The scandal-ravaged natural gas and electricity industries have hit bottom and are now in a recovery mode, said the head of the Committee of Chief Risk Officers (CCRO) last Wednesday.

“I think we are coming out of the bottom, but how long that recovery will take is anybody’s guess,” noted Michael L. Smith, the CCRO’s executive director, during the NGI-sponsored GasMart/Power 2003 conference in New Orleans. “The critical thing is how do we get capital markets and investors to return” to the energy sector, he noted, adding this could take up to 2-3 years.

Smith believes the bottom occurred when there was overriding fear that certain companies — Dynegy and Reliant Energy, for example — wouldn’t be able to refinance their maturing debt, which would have prompted a “cascading series of [more] bankruptcies.” But the two companies successfully refinanced, and the worry of more bankruptcies subsided.

The energy industry “now is taking the necessary actions to recover,” Smith said. The pace of the recovery will hinge on how quickly energy companies adopt the “best practices” standards proposed by the CCRO to restore market credibility, he added.

“Confidence is going to be restored” in energy markets, Smith said firmly. The key question is how much of it will be done by the industry, and how much by government regulators. He believes energy companies should fix the broken market, not regulators. “They [regulators] don’t really want to do it” anyway.

The CCRO, which is made up the chief risk officers of 30 energy companies, proposed “best practices” standards in a number of areas, including natural gas price indexes, credit clearing, information disclosure, capital adequacy and the segregation of corporate duties (governance). The objective of the CCRO, which was formed more than a year ago, is to restore confidence and credibility to the beleaguered energy markets.

Smith said some “best practices” standards are being more readily accepted than others. A “significant amount” of companies have adopted the “best practices” standards relating to governance, he noted, adding that he also was “very impressed” with the number of companies endorsing the credit clearing “best practices” standards.

The proposed standards for price indexes — which call for energy companies to report transaction-specific data to index publishers, such as counterparty and buy-sell information — have had a “noticeable effect on the comfort” of the industry as well, Smith said.

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