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The Nation's Grid Chiefs: On The Future of Markets

Exclusive interviews with the CEOs of five regional transmission systems.

Fortnightly Magazine - October 2006

that. But what that has forced us to do, what has happened to us at MISO, PJM, New York, New England, California, ERCOT, Alberta, and so on, is that 65 percent of our market development software is custom-designed.

But for my grid operations, almost all that software is off-the-shelf. Only 5 percent of it is custom. If you’re writing custom software, it’s extraordinarily expensive. And then it has to be repeated every three to four years. It doesn’t make economic sense to have all these RTOs all writing custom software to do the same thing. That’s where the cost comes into it.

And another source of cost is clearing. We don’t have the clearinghouse functions like normal commodities do, where they clear every day. As a result of that, we have to have these huge collateral deposits. PJM has nearly $300 million in cash deposits on hand, to collateralize the monthly bill. That’s $300 million that’s taken out of circulation. That’s not good.

Fortnightly: How do we get this done, to create a better system for financial clearing? Who makes the first move?

Harris: Well, I don’t know. Our members largely do not want it, because for those who are paying the bills every month, that’s a nice thing. And yet we know from a market point of view that all commodities work with clearinghouses, because you clear daily. You spread the risk. So we know that for us, the dollars of collateral that we have to hold is increasing to the point of becoming way too much.

Fortnightly: Have you talked with banks on this?

Harris: We’ve talked with everybody. How we break the impasse, I don’t know. But this has nothing to do with the merits or demerits of markets. It has to do with maturing; with getting more normalized market forces in play.

You’ll notice that Fortis bought the Cinergy energy trading platform, but they had to pay a premium for it. [Editor’s note: Fortis announced June 27 that it would acquire Cinergy Marketing & Trading LP and also Cinergy Canada Inc., an Alberta corporation, from Duke Energy, paying a base purchase price of approximately EUR 165 million, plus roughly the same amount again for the value of the acquired trading portfolio.]

We see banks moving more and more into the physical side—getting very close to what happens with the physical delivery of electricity. You can see what’s happening from the Goldmans, the Morgans, the Citicorps. It’s very interesting; it seems like the financial community has recovered from Enron and is getting its sea legs.

Fortnightly: Do you have a potential merger partner there somewhere?

Harris: Well, I think you’ve got two national forces moving. You have RTOs, which are learning how to manage very large grids, for which the nation is better off, as opposed to having a large number of city-states.

And then you have the banks [which] bring the sophistication and the risk-management tools that will provide the hedging and the price certainty.

I don’t know where or how any of these things will link up,