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Gatekeeper of Risk: The ISO's Forgotten Function?

Fortnightly Magazine - April 15 2000

have higher credit standards than those located in regions with lower volatility. The highest regional spot volatilities experienced to date, in descending order, have been in New England, New York, PJM, and California.

7. ISO Billing Cycles. Lastly, the length of billing cycle extended by the ISO to its members is an extension of credit and provides insight into the potential for credit risk. That is especially the case given that power prices in certain regions of the country can spike over short periods of time and result in sizable accounts receivable positions. From a credit perspective, ISOs in regions with the highest price volatility should have the shortest billing cycles. Billing cycles at the ISOs range from a high of approximately 80 days (California) to a low of approximately 45 days (New York). New England and PJM fall in the middle, with average billing cycles of approximately 50 and 60 days, respectively. As mentioned, California historically has experienced the lowest price volatility while New England has experienced the highest.

As the number and membership of regional ISOs continue to expand and the volume traded through these entities increases, the focus on credit standards applied will be increasingly important.

Although the number and diversity of ISO participants will surely reduce the potential dollar exposure, there is no substitute for strong credit practices.

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