February 2006 Market Clearing in the Energy Industry 5-29 © Copyright 2006, CCRO. All rights reserved. 5.3. Load serving entities 5.3.1. Impact of shortened payment cycles The shortening of payment cycles adversely affects the cash flow of a load-serving entity (“LSE”). A major concern here is that the LSEs usually receive payments from their members on a monthly basis for energy delivered the prior month. At present, the accounting systems of the LSEs are usually set up for monthly reconciliations and payments. This offers little benefit to a LSE that presently operates with sufficient credit to transact in the market. It basically reduces the amount of open credit received by the LSE as a result of a shortened payment cycle. On the flip side, this will ultimately reduce the amount of exposure that an LSE would be subject to in the event of a default by a market participant. 5.3.2. Impact of netting The ability to offset payables versus receivables is perceived to have a positive impact on the operations of the LSEs. The ability to offset receivables/payables across affiliates and across commodity lines is also viewed as having a positive impact on the LSEs. 5.3.3. Impact of daily settlement on credit exposure Daily settlement accelerates payments resulting in an increase in capital costs for investment-grade LSEs, with benefits limited to the reduction in the magnitude of credit loss that needs to be mutualized, and from improved pricing and liquidity due to increased participation. However, many LSEs are already accustomed to daily settlements as a result of their involvement with NYMEX, EEI contracts and ISDA agreements. Additionally, daily settlement requires additional resources at the LSEs that translate into additional overhead to monitor these transactions. Ultimately, the combination of higher capital and administrative costs needs to be weighed by the LSE against the benefits of lower credit losses subject to mutualization, as well as the benefits from increased participation. 5.3.4. Issues associated with POLR obligations At the present time, there is little clarity regarding the issues associated with POLR obligations. A financially weak POLR supplier must provide service but may not possess the financial ability to procure the power. A significant issue to LSEs is the concern about the uncertain costs associated with these obligations once they are turned over to an ISO/RTO. Since there is uncertainty regarding the rules associated with POLR, it is difficult to determine a long-term plan.