Searching for good news: energy providers shot themselves in the foot. (Editorial).(Brief Article)

Not so long ago, energy companies like Enron, Reliant, Calpine, and others were market darlings, well positioned to profit from a nearly insatiable demand for a product in short supply. California, it was thought, had botched deregulation, but energy providers there could profit anyway. In states like Texas, it was agreed, customers would soon line up to buy electricity from merchant providers; other states would follow. The Vice President of the United States even suggested that the nation's long-term energy strategy would require the building of at least one new power plant per week for the next 20 years. What greater endorsement could be had?

No one could explain the value of dot-corns, which were traded irrationally and exuberantly. These companies had no earnings, so old-fashioned frames of reference like P/E ratios could not be used to evaluate dot-com investments. Still the rising stock market seemed to lift all investment accounts.

In comparison, investors saw energy companies as safe investments, perhaps because of their conservative utility pasts or perhaps because of the record earnings these companies announced at regular intervals.

How could things have gone so wrong?

You know the gory details. The dot-coin bloom lasted most of a decade, and as the air went out of that balloon, investors also soured on the once-safe energy stocks, which were now perceived as tainted by the on-line energy-trading scandal. Enron was shown to be wearing no clothes. Being forced to restate its earnings downward for a number of quarters, led investors to lose confidence in the firm, which exacerbated a serious situation. The firm declared bankruptcy, but things only got worse at the scandal-engulfed company. Allegations that other firms had engaged in practices such as mark-to-market accounting, wash trades, and market manipulation left the whole energy industry standing naked and accused by the market.

Standard and Poors has wondered whether energy traders can ever be considered sufficiently creditworthy to conduct business. Skilling, Lay, McMahon of Enron are all gone. Other top executives have been forced out, and more than one person has taken his own life over the industry scandals. I fully expect that California will be getting energy rebates because of the conduct of utilities in that state during its energy crisis. FERC has threatened a number of energy marketers with loss of ability to compete in deregulated markets because of their failure to provide requested records.

The capital situation is so bad that merchant power providers have been canceling turbines ordered for plants needed to meet demand that may never materialize. Somewhere between 150,000-160,000 megawatts of capacity has been cancelled, postponed, or tabled. Investor confidence in these former media darlings couldn't be lower, which deprives merchant builders of the financing necessary for capital construction. Calpine's response has been typical; it is cutting capital ...