The managing director of Fitch Ratings Global Power Group said Friday that the U.S. wholesale gas and power marketers have a “heady cocktail” in front of them, in light of regulatory investigations, accounting irregularities and, for most anyway, a massive flight of investors. Those under the most scrutiny, said Richard Hunter, have “undermined the stronger companies.” And he added that a more liquid market “will not happen anytime soon.”

The remarks came in a Fitch teleconference centered around the recent developments within the U.S. wholesale markets. Several of the rating agency’s analysts discussed the key liquidity issues facing some of the “larger participants” in the marketplace, how they determined recent rating actions, as well as the “key determinants” for ratings going forward.

“No one can be in any doubt that this is a time of extreme stress” for the energy traders,” said Hunter. Still, he assured analysts that energy trading will not go away, even if some of the players falter. “We do believe there are many companies that will grow out of this, stay out of debt and remain stable as a result. We expect to see a consolidation with fewer players with stronger balance sheets.” But Hunter said, “there is always going to be a trading and marketing component for the asset business. In many cases, it is very difficult to separate those two, and it may be difficult to close out trading operations. There will continue to be trading in the future.” However, a more liquid market will not happen anytime soon, Hunter added.

Though not commenting directly on whether the problems within the sector will spread across the wholesale market and force stable and financially sound companies into bankruptcy, Fitch’s Ellen Lapson pointed out that the “systemic risk that exists is already playing out. There are fewer counterparties to play with; but marketing and trading companies are in the best position to deal with that kind of risk. I’m pretty well confident that marketers and traders are reducing their exposure to those they lack confidence in, and are going with those in a good position to manage risk. I would be surprised if we see a huge spread of default in that way.”

The companies “more at risk” than the energy wholesalers, she said, are “those without the benefit” of a marketing and trading function within their companies. That includes “normal power suppliers, IPPs, or utilities that have contracts with marketers, and then the marketer defaults.” Those companies are at much higher risk, she said. “Marketers and traders have the ability to terminate their exposure, which is not shared by normal commercial contracts.”

During Enron Corp.’s bankruptcy, said Lapson, “we found that while the marketing and trading counterparties were willing to exercise options in master netting agreements, they could terminate and rehedge themselves. A utility or power generator who had a normal commercial contract was stuck holding the bag.”

Fitch will publish a summary of the teleconference on its web site on Monday at www.fitchratings.com.

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