As James Wood, president and CEO of Babcock Borsig Capital put it, the state of the power business “is nothing to joke about”. Speaking at Power-Gen International last month (December), Wood reminded us of how tough a year 2002 was. What a difference a year makes. It was just over a year ago at the same event, that Texas congressman Joe Barton said: ” We have the most powerful economy today because we have the most successful energy market…”.
Those with a little more foresight than Barton could see the cracks were already beginning to appear with many acknowledging that the US bubble was about to burst. The Enron saga was also just beginning to unfold. Yet who could have predicted that the US bubble would not only burst but events in that market would have ramifications on a global scale? Wood pointed out that “in the first nine months of ’02 there were 100 downgrades”. Like most OEMs, the boiler manufacturers had been hard hit too. “Foster Wheeler is closing a New York manufacturing facility. Babcock has been looking for a new owner for a year. We have had to downsize but have retained core values to keep the business going,” said Wood.
Even the mighty GE, which has fared better than most in these tough times, has had to be prudent. According to Del Williamson, president of GE Power Systems global sales: “The US power generation business will go from being a $20 billion business to a $15/16 billion business next year. We have had to be flexible. For example, instead of claiming termination monies we would pick up incremental business from the client. But acquisitions will continue to be our strategy. In 2002 we did $1-1.2 billion in acquisitions. We will do $2-3 billion in 2003.”
Certainly we have seen a number of companies go out of business or swallowed up in a merger or acquisition. Last year simple survival, much less turning a profit, was a skill that most companies had to learn.
Rick Bowen, executive vice president of generation, Dynegy Marketing and Trade, summed it up in the opening of his speech when he said: “It’s great to be here. In fact it’s great to be anywhere.” Following the Enron scandal and the whole issue of round trip trades, Dynegy was one of a number of US energy companies that had been downgraded and under pressure to keep business going.
Yet it was heartening to see that a CEO of a company which has been under fire could still smile in the face of adversity. Bowen, humorously sporting a blue blazer with a red and white target on its back, was pragmatic enough to realise that the current state of the market was caused by what he called a “perfect storm” – but one which would eventually pass.
“The energy merchants were being blamed for California although the market was flawed from the outset. Then the Enron episode blind-sided the ratings agencies, who changed their analyses almost overnight. Companies were not given time to restructure. Risk management could not be executed. The agencies were causing the market to panic and traders were leaving the market. The ‘perfect storm’ scenario which hit California is now affecting the whole industry.”
So when will the bleeding stop? Bowen reckoned in 12-24 months. “Current power prices cannot be sustained for more than one more summer,” he said, “but FERC need to put in place mechanisms to avoid a repeat of California.”
Certainly the ghosts of California and Enron need to be laid to rest quickly if the industry is to get back on its feet and move forward.
Commenting on the issue of deregulation and state of the US market, Ms. Nora Mead Brownell, Commissioner of FERC said: “People have asked for a slowdown but let’s not forget the fragility of the old regulated market. The price of doing nothing is far greater than the price of doing something. Others have asked: ‘why don’t you hurry up? why is it taking so long?’ Well, we have a thing called ‘due process’. We will bring certainty to the market but in a deliberate way. We must make decisions with the customer and economics in mind and not politics. We also need to address the issue of how to balance competitive disclosure with transparency.”
The US and FERC needs to sort out its market sooner rather than later so that confidence can return to the industry and developers can return to a sound financial footing and get back to the business of building plant to meet demand. As Bowen pointed out: “Merchants make a up a good portion of generation [in the US], therefore politicians cannot hold our head under water for too long before we all stop breathing.”