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Collateral Damage

Credit ratings agencies put the squeeze on merchant power.

Fortnightly Magazine - July 15 2002

is needed is for FERC to set reserve limits in much the same way the 1988 Basel Accords set bank capital standards for market risk (the risk that a bank's value may be adversely affected by price movements in financial markets). Or, at the very least, FERC should have a voice on the issue of what capital requirements it considers necessary for players in its markets. Yet, some say capital requirements and oversight should be left up to the Securities & Exchange Commission, or the Commodities Futures Trading Commission, while others ask why shouldn't the market designer participate in the discussion?

According to Prudential, as a rule of thumb, capital adequacy is being determined by a multiple of 3.5 times value-at-risk (VaR), adjusted for the 95 percent and 99 percent confidence level z statistics, which translates into an average multiple of 11.5-12.0 times VaR.

Meanwhile, all this concern over the future of energy merchants has many fearing the end of electric competition in wholesale markets.

But it is interesting to note that such fears have not slowed FERC regional transmission or SMD initiatives, nor has it stopped Congress discussing giving FERC greater authority to oversee wholesale markets. No, it seems the wholesale energy markets will continue to exist-the question is, will the players?



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