Ground Floor/Sheila O'Flanagan: Probably quite a number of US and Canadian citizens were wishing that they too were located on the ground floor last week.
Great though it must be to have the corner office on the sixty-fifth floor of a prestigious downtown building, it wouldn't be my favourite location when the lights go out and the lifts stop working. No doubt some of the people who had to tramp down the stairs have expensive gym memberships where they spend hours on the Stairmaster achieving the exact same effect.
Losing electricity puts you in touch with the world around you, though not necessarily in the way you might have thought. I'm still gobsmacked by the pictures of New Yorkers spending the night on the steps of the post office because they quite simply couldn't get home. More than anything, I guess, it showed our dependence on electricity and power in all aspects of our lives. (And though I've never been anticipating massive power outages here, one of the reasons I live close to the city is that I like to think that I'm within walking distance of my bed if the worst comes to the worst!)
Unlike the bond and equity markets, which feature daily on news reports, even though sometimes they're mere asides at the end of a main bulletin, energy trading rarely gets mentioned. Of course it's a somewhat thorny subject since the demise of Enron and the whole Californian energy debacle of recent years.
Nevertheless, the market is worth about $13 billion (€11.7 billion) a day - well down, however, from its 2001 levels of $200 billion a day.
But since Enron, half of the top 10 energy traders have left the market and an estimated 10,000 people have lost their jobs, even though insiders still believe that it's a market with enormous potential given the anticipated levels of demand over the next 10-20 years. Trading contracts are usually in gasoline, natural gas, crude oil, heating oil, propane and electricity. It's still a difficult trading environment, though, because the energy market itself is perceived to be less liquid and less transparent than many of the others, and confidence in the participants took a big knock when Enron filed for bankruptcy.
They weren't the only firm with problems - another energy company, Dynegy, recently saw two of its former executives plead guilty to charges relating to dodgy accounting, which falsely boosted profits (as well as giving them a $79 million tax benefit). At the same time, another former trader in the company, Michelle Valencia, has been charged with falsifying gas trade information to industry publications in an attempt to manipulate prices.
Reacting far more speedily than the energy companies themselves last week, real-time spot prices for power in NYC soared to $1,051 per megawatt hour on the Friday morning after the blackout from an average price of $123.81 per megawatt hour the previous day. They settled around $169.50 afterwards. I'm pretty much in the dark (sorry about that!) myself when it comes to energy trading but I can see some fingers getting burned in those particular price movements.
There was a knock-on effect, too, on oil prices which have been edging higher anyway in recent times and are now trading in and around the $30 per barrel level again.
Deregulation has been the main driver as far as energy trading is concerned since it has meant that cities and companies can choose the supplier of their electricity. Competition in itself is not a bad thing but as the earnings of different suppliers increased and they saw their share prices rise, they found themselves taking more and more risky trades on board to try to enhance the bottom line.
Just the same as in every situation where traders and management look for the icing to become the cake itself, it was an accident waiting to happen. Lots of US energy companies have high levels of debt, all of which mature in the next few years and, unfortunately, have provisions where renewal will be at higher interest rate levels if those loans get extended rather than repaid and refinanced.
However, the scepticism with which the investor community now regards the energy companies - many of whose debt was downgraded to junk by the agencies - mitigates against refinancing at advantageous prices.
The US has found that although demand for electricity has grown dramatically over the past 10 years, the infrastructure that delivers the power - sometimes across vast distances - hasn't managed to keep pace. According to the Electric Power Research Institute, demand for power in the States has grown at double the rate of its transmission capacity. George W's wake-up call has clearly come after pressing the snooze button, however, as Republicans voted down Democrat proposals back in June 2001 to offer $350 million in federal loans to update the power grid.
Since the mess in California where power blackouts were becoming the norm rather than the exception (and where you can log on to your provider to find out how likely it is you'll be cut off during the day), the San Francisco Board of Supervisors has approved a joint energy-efficiency pilot project with Pacific Gas and Electric and the San Francisco environment department designed to increase reliability by reducing peak demand. But in a country which prides itself on a 24/7 lifestyle, peak hours keep on expanding.
Given the enforced changes in the industry, the market in energy trading has begun to shift somewhat from the producers to the investment banks that have invested in the actual plant as well as beefing up their trading. However, they seem to have faced similar problems - Merrill Lynch pulled out of the market a couple of years ago and its former chief energy trader is under investigation for allegedly embezzling about $43 million.
Cool dark room, any one?
