At their height a year ago, the domestic natural gas and electricity trading arms of energy companies across the United States employed between 12,000 and 15,000 in front-, middle- and back-offices, many making well above average college-educated salaries. There were nearly 4,000-5,000 sales and marketing professionals, another 6,000-7,000 accountants and analysts, and 2,000 to 3,000 specialists, focusing on transportation and certain contracts. Today, energy trading units are shrinking rapidly, but they won’t disappear, a veteran energy expert said last week. They can’t, he said.

Energy traders will continue to exist, said analyst Ben Schlesinger, but the way they do business will definitely change, either through government regulation or self regulation. “I think the sector really adds value,” he said. “It is an extremely important function to make markets in an industry for a commodity that’s deregulated. Its function will continue to exist, no question, but it will employ fewer people.”

It’s still too early to predict what the energy trading units will look like, but Schlesinger said the changes will take much longer than the predicted six months. “Employment and value creation are two different things,” he said. “Sometimes, a highly successful marketing company would not necessarily be employee efficient. It doesn’t work. A lot of value creation is employment intensive. We’ll have to see what kinds of drops there are across the industry.”

El Paso Corp. already has announced it will cut back its trading arm 50%, eliminating 300 jobs. Williams plans large cuts from its trading unit. Aquila has announced layoffs but mostly in its utility operations. CMS Energy Corp. and Dynegy Corp. said they would reduce their work forces. Dynegy’s reductions will take place in the next two weeks. Schlesinger, however, wonders if the layoffs will come from the administrative side of trading, the sales force, specialists or across the board.

If there are drastic cutbacks, Houston will take the biggest hit, he said, estimating that at least half of the energy trading companies are headquartered in the city, and another 20-30% are employed in Houston by companies based elsewhere. “Sempra, Aquila and EnCana all have large trading offices in Houston,” he said. EnCana, headquartered in Calgary, already has closed its trading unit in Houston, with the loss of 100 jobs.

“The industry is going to be reshaping itself in a way that’s a different way of doing business,” said Schlesinger. “There will be more regulation…it may be in the form of data collection. As these things unfold, the shakeout will continue. There is going to be reform in the companies, and others will merge operations in order to accommodate the changes. Until the regulatory process and judicial process has evolved, which will give us a better indication, predicting what trading looks like will probably take longer than six months.”

Asked whether the current shakeout would have happened if the largest energy trader, Enron Corp., had not fallen into scandals and bankruptcy, Schlesinger told NGI that even without the former market leader’s failure, “something was bound to catch up with this business, and that’s not meant in a pejorative sense. Every business tends not to just keep happening in the same direction. Something was going to step in the way of the onrush of participants.”

He said he’s not sure what would have caused the downfall, but most likely it would have followed the California energy crisis in 2000-2001, which has resulted in investigations by federal and state agencies. “That has played a very big role in stopping growth now.”

As Schlesinger sees it, it’s not just the cutbacks in the energy trading units. It’s also the loss of many of the industry’s innovators.

“The people who invented this market as we know it now, [Dynegy Corp. Chairman] Chuck Watson, [Enron Corp. Chairman] Ken Lay, [CMS Energy Corp. Chairman] William McCormick, each for his own reasons, was unseated and what they were unseated for they had nothing to do with. It has taken a toll on a lot of fine people in this business.”

The hits across the sector have come quickly in the past few weeks. Dynegy spokesman John Sousa confirmed Wednesday that his company will begin laying off some employees in about two weeks, but could not specify how many. The company employs 6,200 worldwide, with 1,900 in Houston. “We continue to assess a number of alternatives, including possible joint ventures or sales of assets and businesses,” said Sousa.

Of El Paso’s announced 300 cuts, 150 of those will also be in Houston. Aquila, one of Kansas City, MO’s few Fortune 500 companies, has announced plans to eliminate about 700 jobs and sell assets to reduce costs. Some of those jobs also will be in Houston. And Williams says it will reduce its financial commitment to energy risk management services, a move that will involve an unspecified number of job cuts, mostly in Tulsa. Its risk-management unit now employs about 800. More announcements still are expected.

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