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The Standard Power Contract: A Hedge Against Price Spikes?

The Fine Print: Who Won, Who Lost
Fortnightly Magazine - June 1 2000

was really finalized on March 3, and deals that are being cut for the summer really started in February for the forwards contract transactions. Since the agreement was really final in March, it is going to take awhile before those transactions are covered by the contract. The summer will be too soon for there to be an effect.

If not, how will you measure success?

Katz: I don't know of anybody that can guarantee no defaults. One measure of success might be a reduction beyond what I understand to be a very small number to begin with in disputed transactions; 99.5 percent of transactions in the wholesale market clear without any controversy whatsoever. To that extent, it is the 0.5 percent that gets the headlines. To the extent that [the contract] reduces disputes, I would say that is a measure [of success].

The other [measure] would be to see entities that haven't been playing in the wholesale market in an active trading situation start entering the market. That is one area where I know there is a lot of interest in using the contract because there are some of the more traditional utility potential entrants into active wholesale trading that like the protections afforded by the contract. I think you will probably see new names coming up over the course of the year. That will be another measure of success. You will have more liquidity because there will be more people playing in the market.

McMahon: Right now the bulk of the transactions [is] physical and the derivatives side [is] some fraction of the physical. Hopefully, this contract and other initiatives will help the market get more like other mature commodity markets where physical market is one thing and the derivative market is some multiple of the physical market, which would also help to address the volatility issue.

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