Frayed Commodity

Go-go energy-trading companies learn that booms aren't forever, a lesson traditional Dominion could have taught Enron long ago

August 11, 2002|By Dan Thanh Dang | Dan Thanh Dang,SUN STAFF

In the summer of 2000, a steady stream of New York investment bankers tramped down to Dominion Resources Inc.'s 12-acre campus on the banks of Virginia's historic James River to tell Thomas A. Capps he was crazy.

Just look at the evidence, they said to the chief executive: Energy trading giant Enron Corp. was trading at an all-time high of $90.65.

Calpine Corp. and Dynegy Inc. were posting triple-digit earnings growth. Reliant Energy Inc. and Duke Energy Corp. were winning Wall Street kudos for their plans to spin off lucrative generating and trading businesses.

It was time, the investment houses said, for the Richmond company to get in line. Sell your power plants, they said. Or split off the production business. The big money was in energy trading, Dominion was told.

With pressure mounting, Capps took a good, hard look at his energy company. Then he simply ignored the advice.

It took just a year to prove Capps right. It took two years to make Capps look like a genius.

The industry's strategy to focus on aggressive trading and power-generation businesses was fatally flawed from the beginning, energy experts now acknowledge.

It was based on the idea that more and more power plants could be built, that the price of power would continue rising, that demand would be limitless, and that higher and higher profits would roll in, the experts said.

But the rise of the energy powerhouses was overshadowed only by the speed of their decline.

"We were wondering what they were seeing that we didn't see," said Capps, who has been chief executive for more than half of his 18 years with Dominion. "We decided, nothing. We've never believed in the herd approach to anything. We had what we thought was a good game plan.

"In fact, it has been the best game plan," Capps said. "The fad du jour at the time was to sell off and be power marketers. We thought that was dumb. We still think it's dumb."

Many of the energy companies that were Wall Street favorites have fallen.

Enron declared bankruptcy. Dynegy's share price is less than $2, a 95 percent plunge from its 52-week high. Duke recently fired two employees for improper energy trades that inflated revenue, and several other companies are facing similar investigations. Most energy stocks have taken a nose dive.

"It's been an extremely painful period of experimentation for everyone in the industry," said William W. Hogan, research director of Harvard University's Electricity Policy Group. "Some years ago, the people who were less adventuresome looked like Neanderthals - they just didn't get it. Now they look like prescient visionaries.

"Particularly when you get new things coming along that look sexy and exciting, it's very hard to stick to your knitting."

But that's what Capps did.

Seductive promises

While others were seduced by the promise of reaping dazzling returns on power production and energy trading, Capps was buying a natural gas pipeline.

While others rushed to buy power plants at two to seven times their value, Capps refused to add too much debt for overpriced assets.

While others were buying or building their marketing operations, Capps allowed Dominion to trade only what its plants and natural gas wells could produce.

These days, Dominion is trading at slightly more than $58 a share, about 10 percent less than its 52-week high of $69.99.

But the stock has held up significantly better than others in the industry. And it recently announced a plan to buy a liquefied natural gas plant in Southern Maryland.

Many of Dominion's counterparts are beating a hasty retreat from strategies that were once considered bold and smart, and guaranteed to make millions.

Like the pop of the dot-com bubble, the energy euphoria has faded, at least for the time being, industry experts say.

"The fall of the dot-com and the energy-trading industries have taken place faster than has happened to other industries in the past," said Severin Borenstein, director of the Energy Institute at the University of California at Berkeley.

"If you think about the time it took other industries to turn from profitable to unprofitable - for instance, the steel and railroad industry - that took years and years.

"This happened at warp speed."

The energy-trading boom began soon after Congress passed the Energy Policy Act in 1992. The act directed states to adopt policies leading to greater competition between power suppliers and transmitters.

Energy companies were suddenly functioning in a new world. No longer bound by regional service territories, they were free to buy, sell and deliver power anywhere they wanted.

Things were shaping up nicely. The telecommunications industry was growing, the economy was robust through the late 1990s, and about half of the states had adopted electric deregulation laws.

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