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Financial In Market Volatility tends to be good for traders, and last week's blackout sent some power prices soaring on Friday, creating profit opportunities for some of the nation's biggest energy traders.

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Oriental Trading But industry experts say they do not expect energy traders to rake in unusually large profits from the blackout that swept through parts of the Northeast and Midwest.

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Financial Forex Forex Software Power prices in the Northeast surged on Friday, the day after the blackout, to more than $1,000 a megawatt-hour, up from the average price of closer to $100. But they dropped back close to their normal level.

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Trading Regulators and other market administrators plan to scrutinize those isolated price surges, and they could adjust or even cancel many of the trades.

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Trading Financial System Still, the situation is nothing like the California energy crisis in 2000, when big power traders like Enron were accused of reaping huge profits from the state's energy problems, and perhaps even exacerbating the power crisis by engaging in aggressive energy trading tactics.

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Day Trading Today, Enron which is struggling to emerge from bankruptcy protection does not even have an energy trading operation. Other big energy traders like El Paso Corporation, Dynegy and Aquila Inc. have also left the energy trading business after a series of accounting and trading scandals that trickled out after Enron's collapse in late 2001.

Forex Financial Trading The The major forces in the energy industry these days are not big natural gas and power companies but large banks like Goldman Sachs, Morgan Stanley and Citigroup.

Fortune Make Option Trading Indeed, Wall Street banks moved more aggressively into energy trading when some of the big energy traders pulled out with huge debt loads. And they often moved into the market with stronger balance sheets and the backing of hard assets, like power plants.

Science Of Financial Market For instance, last April, Goldman Sachs, through its energy-trading arm, J. Aron, paid $456 million to buy a 940-megawatt power plant in Linden, N.J., from El Paso. The plant has 85 percent of its capacity under contract and supplies electricity to Consolidated Edison in New York.

Future Trading The rationale to own the actual power is twofold: the returns to be made on such assets are attractive and the unused capacity, about 130 megawatts in the case of the Linden plant, can be profitably traded on the open markets.

Financial Sales Services While traders said that Goldman was unlikely to have earned rich trading profits on Friday, the volatility caused by the blackout supported its approach to actually own the electricity it is trading on the market.

Commodity Trading "If you are in the market and are short electricity in a period of crisis like last week's blackout, buying from the market can be very costly," said Doug Kimmelman, managing director in the energy division of Goldman Sachs. "But if you actually have the asset you won't get caught in this kind of squeeze."

Financial Services Trading Some analysts have praised Wall Street's new approach to energy trading.

Online Forex Trading "To the extent that Goldman can skim the cream off plants like Linden, they will be doing stockholders a big favor," said John Olson, an energy analyst at Sanders Morris Harris in Houston. "Volatility has increased and liquidity has thinned out. This could be a big windfall for Goldman."

Financial Portfolio Trade Goldman does not break out its commodities trading profits, but last quarter, the company's fixed income, currency and commodities division booked net revenue of $1.5 billion, its second best quarter ever. While the booming bond markets drove the bulk of those profits, analysts say that commodities trading played a substantial role.

Sierra Trading Post Morgan Stanley has also made it a point to own some of the power the company sells. Over the last three years, Morgan Stanley has built three electric power plants.

Trading Financial Future The plants, which are in Alabama, Georgia and Nevada, have the capacity to produce 500 megawatts of power, all of which can be sold on the open market.

Forex Trading Software The plants were built in the wake of the California electricity crisis as a means to take advantage of soaring electricity prices and increased demand.

Trading Post Since then, however, energy demand has weakened in a soft economy, and power prices have dropped.

Trading System Now, the energy trading markets are restructuring, with new participants, fewer long-term trading contracts and major banks working in the energy business rather than big energy companies operating like banks, which was one of Enron's innovations.

Forex Trading System Trading experts say it is too early to tell how profitable the energy trading business will become, post-Enron.

Fx Trading But many think that the uncertainty surrounding the energy industry in the wake of last week's blackout could provide some good opportunities.

Trading Card "This could be good for energy trading if the need for transmission brings more people into the market," said David Goodman, director for power trading at Entergy-Koch, which is owned by the Entergy Corporation and Koch Industries. "But hopefully, that won't involve more oversight or regulation, because that could be a negative and stifle capital investments."

In Online Trading Still, while the price spike last week seemed auspicious for energy traders, they have played down the significance of Friday's activity.

Online Commodity Trading "Not much money was made in the markets with Friday trades," said John Shapiro, who runs the energy trading desk at Morgan Stanley. "Five years ago, such spikes were more frequent. Since then the economy has been down and there has been more capacity. New York may be tighter than other markets, but over all they are in better shape now."

Line Trading In fact, the New York Independent System Operator, which administers the New York power market, is preparing to scrutinize Friday's trading surges.

Forex Currency Trading "We're reviewing those prices," said Carol E. Murphy, a spokeswoman for the agency. "We really did not have a normal market on Friday."

Online Option Trading By David Barboza and Landon Thomas Jr.
New York Times - 8/19/2003

Topic: Energy

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