Credit derivatives attract a lot of brainy types, but Anjelina Belakovskaia may be the first chess star to set her sights on the business. An international grandmaster since 1993, when she was 24, the Russian-born strategist is a three-time U.S. Women's Chess Champion and has twice led the U.S. Women's Olympic Chess Team. Last month, she also slammed shut her last textbook on volatility theory when she graduated from the masters program in mathematical finance at New York University's Courant Institute.

With deregulation spreading cheer (and alarm) over large swaths of Europe, Japan and the United States, interest in price risk management and energy trading has reached new levels of profundity. At the same time, though, there is open talk of re-regulating the markets.

All this has helped return energy policy to the front burner. "If you look at energy policy today,” says Fusaro, "it's not only internationalized, it's becoming a national security issue. What's been going on in California is a global crisis. Nonetheless, the country may be learning the wrong lesson about deregulation.”

The '70s vs. the '00s

So how does the current energy crisis stack up next to the benchmark oil crisis of the 1970s? This is worse, he argues. The United States is now more dependent on foreign oil than it was back then (57 percent of U.S. supply now comes from abroad, as opposed to about one-third in the 1970s). In addition, there's a shortage of natural gas delivery in this country—not in the resource base but in the delivery of natural gas, which is what caused prices to quadruple over the last year. And third, deregulation in the power sector has made utilities unwilling to invest in new plants. The result: flyaway prices and brownouts in California, and skyrocketing prices for propane in the Midwest.

The California crisis, moreover, is not a short-term problem. "Politicians are looking for a fig leaf to solve a problem that has taken more than six years to evolve,” says Fusaro, who has just published his second book, Energy Derivatives: Trading Emerging Markets (available at www.global-change.com), which he cowrote with Jeremy Wilcox. "The scary thing is that this problem could be in New York City next summer or in other parts of the country, because load growth and the robust economy have shown a voracious appetite for energy in all its forms.”

The key factor behind the current crisis is that the markets have been deregulated in an era of capacity shortfall. But the models borrowed from Scandinavia and the United Kingdom are also not good fits for California, the first U.S. state to deregulate, notes Fusaro. The energy markets in the United States are complex, with multifuel capabilities and complicated systems of interdependence between states and regions of the country.

So what to do? "We should not have price caps on power since it's a disincentive to invest,” he says. "We should not let bureaucrats manage markets. We should have freer competition. So we need to accelerate deregulation, not slow it down, and we need to let the markets drive investment opportunities. What people forget is that we're only halfway through a process. Natural gas took 15 years to deregulate, from 1978 to 1993. Electric power began deregulating only in late 1992.”

Another point worth making is that the utilities involved in the California crisis don't have unsophisticated risk management structures, as other derivatives publications have suggested. On the contrary, insists Fusaro, Sempra Energy Trading, PG&E and Edison Mission Energy are savvy firms with strong risk systems already in place. What they will need in the coming years are better financial and commercial skills to think strategically in competitive markets.