The energy industry is beginning to trust itself again, and while it may take time, in the end the producers want to produce, the consumers want to consume and “somebody has to take care of delivery” — which eventually will lead to a return of energy merchants, Chuck Watson said Thursday.

However, it will “clearly take an enormous amount of effort…to rebuild, rekindle and redo” the obstacles facing the industry, said the former chairman and CEO of Dynegy Inc.

Watson, who has been spearheading Houston’s successful bid to bring the Super Bowl to the city in 2004, spoke more like a quarterback than energy executive during a keynote speech at Hart’s Energy Markets executive forum on “Trading and Risk: Profit and Protection.” The energy industry veteran said “an enormous opportunity exists” for the energy industry to rebuild itself, but “it will take the players banding together to make it work” above any other effort.

“Customers want their choices back. We’ll regain that and the financial markets will see that over time. It may take three or four or five years, and the physical players may lay off the risks to the financial players in the future. There are all kinds of models. And we may not see a lot of physical players. We may see a different type of player. But we’ll see a new model…a successful model.”

Watson, who was named chairman of Eagle Energy Partners Inc. earlier this summer (see NGI, July 7), offered up a huge helping of optimism for the future. He did not pin the problems of the sector on any particular occurrence in 2001 or 2002, but said it was a series of things, combined with the stinging downgrades by credit ratings agencies in the first and second quarters of 2002 that had clearly taken their toll.

Drawing out a timeline, Watson began with the California energy crisis and resulting investigations followed by Enron Corp.’s bankruptcy in November 2001. The California crisis, said Watson, was the fault of the “entire infrastructure, not one person, not one party. It was the worst case of a lack of attention to infrastructure.” With Enron’s demise and California’s problems, “equity was lost, jobs were lost, but people were still getting their gas and power” with few problems going into 2002.

However, the hits to the energy merchants really began, he said, when the “ratings agencies cut everyone down at least one tick. It was like they cut the legs off and then wanted to see if we could still walk. What we found was that we couldn’t sell our bad stuff quick. We could only sell our good stuff quick.” Which, in turn led to more downgrades the following quarter.

In the second quarter of 2002, with more downgrades of the energy merchants, Watson said the ratings agencies “cut our heads off and told us to breathe.” However, he noted that despite all of the problems, there still were “not a lot of bankruptcies. That’s because on balance, we have good people, good assets and that’s even after selling the good stuff at discounted prices.”

Since then, however, most of the former merchant players are out of the business, which has created a “real, real significant problem.” Watson said it was ironic that experts worried about the slow build up of gas storage last year. “Who did they think filled it up? The producers had to step up, and no wonder we were late filling storage. The customers owning storage are totally different than they were before.”

Now that the energy merchant business has been decimated, Watson noted that “volatility has almost doubled from the late 1990s…markets are not very efficient or very effective.” However, “industry is going to have to fix its own problems. We’ll get some help, but in the end, industry is the only one to fix the problems.” It will take time, he said, but “we’re already seeing that trust again. That’s the first thing we have to get over. And it’s clearly happening.”

The 30-year energy industry veteran said it has been difficult for him to “see the industry trashed” in the past two years. “It hurts to see the industry like this, the loss of jobs.” However, Watson encouraged the luncheon crowd to “not be pessimistic about where we’re going. There will be physical infrastructure, new players…but it has to come back. You’re back…I’m back…and I’m damned excited about the future.”

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