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Special Report

Fortnightly Magazine - September 15 1999

any backup generation in preparation of Y2K, the spokesman said.

Phillip Schultz, director of information systems at the Chicago Board of Trade, said he has confidence in Commonwealth Edison's preparedness for Y2K. The utility would need to have a catastrophic failure for the exchange to be affected, he said.

"Our facilities are designed so that [we] can receive power from multiple substations located throughout the region," Schultz explained.

Like Intel, the CBOT's confidence came with its local utility's willingness to share its Y2K program, said Schultz.

The Commonwealth Edison power outage that forced the CBOT to close its trading floor Aug. 12 - a week after Schultz spoke to the Fortnightly - however, heightened the CBOT's concerns about the utility's preparedness to deliver reliable power. The exchange will continue to work closely with the utility on its Y2K efforts, according to a CBOT spokesperson.

Futures Trading: Harbinger of Disaster?

"I would be very disturbed if utilities went out and purchased futures contracts to hedge against a loss of generation because of a Y2K incident," said Colin Fitzgerald, product manager in the Financial Markets Group-market and product development at the Chicago Board of Trade.

"If electric utilities were not Y2K-ready by Sept. 15, it would worry me," he added.

Yet, Fitzgerald said, buying futures is not such a far-out strategy for a utility that is Y2K-compliant.

"If a firm is looking to hedge a generation shortfall because of a Y2K incident, it would make sense to hedge that exposure," he said. "Conversely, if you have high confidence in generating capacity in the new year, it might make sense to sell excess capacity."

Furthermore, industrials could create a financial hedge by buying and selling futures contracts, as well.

As of early August, futures contracts prices to hedge for the Y2K rollover, both at the New York Mercantile Exchange and the CBOT, had not made any significant increases in price or volume as compared to 1998.

While most utilities are not expected to purchase futures contracts to hedge against Y2K incidents, some support state legislation to eliminate frivolous lawsuits.

Kerry Fisher, associate general council-litigation and claims at Baltimore Gas & Electric, said BG&E has worked on the Y2K problem since 1996 and spent almost $46 million in the process. He supports state legislation that would set specific standards that utilities need to meet to be considered Y2K-ready. Fisher explains that if a Y2K cure were defined specifically, every utility would know whether it met the standard.

The Maryland Year 2000 Commerce Protection Act or House Bill 8, which is supported by BG&E, would establish remedies for damages caused by information technology failure. H.B. 8 also would provide an affirmative defense in a Y2K-related action that the defendant implemented good faith actions necessary to become compliant.

But Gov. Parris N. Glendening vetoed H.B. 8, based on his strong concerns that businesses could escape responsibility if their actions lead to the injury or death of Maryland residents as a result of Y2K failures.

"The final version of House Bill 8, however, although somewhat modified from its original