February 2006 Market Clearing in the Energy Industry 6-40 6. VENDOR SOLUTIONS The suggestion is often heard that adoption of clearing by a few, highly rated, prominent companies is necessary if widespread adoption of market clearing is to gain momentum. While there is merit to that position, it is also true that the adoption of clearing will accelerate when the features of clearing services create value for the broadest possible set of companies. This includes solutions that successfully deal with the issue of physical delivery, as well as other important issues, such as the potential for the loss of unsecured credit, which would increase the cost of capital for some entities. Clearing solutions that successfully deal with these issues will see more participation in cleared markets, especially physical markets, as benefits such as price transparency and liquidity will make the use of clearing services increasingly feasible for many participants. It is up to the market (i.e., the vendors) to offer attractive services, and competition between solution providers will provide the innovations in services and pricing that will make this happen. The situation in the financial markets demonstrates that it is possible to design and price clearing services that appeal to a critical mass of participants, across sectors (producers, end- users, trading entities) and across the ratings spectrum from highly rated entities to non-rated and sub-investment grade entities. In financial markets, where clearing has been successful, entities of all types are attracted to participate due to the benefits of significant liquidity and price transparency brought by these efficient markets. From a regulatory perspective, the policy goals should relate to fostering an environment of innovation in clearing services by the market, deepening and broadening netting pools, and removing barriers to adoption. This section summarizes the needs of the industry participants identified in Chapter 3 and compares them with the services offered today by market clearing vendors. The comparison reveals gaps between what the industry needs and what is offered identifies opportunities to improve the competitiveness of clearing solutions relative to non-clearing solutions and highlights barriers to adoption to market clearing which, if removed, would allow the potential benefits of clearing to be realized more fully. 6.1. Market clearing needs of the energy sector The adequacy of market clearing services relative to the needs of energy sector participants can be evaluated along three dimensions: • The breadth of services offered • The completeness with which the services cover energy trading products, and • The cost of the services offered. These dimensions are framed in a general way, so that they can be used to evaluate both market clearing solutions as well as non-clearing solutions. In 2002, the CCRO identified and provided a high level review of four major energy clearing solution providers, i.e., NYMEX, ICE, EnergyClear, and VMAC. Since then market clearing continues to evolve, both with the entities