Does the utility industry have the financial strength sufficient to meet the combined challenges of: (1) sharply increasing and highly volatile fuel and purchased-power costs; (2) significant...
The Standard Power Contract: A Hedge Against Price Spikes?
that. Of course, that will have some effect on the price. But it also, from a seller's perspective, gives additional comfort level. This was probably something that was pushed more from the people that were more concerned with the physical aspect of trading rather than the financial.
McMahon: The hope is that this contract will start to address the issue of these defaults and how you unwind transactions if and when those things happen. Secondly, [the contract] will bring in more and more participants because, as you know, the trend in utility deregulation and the mega-trends are [that] many distribution companies are divesting themselves of generation. So in order to meet their native load demand, they need to go out and basically purchase all their power in the spot market and the commodity market. These markets can go one of two ways. They can either develop into much more liquid, broader markets with broad participation, or they can go the other way.
Any mechanism for dispute resolution?
Katz: Still not specified, but I can tell you that there are parties in particular trading relationships that will do that on a bilateral basis.
What about changes in taxation?
Katz: Still undefined.
And the significance of bookouts, circles, and daisy chain transactions?
Katz: Still undefined.
Negotiating the Deal: The Confirmation Process
Can traders add their own contingencies? When do new provisions become binding?
Katz: With the confirmation process, there is an option in the contract for whether an unobjected-to confirmation becomes binding under the agreement. If the parties agree, you can have a contingency where if the confirmation contains new terms beyond the essential commercial terms like price, deliver point, whatever; for instance, an alternative dispute resolution provision can be added.
Who does this rule favor - utilities or marketers?
Katz: This was a tension between the marketers and the utilities. The marketers have built out their back-office and mid-office staff that are geared up to accommodate all this processing. They didn't have any problem with confirms going back and forth because they have the failsafe mechanisms established to scan anything that comes in and be able to object within the three-day window that is built into the default confirmation process in the contract.
The utilities, on the other hand, are just gearing up to build out their offices to handle the more dynamic processing of the transactions. So many of them desired to have this other option so that if for some reason this new confirm comes in with new terms and doesn't get caught, they are not necessarily on the hook for those additional terms.
My sense is that as the market evolves, you are going to see less reliance on that because I think everybody wants finality to get the deals done quicker. That is just the general trend in these transactions.
Complying with FERC Rules: What Utilities Need to Know
Will traders be required to file their contracts at the Federal Energy Regulatory Commission?
Katz: This is an activity that we were involved with in February. We arranged a briefing