Life After Enron: Lessons Learned
Sequent’s Tumminello Reflects on Changes in Energy Trading at UH Bauer MBA Advisory Council Discussion
Published on April 16, 2010
The collapse of Enron has had lasting effects on energy trading, according to Sequent’s Peter Tumminello, who gave a talk on the subject organized by the Bauer MBA Advisory Council.
Sequent Energy Management was born the same year that Enron drastically changed the energy trading landscape in Houston.
Peter Tumminello, the acting president of the Houston gas marketing and trading company, said the hard truths gained from the spectacular implosion of Enron reshaped the industry in a good way.
During a talk titled “Life After Enron,” put on by the Bauer MBA Advisory Council, Tumminello said the corporate collapse offered an intensive education in how not to run a company buying and selling energy.
He said energy marketers and traders learned that:
- Strong cash management and credit ratings are critical. The biggest players now are among the biggest oil companies, like BP and Chevron.
- Players in the business are defined by the risks they take. At one extreme are those on the marketing end, like Sequent, which facilitate gas sales and supplies. At the other are hedge funds betting billions on price moves.
- Clear, conservative financial statements are an essential to maintain public trust and discipline within the organization.
- Incentives for employees need to support the goals of the business and its investors.
The last point is painfully relevant today. The Wall Street meltdown two years ago that led to the huge government bailout of many of the biggest names in investment banking brought back memories of Enron.
The bonus systems that enriched those who incurred stunning losses in markets for securities, like mortgage-backed bonds, were similar to the “misplaced incentives” once found at the highest-flying energy traders, he said.
While companies like Enron are gone, survivors like Sequent have devised bonus programs to discourage risk taking; Tumminello said he said he hasn’t seen similar changes at the investment banks.
“There were no learnings from Enron in the banking business,” Tumminello said. “They are still incentivizing risk taking.”
Sequent’s bonus system is designed to focus attention on steady returns for the utility company that owns it, AGL Resources. The earnings are first split evenly between shareholders and its customers, and past a set point the money goes into a bonus pool shared among employees.
Tumminello said he’s not even altogether comfortable being called a trader.
The Sequent business is more focused on selling and delivering gas for independent natural gas produces. It requires people adept at logistics, customer relations and risk management.
Tumminello said it maintains strong ties to the University of Houston – including its sponsorship of the Distinguished Leaders Series at UH Bauer College – in part because the campus is a valuable source of people and ideas.
“Working with the university makes us better,” Tumminello said.