John J. Stauffacher
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Transcript of John J. Stauffacher
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Energy Markets at Crossroads:Has Deregulation Failed?
International Association for Energy Economics
John J. Stauffacher
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Electricity:a Market in TransitionOne foot (at least) firmly planted in the pastMuch uncertainty from lack of clear directionThe good old days and stranded costs
Part of the political price that had to be paidDistortion of competitive optionsHidden agenda for many participants decisions
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Electricity:a Market in TransitionDeregulation or restructuring for a competitive market?
Limbo of neitherLegislative indecisionJurisdictional turf battles
Market failures or failure to let the market work?California—leaping the chasm to two boundsFailure in confidence in markets and participants
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Electricity Market StructureNew state legislation often mandated or encouraged functional unbundling
Addressed market power concernsQuantified value of generation assetsBrought in new players and new ideas
Sellers marketExisting assets allowed fast market penetration Higher prices minimized stranded costsNew facilities faced many barriers
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Financing new Infrastructure- an evolution of lending philosophy
Rate base assurances—just be Just & ReasonableNew entrant QFs and IPPs—relied on obligation to purchase or LT contractMerchant plant—non-recourse project debt, high leverage
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Financing new Infrastructure- an evolution of lending philosophy
Late 1990s shortages and price spikes (signals) brought a wave of investmentPrices for divested generation escalatedReality of slow demand, over supply and resultant lower electric pricesYear Avg Sale Price X Book2000 $430/kw 1.82001 618 1.7
2002(10 mon) 305 1.7
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Financing the industry- can electricity survive a
“boom/bust” cycle ?
Political will to let prices reflect supply/demandRegulatory certainty in the treatment of purchased powerMaintaining sufficient market number of healthy participants
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Financing the industry—the Role of the Rating Agencies
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2000 2002
upgrade
down-grade
Rating Agencies credibility suffered big time from the fall of EnronElectric Industry paying ever sinceElectric industry “taint” and “headline” risk
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Financing the Industry—Rating Agencies and the
Financial MarketsA “credit Armageddon” looms?Major problems ahead- $90B of refinancing by 2006 (20% non-recourse)Adverse off shore experience draining many deep pocketsBuyers market but few buyers—is market power the next major problem?
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Sorting it all out—Can a healthy Electric Infrastructure emerge?
Project debt collateral is the facility itself—an efficient, clean and generally well located facilityUnder resourced load pockets exist—despite NERC’s rosy forecasts—24% reserve margin by 2005But, investment in Transmission infrastructure seriously lags
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FERC’s Answer to the Transition: Standard Market Design
Goal to create a seamless transmission market under a single tariffAddresses congestion through LMPTackles key issues including congestion revenue and resource adequacyNatural gas has shown it can be done
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FERC’s Answer to the Transition: Standard Market Design
Pat Wood-“the status quo is wrong if [it] overrides the
Federal Power Act requirement to treat all transmission customers the same”
Nora Brownell- “political pressure can not change the
reality that significant change is needed to ensure investment to meet both our short terms and long term transmission and generation needs”
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FERC’s Standard Market DesignMany vocal opponents and proponents
Strange bedfellows—EEI and NARUC, EEI and NRDC
Jurisdictional questions heatedRegional differences toutedTimeline and likely judicial challenge
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Railroad Standard Gauge- a regional differences analogue
Prior to 1880’s both narrow and wider gauges usedTechnical argumentsRegional argumentsEconomic interests
Eventually a uniform “standard”gauge was accepted—4 foot 8 ½ inches—the uniform width of Roman war chariots wheels
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Industry Response to Current Crisis
EPSA Code of EthicsCCRO White Papers on Best PracticesWithdrawal from Power/gas marketingDeferred or canceled capital additionalFocus on cash flow and balance sheetSale of assets
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EPSA Code of Ethics and Sound Trading Practices for Electric Power
Suppliers
• Defines and reaffirms the values, principles and internal controls that electric power supply companies must follow
• Complements the internal principles and practices of each individual company in supplying power, managing risk, providing market liquidity and reporting financial results
• Assures that unethical trading practices are not tolerated and that public disclosures are accurate
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EPSA Code of Ethics Guiding Principles
IntegritySound Trading Practices and PrinciplesCandid and Complete DisclosureComprehensive Corporate Compliance
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IntegrityBusiness activities should be conducted in an
honorable and principled manner consistent with the Code’s ethical standards and sound trading practices• Engage only in transactions with legitimate
business purposes, such as managing business risk or that otherwise have economic substance
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Integrity (cont)• Honor contractual obligations • Maintain risk management activities designed to
ensure that power-trading activities are conducted in accordance with this Code
• Report financial results so as to fairly present the financial health of the company
• Not engage in any transactions intended to boost revenues or volumes artificially, or intended to manipulate market prices
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Sound Trading Practices• No unlawful withholding• No creation of artificial congestion• No intent to offer and not provide reliability
services• No “wash” trades• No misrepresentative trading
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Candid and Complete Disclosure• Provide accurate and transparent market and
transaction information• Adhere to procedures to ensure that all trades are
properly and timely documented and that no trades are concealed or misrepresented
• Maintain documentation on all transactions• Ensure that any public information is accurate and
consistent• Continue to cooperate with regulators in their
oversight of market operations
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Comprehensive Corporate Compliance• Maintain a compliance program that will assure
appropriate, timely and ongoing review of power trading activities in compliance with this Code
• Personnel training on the provision of this Code and the company’s risk management policies
• Encourages employees to disclose to senior management any trading practices that might violate this Code
• Establish clear lines of accountability for the company’s power trading practices with appropriate oversight by the Board of Directors or other senior corporate management committee
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Committee of Chief Risk Officers Best Practices Papers
Governance—separation of functionsValuation and risk metricsCredit risk Disclosure
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Will the Industry Response be Sufficient?
Self policing a necessary first stepShrinkage gas/electricity trading volumes a reality but bottom may be nearDeferred and cancelled plants starting to be a concern and gain policy attentionA more conservative approach to economic fundamentals and reporting is here to stayLess out right sale of assets—more debtor in possession
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John J. StauffacherConsultant to the Energy Industry
Contact information:Phone- 281-438-1400Cell- 713-299-5766
e-mail [email protected]