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bobinc
Trad climber
Portland, Or
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Jul 27, 2006 - 10:55am PT
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Yeah -- being hot is one thing; dying of thirst (or having your lawn turn brown, egads!) is another.
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Ouch!
climber
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Jul 27, 2006 - 03:21pm PT
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It's amazing how many energy trading companies sprang up overnite. Most of them went bellyup shortly after. What started it all was a handful of guys in a Northwest utility, brokering power off the Mid Columbia PUDs into California and Utah on the midnight shift as a way to pass the time. They began making millions for the company who leaped into it with both feet. Other companies took notice and became copycats. Enron sent some people to the Northwest and hired some of the guys there.
Things got really crazy and dumb CEOs gave the traders carte blanche in the trades. Some paid huge bonuses for volume trading, never mind that much of the power bought was later sold at big losses. The guys who started it all had a rule not to buy without a sure sell at a minimum profit. They never lost money. Over one weekend, they made something like three million profit brokering power off the Mid Columbia into California, delivering it at much less than what it cost Cal to produce energy.
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JuanDeFuca
Big Wall climber
Stoney Point
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Topic Author's Reply - Jul 27, 2006 - 03:24pm PT
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This is a very interesting topic, any books on the subject?
Juan
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Ouch!
climber
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Jul 27, 2006 - 03:32pm PT
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Don't know of any books, Juan. Perhaps there should be. A friend of mine ate his gun, possibly in part because of a bad trade, that lost many millions.
Enron once offered me a job when they were just starting trading. Glad I didn't take it.
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bobinc
Trad climber
Portland, Or
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Jul 27, 2006 - 04:14pm PT
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It isn't like the public utilities are necessarily any smarter or more virtuous. Seattle City Light went way into the red on the spot market in 2001, so much so that they downgraded the city's bond rating by a few clicks. The traders were interviewed by the Seattle Times and more or less said they would have done exactly the same thing if they had it to do over again... The Supt of the utility finally got canned not long after that despite being good buddies with teh mayor but that was little consolation.
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TradIsGood
Trad climber
Gunks end of country
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Jul 27, 2006 - 09:38pm PT
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Juan, traders often are compensated in a way that is dangerous for their firms. For example, they often get paid a percentage of profits. That seems fair on the face of it. If I make 50 million for a firm trading, then for them to pay me 5 million bonus seems fair.
Wall Street used to work very much like this. The problem is that from the perspective of a very smart trader, this is really an option. If you have a good year, say you make the firm 5 million and they pay you 500,000. The next year you ask to be allowed to make bigger trades so you can make them more money. If they agree, you make the biggest trades that you think you can make money on. If you lose 20 million, the worst that happens if you haven't broken any laws is you lose your job. But with one big year, you might even get a second chance with some other firm. Of course, you hope to make the killer trades and start buying expensive toys...
That was Enron. A firm full of BSDs (big swinging ...). Except they also had some guys that stepped over the line.
I considered buying a lot of their stock when I was building an energy portfolio. But after reading their annual report it was clear that they had changed the company from generation and pipelines into trading. So I was lucky in a similar way to Ouch!
It is hardly fair to place all of the blame for California's energy problems on Enron, however. Enron could not have exploited California if it had been nearly self-sufficient in generation. The regulations, combined with the lack of capacity, lack of foresight on voters, understanding of economics and trade in the legislature, etc. was the "perfect storm" that caused disruption, hardship, and bankruptcy, etc.
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