Series Part 4: Retail supply auctions, known as Basic Generation Service auctions, are being proposed around the country. In a second article on BGS auctions, Andy Dunn presents a different view...
Solving the electricity credit malaise.
already clearing energy futures, such as NYMEX.
Posting full collateral under current billing arrangements, with potential exposures of approximately 60 days' settlement, would represent a significant imposition for many participants. 9 However, by accelerating settlement time frames the quantum of any potential default, and associated collateral requirements, can be reduced significantly. Under spot-market clearing, settlement will occur on a daily, or "T+1," basis, with the following characteristics:
- Settlement amounts are calculated by the spot-market operator, immediately following the end of the trading day.
- On business days, settlement and funds transfer will occur later the same morning. Because fund transfer networks do not operate on weekends and bank holidays, amounts calculated on these days will be settled the next business day ( e.g., trades for Friday, Saturday, and Sunday will all be settled on Monday morning). 10
- Any failure to pay results in a margin call, which must be promptly satisfied (generally within an hour or so) to avoid default.
This process not only substantially reduces potential exposures ( see Figure 3 ), but it is consistent with the mark-to-market process in the futures market. This facilitates the netting of spot-market settlement cash-flows with mark-to-market settlement of futures positions, as well as settlement cash-flows from other spot markets being cleared. This results in a single net movement of cash across all trading activity cleared at the same clearinghouse.
But from where will the data required for settlement come? One apparent complication with T+1 settlement is that some required input data, in particular metering data, may not be available immediately. This situation, however, represents a classic tradeoff between timeliness and accuracy-where it is preferable to use data of "reasonable" accuracy on an interim basis, with later true-up once more accurate data becomes available. This satisfies (most, if not all of) the settlement liability sooner, allowing collateral requirements to be substantially reduced (by contrast, if settlement waited until final measurement data became available, it would be necessary to hold collateral for the entire intervening period). Alternate sources of data include SCADA and State Estimator 11 results, demand forecasts, and dispatch instructions. In most markets this data exists now, without any additional need for data collection.
Risk limits may be applied to some spot-market products, to ensure that a participant's position stays within acceptable risk boundaries. This is most relevant for those products where historical performance is not necessarily an indicator of future performance, such as day-ahead electricity. Limits ensure that a participant cannot dramatically lift its trading activity, and hence exposure, without prior authorization.
Ensuring the timely movement and accurate tracking of funds is important in maintaining the integrity of any settlement or credit process. Clearinghouses maintain an extensive network of relationships with money-market banks for the efficient daily and intra-day movement of funds-both cash and other assets. These mechanisms are generally integrated with national and inter-national funds transfer networks, such as Fedwire. Clearinghouse banking processes are significantly more robust and effective than the banking processes currently employed by any electricity spot market.
Financial and Market Surveillance