A call for utilities to leave the marketing business.
Many of us on the front lines can identify with Stanley Klein's...
Gatekeeper of Risk: The ISO's Forgotten Function?
mix of utilities, municipalities, cooperatives, energy majors, power marketers, as well as regional and national energy companies. This regional cross-section with a broad economic base, in turn, would reduce the likelihood of a correlated credit event. The number of participants for California, New York, New England, and PJM is approximately 70, 80, 145, and 160, respectively. The largest portion of net sellers in all four regions are investor-owned utilities. Such useful demographic information is available and updated frequently on the ISO Web sites.
4. Operational Experience. Do not discount the importance of the number of months or years an ISO has been in operation; it is a good measure of its ability to perform, work out problems and maintain credit controls. As a case in point, while the California ISO's initial 1998 launch date was delayed approximately three months, over the last year, this entity has continued to demonstrate strength in its credit controls and ability to modify changes when deemed appropriate. The historical default level of ISO participants also is a good measure of credit standards and overall control practices. Although the four ISOs have not experienced participant-related defaults, it is important for them to stand ready should any such events occur.
The scope and frequency of internal audits conducted is another strong indication of the overall control environment. For example, an ISO's successful completion of the rigorous SAS 70 audit ("Statement on Auditing Standards No. 70") indicates that appropriate controls are in place. PJM recently completed its SAS 70. The document is accessible on the Web and well worth reading.
5. Staff Turnover. Management strength and the level of overall turnover can provide insight into an ISO's ability to maintain focus and meet specific mandate requirements. In this regard, the experience level and backgrounds of senior management and the person(s) responsible for credit management are important. Excessive turnover at the top and at critical functional areas, such as credit, could be an early warning that appropriate leadership and credit focus is not being maintained. Although this information is not freely posted on ISO Web sites, it usually can be obtained through inquiries and by comparing notes with other market participants.
6. Regional Price Volatility. The level of power price volatility associated with a given ISO region can significantly influence the inherent price risk borne by all participants. For example, the volatility of spot power in California historically has been substantially less than the volatility experienced in New England. During summer months, spot volatility in New England can be three times as high as that experienced during the same period in California. In assessing the credit standards applied by the ISO, it is important to understand price risk and how the ISO is managing this exposure. In calculating volatility, it is useful to apply a three-month rolling average. To a greater extent, price risk is managed through higher minimum credit requirements, as well as through collateral requirements imposed on weaker members. Given the close correlation between price risk and credit risk, ISOs located in regions with higher power-price volatility need to