies on these things. It's a good example of something that needs a fresh look."

Biegler also believes there may be greater emphasis placed on reliability issues when Congress returns to energy discussions. "We've taken a lot of our economy for granted. The issue of reliability of the energy infrastructure, not just protection against terrorist attacks, but also it's adequacy and the comfort that people want to feel. That will become a more important issue. I think we are going to come out of this with America looking to feel better about its prospects for having its standard of living uninterrupted.

"The attacks are going to make the recovery of the economy that much more difficult because obviously nobody claims that consumer confidence hasn't been shaken," Biegler added. However, he has confidence that the economy will be strengthened by the American public. "I think we have a natural desire in the American public to demonstrate support of this county, and I think you are going to see it in the stock market."

The near-term financial impact on the industry and the marketplace, however, won't be fully known for weeks. The first signs may come this week with the opening of the stock market and the open outcry futures trading sessions in New York.

The New York Mercantile Exchange (Nymex) had an abbreviated electronic Access trading session cut short on Friday due to technical problems after having been down all week while members and traders regrouped. As a result, it was difficult to judge the state of the market, which has been in an extended downtrend resulting from the weak economy, demand setbacks related to last winter's high energy prices, stronger production, and high storage inventories.

The impact on Nymex itself still wasn't clear on Friday. The exchange is only a few blocks from the World Trade Center and could encounter some lingering problems this week.

Without the ability to off lay risk using futures and options last week, many of the nation's energy traders were forced to maintain existing orders or sit on the market sidelines until Nymex could resume trading. Very little marketing and trading took place.

Several traders noted that without Nymex functioning, the financial side of the energy market was unable to function adequately. "Some physical deals were done, but at least one large marketing company sent their physical traders home before they had a chance to put in their noms," said one trader. "This will certainly create a paperwork nightmare as well as imbalances on the various pipes. If it becomes a prolonged event, then it might necessitate shut-ins at the gas plant level."

However, Enron, Dynegy and the IntercontinentalExchange were able to keep their electronic commodity trading systems up and running despite the turmoil, which gave traders multiple options they didn't have only two years ago.

The terrorist attack and any U.S. response would have only a limited impact on the U.S. natural gas markets and industry, according to UBS Warburg Analyst Ronald J. Barone. Barone said Friday in a research note that the impact would be limited because gas storage levels are well ahead of schedule. However, he added that wholesale gas and power liquidity likely will be thin for the short term until normal futures trading resumes and any lost trading infrastructure is rebuilt.

One short-term impact in the trading community was the temporary loss of TradeSpark. The rapidly growing electronic trading system suffered a devastating setback. It is operated by eSpeed, which was spun off from Cantor Fitzgerald in 1999 but remained based on the 103rd floor of the World Trade Center near Cantor's offices.

Cantor Fitzgerald also was a prominent broker in the industry. A Texas-based marketer said he was on squawk box with a Cantor Fitzgerald broker on Tuesday morning when the broker said he heard an explosion. "We're seeing smoke out the window," he said. "Something is wrong... I think I'd better be going now."

Cantor, eSpeed and TradeSpark together lost hundreds of employees in the attack but in an announcement on Friday, TradeSpark officials said they would be able to return to service on Monday.

Every sector of the industry could remain on alert for some time. The Interstate Natural Gas Association of America, which represents the nation's interstate natural gas pipelines, sent out an advisory telling pipelines to be "more cognizant of security related issues" in the wake of these terrorist attacks. The Federal Energy Regulatory Commission said it would allow the pass through of costs related to stepped-up security.

Liz Johnson, a spokeswoman for Duke Energy's Texas Eastern Transmission (Tetco), said on Tuesday employees were "camping out in gas control and other departments for the duration."

A Nuclear Regulatory Commission (NRC) spokesperson told NGI that the agency has recommended to all the commercial nuclear power plants in the U.S., non-power reactors, nuclear fuel facilities and gaseous diffusion plants go to the highest level of security "purely as a precautionary measure." NRC spokesman William Beecher said that there has been "no credible threat, specific or general, against any of these facilities, but the NRC felt it was prudent." Beecher noted that all 103 commercial nuclear power plants in the U.S. were designed with their containments sufficient to withstand a direct hit from an airliner.

A spokesman for the Edison Electric Institute, which represents the nation's investor-owned electric utilities, said no incidents had been reported, but extra precautions were being taken. "We are getting reports from a number of our companies that while we're aware of no specific threats against the nation's electricity infrastructure, utilities are taking appropriate precautions -- namely, increasing security at electric facilities, both generation and transmission, and in some instances, non-essential employees are being released as appropriate," he said.

"What we are hearing is that security at all types of facilities, whether they be nuclear or fueled otherwise, that security precautions are being taken."

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