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Outlook for Merchant Energy Sector 'Improving,' Says S&P

An industry profile published by Standard & Poor's recently found that the energy merchant sector is stabilizing and could face better prospects ahead.

The subsection Energy Merchants: an Industry in Repair explains that a combination of events should help shore up the industry:

• Clarifying exposure to potential refund liability resulting from the California energy crisis;


• An improvement in regulatory certainty as it relates to contract certainty;


• The success firms have found in refinancing their short-term debt; and,


• Reforms proposed by the Committee of Chief Risk Officers (CCRO).

"Despite its allegations of wrongdoing and its negative tone, the FERC report (issued on March 26, 2003) heralds an improving outlook for the beleaguered energy merchants. California officials had been demanding refunds of close to $9 billion. In Standard & Poor's view, such large claims would be hard to justify. Yet, now that refund exposures have been better defined, we believe that creditors and investors will be more likely to look favorably on the energy merchant group," the report said.

A major factor, Standard & Poor's said, has been the ability of most merchant power generators to refinance their short-term debt. This recovery would not be possible if these refinancings had not been achieved.

The report also highlighted a couple of potential reforms such as the use of a central clearinghouse for trading and improving price reporting to natural gas indices. The CCRO estimates that the use of multilateral netting agreements (i.e. aggregating collateral needs across numerous counterparties through a single clearinghouse that has many members) could reduce the industry's collateral requirements by 75 percent to 90 percent. The committee also said improving reporting practices will boost confidence and make the process more transparent.

The report suggests that positive progress on all of these fronts bodes well for the competitive power industry, even though Standard & Poor's notes that it may take many years to achieve the industry's "past glory."

"Standard & Poor's continues to believe in the integration of energy marketing, unregulated power plants, pipelines, natural gas storage, and other energy assets - albeit with an appropriately balanced and financed business model," the report said.

For more information, contact EPSA's Douglas Austin at daustin@epsa.org, or (202) 628-8200.