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Risk Management Forum: Desperately Seeking Liquidity

Troubled markets drive defensive tactics.

Fortnightly Magazine - February 2009

will be there when we really need the capital, we’re pre-funding and shoring up our credit strategy. Also, in November we rolled out a business plan that minimizes reliance on access to new capital in 2009.

 

Fortnightly: How has counterparty credit risk changed for Duke’s business?

George V. Brown, General Manager of Global Risk Management and Insurance, Duke Energy:  There has been some increase in problem credits. Some of the customers in our service territory have experienced financial difficulties, and we have protections in place in our tariffs that enable us to ask for security from customers in this situation. We’ve been doing that in our service territories.

In the wholesale markets, we clear most of our transactions through an exchange clearinghouse, and that reduces counterparty credit risk. A lot of people are trying to do more of that these days. But there are parts of the business where that kind of clearing just isn’t available. For example, we buy a lot of coal, and we have to deal with coal companies through bilateral transactions. Those companies have felt some of the pain, but they experienced very high prices at some points and so most of them aren’t in terrible shape. They’ll be able to weather the storm if it doesn’t go on for too long. They’ve contracted for their product sales and they can contain their operating costs.

We’re paying attention to our customer base, staying ahead of the headlines, and where we need to do so we’re asking customers to provide security against receivables.

We don’t have a lot of market risk. We don’t have a lot of exposure to spot-market volatility, so we’re not subject to the whims of short-term prices. We do have some off-system sales and wholesale trades that move with the price of power. That’s down a bit from where it was in 2008, but it doesn’t look like it will be a big fall. The entire energy complex has been coming down. Since we operate in a margin business, it hasn’t had a huge impact on us at this point.

 

Fortnightly: How has the Wall Street meltdown affected your access to risk-management services from financial firms?

De May:  There has been a reduction in liquidity generally, but it hasn’t really affected us. We did have some transactions with Lehman. But because we don’t do much trading and we don’t have a proprietary trading business, it hasn’t been a big deal for us. We tend to sell to other utilities or into RTOs.

Fortnightly: How do you anticipate the economic downturn will affect demand for energy commodities? How is this affecting your hedging activity and supply plans?

Brown: We anticipate with the downturn there will be reduced demand in the short term. We’ll experience some problems with collections, but I don’t know that it will have a big impact.

Utilities have a very long-term horizon, and at this point we don’t see a material change in long-term residential demand growth for the company. There could be other changes that have a material impact on