February 2006 Market Clearing in the Energy Industry 4-14 © Copyright 2006, CCRO. All rights reserved. 4. ISO/RTOS ISO/RTOs represent a growing share of power market activity, via expansion of existing markets and startup of new RTOs, but have adopted, in many ways, very different products and administrative policies and procedures. Some convergence is beginning to occur with respect to credit polices, however, product design and market operations continue to be unique across ISO/RTOs. ISO/RTO issues, such as settlement cycles and bankruptcy, and where certainty is presently lacking in the ability to set-off physical and financial products, are obvious challenges to clearing solutions. There is a need for design of products that are economically clearable and the creation of clearly defined products that can be made clearable at their initial introduction. 4.1. Vendor Solutions/Offerings Vendors offering clearing solutions need to be clear and accurate about the value proposition being offered. The design of the clearing solution should encourage market confidence, be cost effective, be creditworthy and provide a mechanism for physical delivery. The solution should provide the necessary analytical tools to a potential user to assess the solutions’ economic value, balanced against both real and perceived costs There is a need to clearly and accurately describe the financial backstops of the clearing mechanism, and to describe, in detail, the processes (legally, financially and operationally) surrounding what happens “if the wheels fall off.” Products that are defined and structured by regulatory bodies, such as state regulators, may not find a market to be cleared, as these products are narrowly structured as to offer little liquidity other than through a prescribed auction or like process. The logistical and legal challenges of coordinating physical delivery in the settlement process can be substantial. At this point in time, with the exception of natural gas in some markets2, clearing services for physically settled products are limited in North America, and this, in turn, limits uptake of market clearing. Figure 2-3 provides the locations in North America where gas and power products have been physically cleared. 2 Both NGX and the NYMEX presently have liquid clearing models for physical natural gas, with NGX physically clearing over 15 natural gas contracts across North America, while NYMEX provides for an exchange for physical (EFP) of its floor traded Henry Hub natural gas futures contract.