Enron fall spurred risk management consolidation

In a world ravaged by financial scams such as Enron and WorldCom, risk management is the buzzword.

Ironically, it is not just customers and investors who have to manage risks but companies themselves. In India, risk management in the energy sector is in its infancy but is expected to gain increasing currency due to deregulation.

Robert Sayer, partner, Ernst & Young, UK, who leads the energy team, speaks about the British experience in an interview with Hemangi Balse and S Ravindran.

What has been the impact of the collapse of Enron on the risk management business in the UK power sector?

Immediately after the Enron debacle we found that a lot of US trading companies were badly affected by downgrades. Most of them pulled out of the electricity trading market in the UK. What is left now are the big and original players.

There has also been consolidation in the market with two big German power companies have come in and bought two another companies -- PowerGen and Energy.

In addition, what has happened is that the banks have begun trading in electricity. These include big names such as Deutsche Bank, Morgan and Goldman & Sachs.

Is power trading a profitable activity in the UK?

Power trading results in low cost power in the UK. The costs go down so low under the current arrangement that the generators are not able to make enough money to finance debts and you see a lot of power stations into serious financial difficulties.

Could you elaborate?

In a free market economy, generators are selling power at almost marginal cost which puts pressure on their ability to service debt.

What we came across in the UK was very unusual. A lot of people came into the market in early 90s wanting to understand about deregulation.

So what the US companies did was they paid an awful lot of money for power stations assuming that power prices would continue to go up.

In reality, what happened was that there were too many power stations leading to over capacity. Now you have very low prices.

Power trading in India is still in its infancy. India has Power Trading Corporation in which Tata Power has recently picked up a stake. What is that model that you would advocate and what are the pitfalls that lie ahead?

I cannot advocate a model at the moment but I think you should be able to manage your risks and framework much more effectively than in the past.

When deregulation happens, first of all people start trading using very simple contracts in a complicated business environment.

As they move up the learning curve, contracts get more sophisticated. They customise products and at that stage you have to ensure that you manage your earnings and risk profiles.

Further, you have to make sure that in such a situation you are not taken unfair advantage of. We have been discussing with parties how to manage risk in the Indian environment.

Have you secured any Indian clients as yet?

We are talking and discussing with various people. We have a great team here in India and experience in risk management.

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