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Industry faces problem of retail customers who 'don't get no respect'

Finally! Energy traders and marketers are paying close attention to counterparty credit risk and probabilities of default. The days of credit managers holding a symbolic seat on a trading floor and having no real input into pricing energy trades are long gone. Wholesale energy shops now understand the importance of credit, yet the industry still apparently treats the commercial and industrial retail customers with little respect when it comes to credit.

Most retail energy suppliers are still nursing wounds of an overly aggressive growth strategy and are struggling to get by. There's a good chance prospective customers have better credit ratings.

The trail of energy credit junk is littered with the debris of once mighty energy companies. It's tough to find a high-credit quality energy supplier these days. Energy companies were so busy competing in the intoxicating race to "build a book" and pump-up revenues that the industry forgot about credit quality. The industry seemed too preoccupied with flaunting lofty price-to-earnings ratios than to care about fundamental credit analysis. The energy world appeared to be a big playground with everyone heading his own way to record revenues and 52-week stock price highs. Alas, what a short party.

Either the industry has amnesia, or conveniently forgot about the spectacular credit meltdowns that plagued other "hype industries" over the last two decades. Remember the folks at Drexal Burnham Lambert who pushed high coupon bonds to the quantitatively challenged savings and loans industry? One would assume the S&L leaders understood credit risk and should have refrained from buying highly speculative debt. Not a chance. Gorging on the sweetmeats of high returns, these bank experts convinced gullible grandparents to buy this "safe" credit paper.

When it appeared safe to start swimming laps in the credit pool again, along came long-term capital management. Remember this high-flying hedge fund that levered itself nearly 50 to 1 in its efforts to move markets and capture returns? Borrowing a gambling phrase, they were "whales" and bet big. So big that the Federal Reserve and a flock of Wall Street banks had to step in and bail out this "sophisticated" group.

	Electric Utilities, Retailing
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It's been well over a year since the energy soiree abruptly ended and the energy industry imploded in a dramatic credit meltdown. Today, the few companies left standing are holding onto the wall nursing nasty hangovers -- swearing they'll never do it again. Do what again? Ignore the credit manager sitting in the corner holding up the credit default probability charts and trying to get the industry to follow sensible credit standards.

Nearly all the remaining wholesale energy participants have found credit religion and insist on securing adequate credit terms before trading with each other. Hallelujah, the diminished wholesale energy group is finally spreading the gospel of credit.

One major problem remaining in the retail supplier industry is that the industry still insists on treating the retail end-user differently. Trust is at an all-time low in the retail energy market, and if the industry is serious about rebuilding its image and attracting retail business, it's high time the industry starts showing contractual respect for the retail buyer.

Bilateral credit terms are now the standard in the wholesale world, yet retail suppliers still maintain unilateral credit terms in their standard retail energy contracts. The suppliers need to start respecting the reality of bilateral credit fairness and stop trying to convince customers to sign one-sided retail contracts.

The reality is, most of the energy suppliers left trying to sell to the retail market are either junk rated or operating as a separate legal entity with "implied" support from investment grade parents. Implied support gives little to no comfort in today's credit world.

It's best to refrain from talking about how strong a subsidiary's parent company is unless the parent is willing to step up and provide a formal guarantee. Retail suppliers go to great lengths to grant themselves ample credit rights while offering customers practically nothing. It's time to drop this practice. In today's credit world, most retail buyers have better credit ratings than the energy suppliers and are hesitant to deal with the reconstructed energy companies left playing the retail energy game.

Retail buyers do not want to get burned like some of the folks in California who were left holding one-sided contracts when their energy suppliers defaulted. If the industry really wants to win back retail business, creating a user-friendly bilateral contract that treats both buyer and seller fairly is a good start.

The retail energy business has managed to survive its most challenging times to date and the industry appears to be turning the corner. It's now time for the industry to rebuild trust with retail energy buyers. Creating an energy contract with bilateral credit rights that protect the credit-worthy retail buyer from supplier defaults is a great place to start.

Ken Rubeli is executive vice president and a founding partner of Mobius Risk Group LLC (www.mobiusriskgroup.com), which provides energy risk management outsourcing and advisory services to the commercial, industrial and petrochemical industries.