As Concentric’s 20th anniversary year draws to a close, I want to pause and thank our clients.
You are the engine of our business, and we would not be here without you.
As we look forward to the next twenty years, I am reminded of how much the energy landscape has evolved since the early 2000s and the extraordinary depth of experience and knowledge we offer our clients. From the California energy crisis to today and onward into the future, the Concentric team remains dedicated to providing economic and financial advisory services delivered by the most passionate, experienced, and dedicated consultants in the energy industry.
From the Concentric family to yours, we wish you a prosperous 2023.
And thank you again for helping us get here.
John J. Reed
Chairman and Chief Executive Officer
Concentric Energy Advisors
Forged by Fire: Concentric Marks 20 Years of Learning from Crisis
Published: December 29, 2022
By: Concentric Staff Writer
It was in the crucible of the California energy crisis of the early 2000s that Concentric Energy Advisors (“Concentric”) was formed, and similar to the challenging environment in the energy industry today, it is in times of crisis when knowledge, experience and opportunities are gained, Concentric Chairman and Chief Executive Officer John Reed said.
Founded in 2002, Marlborough, Massachusetts-based Concentric has since grown from a start-up with less than a year of cash to a thriving employee-owned firm of over 65 employees with two subsidiary companies—CE Capital Advisors and Concentric Advisors ULC. Today, Concentric provides consulting and financial advisory services throughout the U.S. and Canada regarding utilities, wholesale and retail power and natural gas markets, and the oil pipeline industry.
Back in the fourth quarter of 2001, fundamental changes were going on in the energy industry, especially in California energy markets, where allegations of market manipulation and accounting irregularities were coming to light regarding the Houston-based energy firm Enron. Enron was not a minor player in the energy industry. It had 19,000 employees and more than $100 billion in revenues in 2000, according to Forbes.
But Enron claimed a lot of things, and at the end of 2001 when the company’s massive accounting fraud was revealed, Enron went from being the darling of the credit markets to filing for Chapter 11 bankruptcy in December of 2001.
“It was shocking, nobody had ever seen anything like that,” Reed, who has been operating in the industry for 46 years, said in an interview.
In the wake of the September 2001 attacks, a period of turmoil in America occurred, including in U.S. energy markets and other industries Enron was involved in, like water and broadband. This resulted in a coincident financial crisis, and nobody knew what kind of industry would emerge after the “merchant meltdown” of late 2001, Reed said.
It wasn’t just that Enron went under, but its contractual counterparties were now suffering. In a 12-month period, bankruptcies or near-bankruptcies occurred for other huge companies such NRG, Dynegy, Reliant, Calpine, and Mirant.
“It was kind of a spooky time to try to start your own business,” Reed said, adding that his new company had to plan for a rocky beginning. “All it takes is for one big player to go down, and suddenly every other player finds they are holding potentially worthless paper … it goes on and on and on.”
But Reed felt that despite the accounting irregularities at Enron, other companies were unlikely to have engaged in similar activities and would likely bounce back, which gave him faith. What followed in the wake of Enron was a new law known as Sarbanes-Oxley and a host of new regulations regarding accounting, financial reporting, credit and other business practices such as natural gas and power contracting.
One of Concentric’s earliest clients was the state of California, which was trying to ferret out parties that were engaging in market manipulation, Reed said. Concentric became an expert for the state looking for improprieties and illegal behavior, requiring Concentric to begin investigating companies that formerly had been clients. This was one of the most challenging aspects of launching the new business and positioning it in the rapidly changing marketplace, he said.
“We found ourselves right in the midst of all that,” Reed said.
At the time, the industry was navigating the post-Enron waters, which meant flipping certain accepted business practices on their heads. In one case he worked with a company to voluntarily set rates in a way that wouldn’t recover higher costs resulting from an affiliate’s bankruptcy resulting from the 2001 energy crisis. This meant executives had to be convinced to take a financial hit and move on—and they listened.
The ensuing years saw new crises, such as the financial crisis of 2008 that had outsize impacts on the energy industry, and to a lesser extent, the upheaval in 2016. But nothing compared to the simultaneous crises occurring in 2000 and 2001, Reed said.
The industry grew and learned from those experiences—“it wasn’t easy, and it wasn’t painless, but it was dramatic.”
Today, it’s spiking natural gas prices and reliability issues in places like California, Texas, and the Northeast that will have almost as much impact as the crisis of the early 2000s. During Winter Storm Uri in February 2021, some utilities expended their entire natural gas purchasing budgets for an entire year over a few days. This required utilities to rush to capital markets and stress over getting approval for cost recovery from regulators—and this often requires consultation with firms such as Concentric.
Similar to the early 2000s, 2021 and 2022 “were a sea change. It was a demarcation point where we very quickly went from a surplus market to a shortage market and recognized that it will likely be a very long time before we can reverse that,” Reed said of the energy shortages and price hikes of the past year and a half.
“The industry is again being offered learning opportunities,” Reed said.
Across the larger industry, it was assumed by some that there would be a predictable and manageable transition to decarbonization of the grid, Reed said, but the events in Texas and global events such as the war in Ukraine, the COVID-19 pandemic and associated supply chain issues have complicated the picture.
“We are seeing greater tension between reliability, decarbonization, and economics than most experts expected, and energy issues are rapidly becoming more political. People vote with their pocketbooks, and economics matter,” Reed said.
Along with high gas and food prices, high energy prices are increasingly becoming an issue, and “affordability is becoming what I would describe as the inconvenient truth right now,” he said.
Whether it be the modern era or recent historical events, Concentric has always been poised for growth, with a strength forged by the constant change in the energy industry and the need to learn from market realities and adapt plans time and time again. That is why the experience and knowledge gained by Concentric over so many years is vitally important.
All views expressed by the contributors are solely the contributors’ current views and do not reflect the views of Concentric Energy Advisors, Inc., its affiliates, subsidiaries, or related companies. The contributors’ views are based upon information the contributors consider reliable at the time of publication. However, neither Concentric Energy Advisors, Inc., nor its affiliates, subsidiaries, and related companies warrant the information’s completeness or accuracy, and it should not be relied upon as such.