Energy Trading Goes On, But Buyers Are Smarter

The trials and tribulations of Ash Grove Cement Co.'s Montana plant illustrate how deregulation initially went wrong, how Enron briefly took advantage of it, and what has happened since Enron's collapse.

In 2000, the plant was scrambling for reliable electricity. Thanks to deregulation, Montana Power Co., the local electricity utility, had been allowed to sell all its generating plants and transmission lines and invest the proceeds in a fiber-optic network; soon it would go bankrupt. The company that had bought the generating plants, most of them hydropower plants in the area, was under no obligation to sell the power to Montana; it could sell the electricity anywhere on the grid for the highest price it could get.

Meanwhile, customers like Ash Grove were desperate. A cement plant, which consumes vast amounts of energy, cannot be turned on and off like a light bulb. It needs to run all day and night. So the cement maker leased costly oil and diesel generators and put them on rail cars near the plant.

Then along came Enron, a former oil and gas pipeline company that said it was making 80 percent of its profit from trading electricity, oil, natural gas and even broadband capacity. Investors loved it. It seemed like a good, reputable alternative.

Enron offered to sell Ash Grove power at a price four times what the cement maker had paid the old Montana utility. At least the power was available, the cement maker thought. Then an Enron executive called to offer a 5 1/2 -year contract, with the first six months at twice the old rate and then five years at close to what Ash Grove had paid in the past. The Enron executive gave Ash Grove just one day to take it or leave it. The company took it. Six months later, Enron collapsed and couldn't deliver.

That wasn't the end of the story. Since Enron vanished, Ash Grove has become part of the new system of buying and selling electricity. Now it buys on medium-term contracts and thinks about whether its suppliers have generating plants and the ability to deliver. Ash Grove now buys power from Pennsylvania Power & Light Co., which bought the old Montana generating plants. The cement maker has a one-year contract, which expires in December, when it will shop around for prices it hopes will be lower. Neither Ash Grove nor PP&L is obligated to do business with the other again.

"Things have basically returned to lower levels," said Jack Ross, Ash Grove senior vice president and general counsel. "You don't have the type of business entity that basically gamed the system. You are able to get power from a number of sources. Though the prices are not particularly attractive, they're reasonable enough to turn a profit on.

"Probably like many buyers, we're unwilling to go into something long-term for fear that we're going to end up on the short end of the stick. We've been burned."

The main hangover from the crisis of 2001 is that Ash Grove and Enron are still fighting over the contract; Enron claims that Ash Grove owes it $5 million. The Enron trader who signed the contract, Timothy Belden, pleaded guilty to wire fraud for participating in schemes to game California's power markets during the state's energy crisis in 2000 and 2001.

Across the United States, more and more businesses are buying electricity at negotiated rates rather than simply accepting the regulated rates of the past. Many residential customers have had prices dictated by auctions held by local utilities, even if related subsidiaries end up with winning bids. Recently those auction prices have been high, prompting calls for re-regulation of utilities. But that seems unlikely.

"For 20 years there's been a movement toward markets. That horse has left the barn," said Martin Cohen, director of consumer affairs for Illinois Gov. Rod Blagojevich (D). "So much of power generation is held by non-utility companies, there's no turning back to a regulated utility model."

Instead, regulators, many of which approved auctions for three-year electricity contracts (as in Maryland), are using a series of auctions in successive years to spread out payments and smooth out energy-price fluctuations.

What went wrong with Enron? Fusaro said it was mostly about Enron. "They were a company swimming in debt. It had nothing to do with energy trading. They had good risk analysts. But they made a lot of bad investment decisions and tried to hide their losses."