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Friday, 9 November, 2001, 23:04 GMT
Traders wary of Enron's fate
Britain's electricity market should weather the troubles afflicting US energy giant Enron, but worse effects could be felt elsewhere, senior traders have told BBC News Online.

Houston-based Enron built itself up into one of the biggest traders in gas and electricity in the past few years, but the recent discovery of a massive hole in its balance sheet has raised question marks over its future.

British gas and power regulator Ofgem told the BBC that it was "monitoring the situation", amid fears that Enron's financial deterioration could destabilise the market, causing millions of pounds' of energy transactions to unravel.

But Brian Senior, director of trading and asset management at Innogy, the former National Power and one of the biggest electricity traders, said that his firm and others had stepped in to fill the gap left by Enron.

Innogy, along with about eight of the UK's biggest energy traders, has suspended dealings with Enron until its financial position is clarified.

Mr Senior warned that, while the UK market should escape, the risks were higher in the US and especially Continental Europe, where Enron is an even bigger market player.

Wheeler-dealing

Over the past few years, liberalisation of the UK gas and power markets has created a trading culture similar to that seen in financial markets.

A host of firms, from energy producers to banks and brokerages, now deal not only in gas and electricity themselves, but in a complex array of futures, options and swaps contracts.

It was Enron's inventiveness in these so-called "derivatives" markets, coupled with its aggressive trading culture, that propelled it into the top rank of traders in most markets worldwide.

But the complexity of that financial wizardry also helped conceal the problems that emerged last month, when US authorities launched an investigation into the firm's balance sheet, sending its shares tumbling.

On 8 November, the firm admitted that its financial statements from 1997 to the first half of 2001 "should not be relied upon", prompting credit agency Moody's to cut its rating to just above junk-bond status.

Waiting for action

Mr Senior said that he was "looking for some form of credit support" before Innogy and other firms would resume trading with Enron.

That could take the form of some kind of up-front payment, funds set aside in case of default, or a support from a wealthy bank or other trustworthy counterparty.

Dynegy, a smaller US rival, is currently in talks to acquire Enron for a rumoured $8bn, and is believed to be working out ways to improve Enron's creditworthiness before a deal can go ahead.

Innogy is the only big firm to have admitted suspending trading with Enron; other suspects, including Powergen and Centrica, only said that they were monitoring developments.

Steering clear

Traders are doubly wary of firms in Enron's position, Mr Senior said.

First, they fear that a collapsing firm may not be able to pay for energy that it has ordered.

Second, they worry that a trader may have huge obligations in the derivatives market that it could prove unable to meet.

The failure of a big trader in a relatively modest-sized market could have a domino effect, pushing other firms - especially small dealers, into bankruptcy.

Mr Senior said he did not anticipate knock-on failures of energy trading firms in the UK market, but did not rule out a domino effect in Continental Europe, where energy markets are smaller and less sophisticated - and where Enron has a substantially larger share of trading volume.

See also:

09 Nov 01 | Business
Enron admits inflating profits
06 Nov 01 | Business
Enron set to leave India
01 Nov 01 | Business
Troubles multiply at Enron
22 Oct 01 | Business
Probe sends Enron shares tumbling
06 Sep 01 | Business
US warns India on Enron
30 May 01 | South Asia
Enron plant 'shut down'
27 Mar 01 | Business
Price worries over energy market
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