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So, You Want to be a Retail Energy Marketer?

Retail energy markets entail a unique set of risk management challenges.
Fortnightly Magazine - March 15 2002

CTC surcharge is typically charged to all customers starting at the beginning of the transition period regardless of whether they chose the standard offer or unbundled tariff. The CTC is meant to compensate the local utility for its stranded costs under as a result of deregulation.

An inaccurate guess on the timing of these events will result in a long or short generation for the retail marketer. Also, there is the potential for losses related to unrecoverable CTC charges if period III lasts longer than expected.

Magnitude Risks
Periods IV, V and VI have to do with the magnitude of the tariff charges. Area IV represents the CTC surcharge. CTC amount varies from utility to utility depending on their specific stranded-costs and each state can have its own methodology for determining whether CTC is a fixed or variable charge (e.g. Illinois is residual while Texas is fixed 1). A strategy among some retail marketers is to give a discount off of the current rate which includes CTC in the hopes of making up for some early losses when CTC ends. Thus an inaccurate forecast of CTC amount can cause deals to be mis-priced and create losses into the future.

Zone V is representative of the generation prices the local utility passes though. These prices have become increasingly volatility as utilities have passed through higher generation fuel costs through their periodic fuel trackers. A retail marketer will be exposed to this risk at least through the start of transition and then possibly thereafter if the standard-offer rate is lower than the unbundled rate.

Area VI covers the local utility's transmission and distribution (T&D) charges. These charges are generally determined by cost-of-service based regulation. If the retail marketer chooses to give its customers a total fixed-priced deal it must incur the T&D price risk. On a system-wide level T&D prices are comprised of many factors.

Each of these factors must be taken into account in order to calculate a system-wide forecast of an individual utility's rates into the future.

System-wide detail is probably not adequate in most circumstances, therefore the analysis should drive down to the tariff level.

-D.A.F. and M.F.N.

  1. Unit 2004, with true-up thereafter.

The primary differences are load shaping, scheduling, and swing. For instance, a full requirements deal is by definition retail since the marketer would have to follow their demand by scheduling constantly. Wholesale is blocks of power. The standard traded quantity in ERCOT is 50 MW 5x16, meaning 16 hours a day, 5 days a week, 50 MW flat, no fluctuations in demand. Add in odd size blocks (52 MW for instance) and ancillary services such as spinning reserve, line losses, load following (or swing optionality for us financial types) and you get retail generation. Adding transmission and distribution, CTCs, system benefit charges, and other tariff type things gets you to retail bundled," says Mark Courtney, the former director of origination for Enron Energy Services.

Unique Retail Energy Risks

The characteristics that differentiate a retail energy deal also imbue it with certain unique risks beyond those incurred by