Is a proposed solution to energy-trading woes too little too late?
The Committee of Chief Risk Officers (CCRO) representing various utilities and merchant...
a spate of banking industry disasters linked to financial derivatives. The group succeeded in doing something that few best-practice groups have achieved: It persuaded one of its most prominent members to go public and officially endorse recommendations adopted by the group as a whole.
At the time, the CEO of J.P. Morgan held press conferences in New York and London supporting the group's recommendations-and inspiring other banks to make such declarations. Furthermore, the Group of Thirty is made up of industry professionals as well as some regulators and academics (not the case with the CCRO). Many believe this grouping has contributed to more sober and realistic recommendations. In fact, the 1990s recommendations exceeded the scope of the regulator's proposals-another aspect that gave the group credibility.
When the CCRO unveiled its proposals for improving energy price indexes in late February, many industry watchers voiced disappointment to see so few utility companies stand up and support the standards publicly. In fact, so loosely fashioned are the best practices for price indexes that many feel the industry may never succeed in developing indexes that offer an accurate picture of the market. That, of course, would be disastrous. Without a true understanding of how much power to buy or sell on the open market, utilities are setting themselves up for more decades of paying for overpriced contracts that they may or may not be able to pass on to ratepayers.
The bottom line is that the CCRO exists to help utilities satisfy their most singular mission-to provide power for their customers. While some bold utilities may claim that they have more than enough generation to meet load and do not need liquid wholesale markets, there are more than a few divested, wires-only distribution utilities in which a contract with a supplier is the thread by which they fulfill their obligations. One can think of many situations by which that thread might be cut. Recall the late 1990s Midwest price spikes and how suppliers, outages, and weather failed one Midwest utility that was forced to pay egregious power prices on the open market to meet its obligations.
The Regulators: Putting the Screws to Utilities
Even as utilities seek the best supply contracts they can find for their customers, it's obvious that they are being forced to go back to the old days of establishing resource adequacy. Take, for instance, Duke Power, which in late January issued a request for proposals to wholesale power suppliers and power marketers to supply the company with up to 500 MW of electricity beginning in 2005 and up to 1,500 MW beginning in 2009. According to press statements from Duke, the company intends for the RFP to help it use the competitive wholesale power market to meet its customers' growing need for electricity. And sources say Southern Co. is actively engaged in providing supply contracts to various regional entities. But without a viable regional market to point the way on price, these utility buyers and sellers risk the wrath of state regulators, who eventually may launch prudence reviews and disallow long-term purchased