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Power Prices Today: Growing More Unpredictable

Even the volatility is volatile. And that can play havoc with hedging.
Fortnightly Magazine - October 1 2002

in past summers. Other aspects of the wholesale power business have changed significantly.

  • First, trading volume has dropped. According to , the total volume of trade on the daily wholesale market on July 16, 2002 in the major eastern markets considered here were 272,000 MWh over the 16 peak hours. On the same date in 2001, the volume of trade was more than twice as great. Similar results are obtained for other dates. The decline in volume of trading is consistent with a decline in the number of players and reduced risk in the market. It may also be a consequence of a greater effort at quality control by major price reporting services because of pressure from regulators and the industry. 5
  • Yet trading expands in Texas. Again, according to , Texas now has more distinguishable wholesale power markets with a combined volume of trade of almost 100,000 MWh over the 16 peak demand hours on July 16, 2002-more than 4 times as much as the previous year at the same time. Similar results are also obtained for other dates. This growth is explained by the recent restructuring of electricity markets in Texas.
  • Futures markets fail badly. Regulated futures contracts for power, which were greeted with much fanfare at their inception, were finally delisted this year, because of a lack of trading. The failure of these markets may be traceable to the futures contract for power being too much like the very successful natural gas futures contract, since the two businesses are very different. This fact occurred because of the great success of the natural gas futures contract market. Yet the gas business has storage, which can put a damper on price increases for one or several days. Unexpected congestion over several days on a major transmission line is also more common for power than for natural gas. Outages of major power plants are also more frequent than the shutdown of a large number of wells. Such differences would seem to argue for standard contracts with different features to include a shorter term for power.
  • Banks emerge as traders. Not only are there new markets, but there are also new entrants to the wholesale part of the industry interested in building business in derivatives as a risk management service and in trading. As discussed earlier, Bank of America has hired a former Enron regional director to head up its new trading desk in electricity derivatives. Earlier in the year, UBS took over Enron's trading operations, and Deutsche Bank expanded its energy desk and opened a new office in Calgary, hiring former Enron managers to build a derivatives business. These companies, of course, have excellent credit ratings and broad knowledge of financial markets, unlike the many wholesale power arms of energy companies that are greatly reducing the size of their wholesale and risk management operations.
  • Distributed generation serves to manage risk. It also appears as if companies and major consultants to the industry are looking increasingly and more critically at the flexibility afforded by technologies such as distributed generation and by payment methods