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Commission Watch

IOUs, RTOs duke it out over standardization.
Fortnightly Magazine - September 2004

up many lines of credit and establish separate collateral with many trading counterparties.

Flory's company wants to take over all the credit risk for the RTOs and ISOs, similar to that done by the DTTC. He promotes bridging the financial and physical markets to ensure that physical and financial reliability reinforce each other. He says the challenge is creating a credit-clearing solution that fits the physical market and bridges to the financial energy markets.

He calls for netting across market transactions-that is, treating electricity not as a commodity but as an accounts receivable, for spot and forward power, gas, and financial transactions. He also advocates multi-level clearing and says that netting allows significant reduction in cash requirements by freeing up the cash available to trade further forward.

Mary Duhig, director of Aon Trade Credit, which focuses on mitigating credit risks, recommends credit insurance as a solution to mitigating risk of bankruptcies and late payments. The policies can be structured to fit needs. Prices vary depending on coverage and deductibles, which are determined by the level of risk clients are comfortable carrying on their balance sheets. She points to an ISO that wanted zero deductible on its insurance policy covering cooperatives with $100 million in annual revenue; the price was $150,000. She calls this type of insurance "very cost-effective especially when compared to derivatives." But questioning by FERC staff showed that they believe there is some reluctance on the part of RTOs to buy such insurance because of its high cost.

 

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