Solving the electricity credit malaise.
"TCE, a [qualified scheduling entity] QSE in the ERCOT region, filed for bankruptcy protection in March 2003 … the outstanding principal amount owed to market participants at Jan. 1, 2005 is $13,692,188.37. … ERCOT intends to begin the process of uplifting to QSEs representing LSEs the principal amount remaining on TCE's payment obligation to ERCOT. … On Jan. 18, 2005, ERCOT will send invoices totaling $2.5 million to QSEs representing LSEs. … After this initial invoice, ERCOT will continue to uplift $2.5 million per month until it uplifts all remaining outstanding principal."1
Such was the news that greeted ERCOT participants the morning of Jan. 18. This situation is not unique, with many electricity spot markets2 around the world experiencing similar defaults in recent years-often in the millions of dollars.
In most electricity spot markets, the spot-market operator (SMO)3 serves as the central counter-party to all trading, with any defaults socialized to the pool of all participants. Because participants do not have any knowledge of other parties' spot exposures and no way to manage these risks bilaterally, potential losses are both unpredictable and unhedgeable. As a result, participants are totally dependent upon the credit practices adopted by the SMO.