Power companies that up until very recently routinely traded amongst themselves are losing confidence in other companies' creditworthiness and are turning to letters of credit (L/Cs) to manage trading risks.

Since the mid-1990s companies have bought and sold contracts for electricity to manage the risks of rising and falling energy prices and to consolidate power contracts for their customers.

This often entailed energy companies extending credit to each other, often US$50 million to US$70 million, to guarantee payment of contracts.

Enron fallout

Enron's spectacular bankruptcy has changed all that. Loss of trust in the industry's balance sheets has forced power companies to adopt risk averse strategies. Now they are more likely to sell excess capacity than make speculative energy plays.

Company-to-company credit lines have also been sharply cut back, which has resulted in energy traders turning to more secure bank L/Cs.

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