Incentives and profits for speculative trading are out, and traditional hedging and marketing centered on assets are in, according to the head of theWestern Power Trading Forum.

All the incentives for short-term cash markets are being taken away by the Federal Energy Regulatory Commission and state regulators as embodied in FERC standard market design (SMD), said Gary Ackerman, executive director of the 30-plus member WPTF. Price mitigation measures and price caps are being installed broadly, which for Ackerman “screws everyting up.”

Profit margins are going to be a lot more constricted, Ackerman said, so he thinks profitablity is going to be more along the lines of longer-term derivatives, three- to five-year packages and products. In Ackerman’s future environment, the middle man companies will buy from suppliers and repackage the supplies in different to ways for potential buyers.

“Some of the new intermediaries in the market are going to be a lot more conservative than some of the gunslingers you saw among those who pioneered the power trading sector,” said Ackerman, noting that is similar to what has happened in other industries.

Ackerman thinks doom-and-gloom analyses coming out of the financial and regulatory communities are a “half-step behind” what is happening at year-end 2002. Nevertheless, some respected sources, such as Fortune magazine, predicted bankruptcy for a number of major companies and a retreat “back to (the energy industry’s) roots: as a low-margin business dominated by power generators and local utilities.” He sees growth in the U.S. economy and accompanying growth in electricity demand kicking in by the second quarter next year.

“We’ve got a lot of things coming together in the first quarter next year, so by the second quarter, I think we’ll be looking at a totally different industry,” said Ackerman, “which is hard to believe when you are in the depths of a trough, but we know troughs.” He thinks the energy sector has reached bottom.

Rather than stepping back, Ackerman envisions the industry “stepping up” to refinancing what Fortune characterized as $600 billion coming due over the next four years. Most immediately, he says the AES Corp. refinancing set to be settled Dec. 15 could be a key indicator.

“That’s one where they are taking existing debt, stretching it out by paying half of it now and half in three years at higher interest rates,” he said. “That’s the one I am going to watch as being sort of the bellwether of what the financial industry thinks about the electric industry.”

Ackerman said he is very encouraged by the alliance of industry risk officers that is taking the initiative to address some of the industry’s credibility problems. He said this is an attempt by the industry to pull itself up “by the bootstraps,” and he is looking for more efforts from them and others. “They’re the best chance of providing leadership in an industry that has lost most of its leaders,” Ackerman said.

Most of the WPTF members are staying in the lobbying and trade association, and some new members from the public sector are joining, Ackerman said, noting he is currently adding more members than he is losing. “A couple have come from the financial industry, but the majority come from a combination of law firms, public power, and new entrants in the marketplace,” he said. (Seattle City Light and the City of Alameda, CA, are the two new public sector members.)

The public sector utilities, as well as others, are “looking for trading partners,” Ackerman said. “Our forum is the best way for them to keep abreast of who’s trading and who’s not.” Even members like Williams who announced they were disbanding their trading units are still doing some asset trading (as opposed to speculative trading); they have to, Ackerman said.

“When someone says they are getting out of ‘trading’, they mean speculative trading; you just can’t get away from trading around your own assets, especially in electricity.

“I think there is a turn, or transition going on in the Wall Street houses that recognize there is value in this industry and it is not going to die off,” Ackerman said. “We’ll see signs of that hopefully in the next couple of months.”

Currently, WPTF is keeping track of the market re-design work at the California Independent System Operator (CAISO), watching what Ackerman sees as a continuing “tension” between the desire for both mitigation measures and assurances of resource adequacy. “We wouldn’t need the resources adequacy discussion if we didn’t have the price mitigation (capping) measures,” he said. “One of these days FERC is going to have to stand up and figure out what they want.”

He acknowledged that the state-federal tussles over who has primary jurisdiction over resource adequacy isn’t helping the situation either. “This is a Gordian knot that is dying to be cut,” he said. “It is really hurting the industry’s attempts to re-establish itself on a creditworthy basis.”

Also high on the trading forum’s watch list are the three major California-related FERC proceedings on the refund issue, long-term contracts and the allegations that El Paso held back supplies to drive up the California-Arizona natural gas power price two years ago.

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