WASHINGTON (CN) – The Federal Energy Regulatory Commission had proposed universal credit practices for the wholesale electricity market to replace the ad hoc credit practices developed by regional transmission organizations and independent system operators.
Among the reforms the commission is seeking is a reduction of the billing period between the purchase of electricity and payment to seven days. Reducing the settlement period would lower collateral requirements for counter-parties, reduce credit risk exposure time and provide earlier identification of potential defaults. Eventually the commission would like to see one-day settlement periods.
Such a reform might pose cash flow problems for wholesale buyers who bill their retail customers in 30 day cycles and who benefit from the “float” or interest they earn by keeping their cash on hand for longer periods.
If the billing cycle is reduced, the need for extension of unsecured credit to wholesale buyers would also be reduced and the commission proposes to limit such unsecured credit to $50 million per counterparty. The commission also is considering different unsecured credit limits for different sized electricity markets, but ultimately would like the energy markets to eliminate the use of unsecured credit if the billing cycle is reduced to one day.
The other side of buying electricity often is buying capacity on a transmission system to transport the electricity to customers. Transmission rights often are sold under longer dated contracts running up to years into the future. Because the value of transmission rights fluctuates with the condition of the grid and the weather, and the contracts cannot be terminated until the expiration of the contract, immediate losses due to reduced capacity could quickly bankrupt a buyer. The commission proposes to eliminate unsecured credit in transmission rights markets so that buyers will not enter contracts beyond what their secured credit lines would allow.
When a wholesale buyer goes bankrupt, because actual title to the energy in an energy transaction does not switch to the owner of the system on which the energy was bought and transmitted, the system operator cannot net payments it owes to a buyer against those owed by the buyer to the system. This causes the system to take a loss on any transactions not already paid for because creditors of the bankrupt buyer would have claim to payments owed to that buyer.
To offset the risk the system operator bears, the commission plans to require all market participants to include provisions in their contracts that would allow participants to net payments owed and payments received between counterparties before creditors can claim right to any payments.
More fundamentally, the commission is asking market participants to define financial criteria for participation in the market. The commission believes that it currently is too easy for under-capitalized traders to enter the market, placing a great degree of risk of default on other participants.
The commission’s proposals may radically alter the landscape for participation in energy markets causing smaller buyers to join consortiums, as in many cases they would find it hard to meet the liquidity demands the proposals would require. Feedback on the commission’s proposal is due by March 29.