Remora

The magic of the market place in the hands of the magicians

LI has the long, grudge-laden memory you'd expect from a disappointed loner and potential assassin. Meaning I review for a living. But nothing has tickled us so much, in the hours of bile that precede dawn, as the news about the energy markets. For if, like me, you were reading the biz press in the nineties, the Daniel Yergin crowd, the Larry Summers crowd, well it just seemed super-evident that when we give power to the power companies, a veritable cultural renaissance would ensue, a happy coordination of supply and demand that would reward stockholder and consumer alike!

It was bliss to be a free trade ideologue in those days. The epicenter is still the Cambridge Energy Research Associates, a think tank associated with Daniel Yergin. The think tank has issued a report that recommends ... further deregulation! Of course, with 'structure" this time, maestro.


�The power business in the U.S. is too important to continue to restructure on a trial-and-error basis. Pragmatism should prevail over experimentation in power market design,� said Francis X. Shields, Accenture, Partner in the Competitive Energy Markets practice. �The focus should be on markets that do work, not those that do not�.
�The power industry is at the crossroads of three paths: it can continue to muddle along the path of experimental deregulation, backtrack to comprehensive regulation, or move forward to power markets that work,� Shields said. �The United States needs to avoid slipping back to the �devil it knows� � comprehensive regulation. A move forward requires accepting that power markets are complex, unlikely to evolve on their own accord, and need structure to work properly.�

And what does it mean, this "needing of structure"? We like CERA's last recommendations best:


"Coordinate wholesale and retail transitions � Big bang deregulations are too risky in an industry as complex as electric power. In moving to wholesale markets, vesting contracts that expire gradually over the first years of the market to provide time for participants to move up the learning curve. Once wholesale markets are in place (which may include large industrial and commercial customers), retail markets should be opened as quickly as possible, but in phases to reduce the technical stress on the system. The first phase can include large industrial and commercial customers participating at the opening of the wholesale market.

Minimize distortions of market price signals � Price caps have the effect of distorting economic activity in any market. If wholesale price caps exist in any form, they should be set above the highest possible incremental cost of production. Similarly, price freezes at the retail level should be thawed in order to reconnect demand to the market. Prices need to convey information clearly in order to coordinate economic activity in a market. Governmental public policy objectives -- such as fuel mix, rural cross-subsidization, obligation to serve and low income initiatives � should be kept independent of the spot and forward trading mechanisms in the wholesale market, and be clearly identified as separate charges on consumers bills in the retail market."

Those transitions can be tough, especially when dealing with large scale customers, like businesses. So you can always lay off costs on your small, atomized customers -- let's call them residences. And then, of course, it is very important not to have to deal with any price curbs that might impede this kind of gouging. We love it, we love it...

We especially love the gobbledygook about prices as information. This might be of interest to Dynegy, Reliant or CMS. The CEO of Dynegy, Chuck Watson resigned today, in light of revelations about, well, chatter on the price party line. Chuck has had a wild ride since December -- buying and then unbuying Enron, getting touted in a Forbes cover story and now getting dumped by the board:


Watson was the second CEO of an energy trading company to resign in less than a week amid federal inquiries into simultaneous power swaps between energy traders that artificially boosted trading volume and, in some cases, reported revenue. William T. McCormick Jr., chairman and chief executive of CMS Energy Corp., announced his resignation Friday, less than two weeks after the company admitted conducting energy trades it used to falsely inflate revenue by more than $4.4 billion.

The swaps, dubbed "round-trip trades," involve simultaneous swaps of electric power for the same price and have been questioned by the Federal Energy Regulatory Commission and the Securities and Exchange Commission. Dynegy, a one-time suitor of bankrupt Enron Corp., disclosed earlier this month that the SEC is looking into similar trades made by the company last fall. Dynegy said it conducted the trades to test its system and that they didn't yield any profits for Dynegy or its trading partner. "

Somehow, I have a problem trusting the word of an energy trading company about what does and does not constitute profit. Dynegy had a little problem with that category itself, as well as with the preserving, with the appropriate sacred rites, the holy nature of the information-price dyad, according to a Reuters report last month:



"Dynegy used an arrangement called Project Alpha to address a growing gap between cash flow and net income and to cut its tax bill, the Wall Street Journal reported on Wednesday.

Dynegy officials told the Journal that Project Alpha was aimed at guaranteeing a stable source of gas.

The newspaper report said Dynegy created a partnership that entered into a five-year gas-trading contract with a special-purpose company. During the first nine months of the contract, the partnership bought gas at below-market prices, yielding profits; during the remainder of the contract, the partnership paid above-market prices, producing losses.

Dynegy used the losses to narrow the gap between its cash flow and net income and to reduce its taxes, according to the report.

The Economist, a magazine that has bought its ticket for the the privatization ideology and never looked back, has an interestingly skewed story about the appalling dishonesty -- I mean, the financial innovations -- of the power brokers and their ilk.



"EVER since Gray Davis, governor of California, locked his taxpayers into exorbitantly expensive, long-term electricity contracts at the height of California's energy crisis, his staff have worked tirelessly to pin the blame on somebody else. The collapse of Enron helped, in a general way, to divert attention. Until recently, however, the energy trader's bankruptcy had given little impetus to Mr Davis's allegations that energy traders had fleeced California by illegally manipulating energy prices. Now Mr Davis has found succour at last. Two new regulatory investigations and collapsing investor confidence have left the industry flat on its back.

On May 13th, Kaplan Fox & Kilsheimer and Wolf Popper, two law firms, filed suit in San Francisco against a number of energy suppliers on behalf of Californian taxpayers. The suit alleges that long-term power contracts have forced consumers to pay $9.1 billion more for energy than they would have done at �proper� market rates, and that over the next ten years the gap will be even bigger. "

Talk about an odd way to slip in a fact inconvenient to your mindset. Or a set of facts, a whole world of facts.

Lets sum it up and get on to some real work. When the magicians are minding the magic acts, expect tricks. Or as My Life with the Thrill Kill Kult once asked, what do you do when "no one's there to spy on you?" Why, you trade gas at below market prices, mislabel the transactions for tax purposes, and make it up by trading at above market prices, thus conveniently benchmarking for further trades, that's what you do! It's just business.