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The Fourth Wave

Are banks better at trading power than utilities?

Fortnightly Magazine - October 1 2002

that they are somehow avoiding some sort of physical or environmental risk. Maybe some tax issues. Whatever the legal implications are to having title instantaneously from original producer to the ultimate consumer with a whole bunch of financial players in the middle that collapse out instantaneously. I don't think it is physical."

In fact, our trader goes so far as to offer a mathematical proof.

"If you are in a physical business," he explains, "you have contract load and contract price." [And he adds that excess load-actual load above contract load-above contract volumes will settle at the spot price.] "That is basically the pay out. That is what you are going to be paid at the end of the month."

Here is that equation:
LC x PC + (LA - LC) x PS

And that equation can also be expressed this way:
LC x (PC - PS) + LA x PS

The banker continues: "So, you deliver that [contract load], and if your public needs more [excess load], you are going to be paid the spot price for the excess. If you deliver too little, then that is a negative number and that means you are going to buy in the difference that you owe there from the spot market. If I take the [contract] terms, that is a swap. These things are mathematically indistinguishable. The physical market and the financial market-the economics are entirely the same."

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