US Power Markets Tighten Credit Requirements For Participants
14 January 2009 - 8:22AM
Dow Jones News
U.S. power markets are tightening credit requirements in the
wake of the global financial crisis, trying to reduce risks faced
by generators and other market participants.
Independent system operators, known as ISOs, have faced the
sudden exit of prominent investment banks from their markets, while
seeing increased concerns about the liquidity of some remaining
participants.
ISO New England may eliminate unsecured credit made available to
firms that trade in the six-state electricity market it operates.
The California ISO reduced similar credit limits last month as part
of changes to protect participants against defaults.
The California ISO was "confronted with the question of whether
we should reject letters of credit from certain prominent banks
that appeared troubled," said its chief financial officer, Philip
Leiber, during a Federal Energy Regulatory Commission hearing
Tuesday. "We also had market participants that were severely
strained due to bankruptcies of their major customers."
The changes come as power markets have seen liquidity diminish
as some banks cut their operations, while others such as Lehman
Brothers Holdings Inc. (LEH) - which filed for bankruptcy
protection last fall - completely exit the markets.
An ISO functions as a clearinghouse for a regional power market.
A generator sends electricity to a buyer, but the payment isn't
immediate, taking time to clear through the ISO. The time lag
creates risk for market participants.
ISO New England extends $75 million of unsecured credit to
participants, usually requiring a corporate guarantee or strong
credit rating. But it's looking to eliminate unsecured credit all
together, requiring a letter of credit, cash or other secure
facilities.
"Recently there have been 'near misses' and one of the largest
investment grade players in the region publicly announced that
without financial relief it would have declared bankruptcy," ISO
New England Chief Financial Officer Robert Ludlow said in testimony
to FERC.
The elimination of unsecured credit would be the latest step to
address credit in ISO New England's market, which has grown from
clearing annually $500 million to nearly $10 billion in the last
decade. Ludlow said there are concerns that eliminating unsecured
credit could reduce liquidity and participation in the regional
power market. But the ISO wants to prevent "unmitigated risk
taking."
A spokeswoman for ISO New England declined to comment on the
"near misses," or name the company Ludlow refers to in his
testimony.
The California ISO last month decided to cut the unsecured
credit limit to $150 million from $250 million. Also, it changed
other credit rules, including financial penalties for companies
that default or make late payments.
Banks active in U.S. power markets, including Goldman Sachs
Group Inc. (GS) and Barclays PLC (BCS), couldn't be reached
immediately for comment.
Other regional power markets are looking at credit requirements.
PJM Interconnection, which oversees the market in 13 states,
including Illinois, New Jersey, Ohio, Pennsylvania and Virginia,
already was looking at the issue ahead of the global financial
crisis after facing defaults two years ago, a PJM spokeswoman
said.
-By Mark Peters, Dow Jones Newswires; 201-938-4604;
mark.peters@dowjones.com
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