NEW YORK, Aug 17: Wall Street firms are jumping into the risky but lucrative electricity trading market, filling the void left by cash-strapped energy firms that no longer have the financial muscle to trade.

Deutsche Bank’s US securities unit and Bank of America Corp. have recently decided to enter the market. They said they hope to make use of their stellar credit ratings, risk management skills, and experience in commodities trading.

Wall Street’s interest in the sector comes a few months after UBS Warburg, the investment banking arm of Swiss bank UBS AG, bought the trading business of collapsed trader Enron Corp.

Deutsche has recently applied for a license from the Federal Energy Regulatory Commission, the energy watchdog.

Now the brain drain is reversing with the banks rehiring some talent to create their own trading desks.

They (banks) have the financial wherewithal and the sophistication required to compete aggressively within a vibrant trading market. Also, they understand performance management, control and reporting issues, says Mark Ferri, vice president, global energy practice of Fuld & Company, a Boston-based strategic intelligence consulting firm.

The credit drain has paralyzed supply and demand in the forwards and derivatives markets, pushing activity to the spot market where megawatts are traded on a day-to-day basis among companies that own their own power plants — a throwback to the days before deregulation.

Aquila Inc shut its business recently, while Calpine Corp, Mirant Corp. and Dynegy, Williams Cos Inc. have reduced their trading activit0y as poor credit rating prevents them from taking risks.

Deutsche also has looked at the possibility of buying or partnering with the trading business of Aquila, sources familiar with the situation said. The exchange of information did not result in any serious talks.

Bank of America, which recently hired seven traders, mostly from Enron, last month received permission from the Office of the Comptroller of Currency of the U.S. Treasury Department to trade cash-settled electricity derivatives. The bank, for now, does not need FERC permission as it is refraining from physical delivery—or the actual transfer of power, a bank spokesman said.

Deutsche Bank is keeping its options open and hopes to get into physical delivery at some point of time, its spokesman said.

Investment bank Morgan Stanley, which was among the first financial institutions to get into electricity trading, is actively involved in physical trading through its Morgan Stanley Capital Group.

Goldman Sachs Group Inc is also an important player in the trading game and at one stage had considered bidding for Enron’s trading business before it was bought by UBS last year, according to people familiar with the situation.

With energy deregulation a reality in the United States, some believe that eventually one would see energy firms getting into joint ventures with financial firms or financial firms going it alone using their risk management skills.—Reuters