Restructuring the U.S. Power and Gas Market

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Karl Miller
Risk staff
01 Oct 2002
Over a career spanning Enron, El Paso Energy, EDF Trading and PG&E, Karl
Miller has found himself frustrated with the energy industry’s inability to dig itself
out of the credibility and debt problems it now faces. Like many in the industry, he
can see the problem, but the inaction of some of the worst-performing firms in the
first two quarters of this year has led him to take action himself.
With partners Kevin McConville and Heinz-Dieter Waffel, he has set up a
partnership designed to fund the acquisition of distressed power and natural gas
assets. “For the first two quarters of the year we were waiting to see whether
there would be some cleansing of the market-place – and we didn’t see that
happen,” Miller says. “We didn’t see any change, we didn’t see the management
coming clean, we didn’t see write-downs and we didn’t see that the market was
really understanding.”
“I don’t need to be doing this,” he adds. “I’m doing it because it’s an absolute
crime – a sin – that these things are not changing.”
Miller is harshly critical of the management teams of the major US energy firms.
In particular, he says, they have handled the sales of stable, performing assets –
such as pipelines – very badly. “These sales were designed to do nothing more
than protect the existing management teams,” he says.
Miller’s partnership will essentially act as an interim management team for
distressed or bankrupt energy companies, allowing capital markets – potentially
worth $5 billion to $10 billion to the energy industry, Miller says – to make inroads
into energy without needing the expertise peculiar to the business. The business
model relies, to a certain extent, on further bankruptcies, and Miller is certain
more will come.
He says the figure of $500 billion estimated to have been lent to the energy sector
by US and European banks and bondholders is just the tip of the iceberg. “That
figure was just an aggregation of roughly 80 companies that were identified by
independent analysts,” he says. “But it doesn’t reconcile the truly off-balance-
sheet nature of the debt of many houses. So you can surmise that the number is
understated. How far, we just don’t know, but I think we’re just scratching the

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surface.”
Miller’s career began on Wall Street in 1989 at investment bank Dean Witter
Reynolds, after which he moved to futures and options trading company Copia in
New York. “But then I did something most people in my profession don’t do,” he
says. “I took some time out of the market and went to work for the regulator.”
Miller’s year with US industry body the Commodity Futures Trading Commission
has given him valuable insights into the trading business. “It was amazing. You
quickly learn what the regulators know and what they don’t, and just how
inefficient the system truly is.”
Was this career move designed with playing the system in mind? “Not at all. I’m
an ethical person, I’m not into gaming,” he says. “But I came out with an
understanding of how it could be gamed by others, as well as how many gaps
and holes there are in the overall efficiency of a market. That is obviously
something we’ll have to continue to work through as an industry.”
Armed with this knowledge, Miller joined Enron in 1994, setting up Enron Nordic
Energy and Enron Australia with the company, as it quickly ramped up its energy
risk management operations.
Miller has since worked with US firm El Paso Energy in Europe, with EDF Trading
and with troubled Californian utility PG&E in 2001. But now he feels being
independent is ideal in the tumultuous market and expects through his new
partnership to conclude a private-equity/leveraged-buyout transaction within the
next six months.
“We’re looking at several companies with sizeable portfolios,” he says. “The
willingness of management at some of them to give up has been difficult – but it’s
only a matter of time before the board exercises its fiduciary rights and
obligations, which means removing management. Until then, the quality people in
the market-place will continue to suffer, and that’s not good for any of us.”