Profiting from the darknessgreenspun.com : LUSENET : Grassroots Information Coordination Center (GICC) : One Thread
Profiting From the Darkness California’s problems have created a lucrative opportunity for energy companies. Unfair? Maybe. But don’t expect mercy from markets NEWSWEEK
May 14 issue — When it comes to football, “piling on” a player who’s already been tackled is a major penalty that can set your team back a long way. But when it comes to markets, piling on by taking advantage of the weak is called “opportunism,” and it can get you a big bonus.
WHICH BRINGS US to California, where piling on enfeebled utilities and customers by power generators and power traders has become a way of life. Thanks to the idiotic way that California deregulated its electricity markets, the generators and traders of powe in California have been making a fortune because electricity costs have gone through the roof.
Meanwhile, consumers are getting pounded rather than protected, economic instability is spreading throughout the Western United States and some of the utilities that distribute power to customers are getting clobbered. One big utility, Pacific Gas & Electric, has already gone broke and others may soon follow.
But while the market has produced a horde of losers—California’s wholesale power bill is running at 10 times the level of two years ago—there is a handful of big winners: companies that generate or trade power in the California market. Among the winners: Calpine, whose first-quarter profit quintupled, compared with last year’s; Reliant Energy and Williams Cos., whose profits more than doubled; Mirant, up 84 percent, and Dynegy and Duke Energy, whose wholesale power profits doubled and quadrupled, respectively. Enron, the nation’s biggest energy trader, had a 75 percent increase in wholesale-services profits, but says little of that was from California.
Some of these companies’ profits would have risen far more—Mirant’s would have quadrupled—had they not taken big earnings hits to cover the risk of not being paid for some of their California sales. If they finally get paid, their profits will be outtasight. You can see why some of these companies’ stocks have heated up as California melted down.
To be fair, you can’t attribute these entire increases to California —but you can be sure California accounts for a good portion of them. There are other, less obvious winners, too. Among them: the unregulated subsidiaries of some companies that own California utilities; aluminum producers that are making more money by closing their plants and selling their power allotments than they would have made by producing aluminum; farms that find it more profitable to resell electricity than to grow crops; and, in general, anyone in the Western United States or Canada with an electron to spare and some way of getting it into California.
I’m not saying that these companies are immoral for making a fortune by taking advantage of California’s problems. Breaking the law by creating an artificial shortage—which has been alleged, but not remotely proven—would be immoral. Taking advantage of a situation? That’s what’s known as amoral—having no moral values, either good or bad. It’s not nice, but it’s perfectly legal, and it’s the way market players are expected to act.
So when California Gov. Gray Davis said last week that he was planning to have a “heart to heart” talk with California power generators, you just had to laugh. Because when it comes to business, those people have no hearts. They’re not supposed to.
What created the problem in California is not only deregulation, but a stupid deregulation plan carried out ineptly: the Kilowatt Keystone Cops, as it were. California put a cap on the rates that utilities could charge customers, but until recently, it forced utilities to buy all of their power in the short-term markets. The utilities foolishly agreed to this deal. The problem: short-term markets are notoriously volatile. And notoriously ruthless. If there’s a small surplus of power, you have desperate sellers trying to sell power, which can’t be stored.
But if there’s a shortage, everyone piles on. Had California utilities been allowed to do the rational thing and buy most of their power in long-term markets, they would have paid more initially, but they and their customers would be in far better shape now. Compounding the problem is that while the state deregulated the wholesale rates the utilities paid for power, they capped the retail rates utilities could charge.
Combine that with total reliance on the short-term market and—voila! —you’re totally at the market’s mercy. And markets have no mercy. In the old days, when utilities were regulated, there was often waste and inefficiency, but power was reliable and utilities cared desperately about keeping the lights on.
Now, we have markets that don’t care about anything. Someday, markets may give us total reliability at a cheaper price than regulation would. But in the meantime, get used to the piling-on concept. Just hope you end up on top of the pile. With Kevin Peraino. SLOAN is NEWSWEEK’s Wall Street editor. His e-mail address is firstname.lastname@example.org. © 2001 Newsweek, Inc.
-- Swissrose (email@example.com), May 09, 2001