UPDATE: Power Generators Wary Of OTC Trading Regulations
19 September 2009 - 4:19AM
Dow Jones News
U.S. power markets are being swept up in a
derivatives-regulation bill backed by the Obama administration,
raising objections from generators who fear the reforms would make
it harder to protect against swings in commodity prices.
The Electric Power Supply Association, an industry group, warned
in a letter this week to U.S. Reps. Collin Peterson, D-Minn., and
Barney Frank, D-Mass., that proposed legislation to force
over-the-counter trades into clearing houses and onto exchanges
would increase power prices and volatility, while drying up
liquidity.
The Treasury Department has proposed that clearing houses
guarantee many of the over-the-counter trades to mitigate risks to
the financial system if a large trader can't meet its obligations.
Since an outline of reforms came out in late July, much of the
focus in the energy sector has been on the oil and natural gas
markets. But the power industry is watching closely, since it
relies heavily on a range of derivative contracts to lock in future
prices for the electricity they sell and power-plant fuels they
buy.
"We want to, more than anything, ensure the spillover...does not
create undue, additional costs to the wholesale price of
electricity," said James Miller, chairman and chief executive of
power company PPL Corp. (PPL), in an interview this week.
A major concern for generators is what new regulations could
mean for collateral requirements. If over-the-counter trades are
cleared, generators could be required to use cash rather than
assets or letters of credit as collateral, tying up massive amounts
of money in a capital-intensive business. Large generators would
likely be able to handle the requirements, but say their increased
costs would add to wholesale power prices and trickle down to
consumers. A change in collateral requirements could hit smaller
companies harder since they may not have access to the large
amounts of capital that would be needed.
Unlike oil and natural gas, power isn't traded on an exchange
and remains mostly a regional commodity. The industry estimates
about 40% of over-the-counter trades in power are cleared now,
primarily through the Intercontinental Exchange and New York
Mercantile Exchange. The market itself is dominated by generators
and suppliers, since many speculators exited after the collapse of
Enron Corp.
The Electric Power Supply Association said proposed regulations
could push the industry, which relies on specialized contracts
because of the uncertain nature of hourly power demand, toward
standard contracts, making hedging increasingly difficult. One
example of the challenges to standardization is a sales agreement
for power needed from a natural gas-fired power plant when wind
generation isn't running. The agreement isn't based on a set volume
at a set time, but instead hinges on when the wind isn't
blowing.
The derivative-regulation bill at the center of the debate
requires that "standardized" contracts be cleared, which backers
say will exempt many of the unique transactions used by power
companies.
"We are just really beginning to have the conversation," said
Elizabeth Moler, executive vice president for government and
environmental affairs and public policy at Exelon Corp. (EXC).
She said the industry is trying to understand the details of
government proposals to see which types of contracts would have to
be cleared. If new requirements are put in place, Moler expects new
instruments will have to be developed to meet the industry's
hedging needs.
The Electric Power Supply Association represents power plant
operators, including Exelon, which sell power at market prices
rather than at regulated rates, making up 40% of U.S. generating
capacity. The group, in its letter, favored a bill proposed by Rep.
Michael McMahon, D-N.Y., which is more industry friendly.
Peterson and Frank are key figures in the growing debate over
clearing requirements. Peterson is chairman of the House Committee
on Agriculture, which regulates commodity markets, while Frank is
chairman of the House Committee on Financial Services.
-By Mark Peters, Dow Jones Newswires; 212-416-2457;
mark.peters@dowjones.com
(Brian Baskin in New York contributed to this article.)