February 2006 Market Clearing in the Energy Industry 5-20 © Copyright 2006, CCRO. All rights reserved. 5.1.3. Varied payment /settlement10 periods and policies ISO/RTOs maintain complex settlement processes that are the result of their stakeholder processes, business practices and the products and services they offer. Generally, the settlement occurs during the first few business days of each month following a transaction with payment due to the ISO/RTO within 10 business days of receipt of the bill by the member, or by the 20th of each month. This timing is consistent with traditional bilateral market transactions. The cash conversion cycle results in a 50- 53 day period between the time a transaction occurs on the first of the month and receipt of payment from the ISO/RTO to the seller on or about the 22nd of the following month. Exchange based clearing processes generally settle and clear on a daily basis. ISO/RTOs have begun to recognize the importance of accelerated settlement in market risk mitigation after experiences with participant defaults that at times were beyond the control of ISO/RTO regulations. ISO-NE made the first step to move from monthly to weekly settlement to mitigate mutualized risk. Additionally, since the adoption of weekly billing by ISO-NE, MISO has adopted weekly billing, and the SPP has proposed implementing weekly billing. ISO/ RTO/ Pool CAISO ERCOT MISO ISO-NE NYISO PJM SPP Generic Trans- mission Owner WSPP Settlement Period (days) 95 35 15 15 52 52 1511 52 52 As shown above, ISO-NE and CAISO settlement periods are at opposite ends of the traditional cycle. ISO-NE implemented a 7-day billing cycle in July 2004 resulting in a settlement cycle of 15 days12 while CAISO has a cash conversion cycle of up to 95 days (102 days13 for which collateral coverage is required). In addition, there are various ‘true up’ processes in each of the ISO/RTOs that call for billing adjustments based on a number of factors including system issues, lack of accurate data, or FERC orders that may result in rebilling and settlement issues as much as 24 months in arrears of the original transaction. 5.1.4. Netting of exposures A challenge that has caused difficulty for some participants is that while netting of obligations achieves credit risk mitigation for settlement, it is ineffective with respect to collateral or margin posting, and inefficient from a capital allocation standpoint. 10 This is the documented “settlement or billing cycle”, while corresponding collateral, required by credit policy, requires a longer posting period, due to a 3-5 business day lag of data for settlement. 11 Proposed weekly billing cycle. Invoiced on Friday, payment due on the following Wednesday 12 See New England Power Pool, 107 FERC ¶ 61,201 (2004). 13 Metering data is received 45 days after the flow of energy.