February 2006 Market Clearing in the Energy Industry 7-43 © Copyright 2006, CCRO. All rights reserved. 7.2. continue to promote accelerated settlements and netting A central tenant of market clearing is the use of accelerated settlements and netting to reduce risk and improve capital efficiency. As such, efforts to promote accelerated settlements and netting should continue to be encouraged by regulators and ISO/RTOs. 32 FERC has demonstrated through its Policy Statement that it supports both accelerated settlements and netting within ISO/RTO markets, to the extent practical33. For example, actions by ISO-NE, with its stakeholders in NEPOOL, resulted in the first weekly billing tariff being accepted by FERC, prior to FERC holding its Electric Creditworthiness Technical Conference in July 2004. The ISO-NE action reduced risk in ISO-NE administered markets by over 65%. With ISO-NE adopting weekly billing, and other ISO/RTOs subsequently following ISO-NE’s lead (or in the case of CAISO, CAISO stating it intends to move to billing mid-month, the month after flow, subsequent to the implementation of a new settlement system scheduled in 2006), the clear trend in ISO/RTO markets is towards accelerating settlements. Additionally, the trend in ISO/RTO administered markets has been towards increasing netting, including in ERCOT, where draft protocols for the new nodal market would allow Congestion Revenue Rights (CRRs) and energy market activity to be eligible for netting. 7.3. Provider of Last Resort (POLR) Clearing of energy products in power pools can greatly reduce the credit risk of individual pool participants in the event of a default by another pool participant. However, all pools have an obligation to continue to supply the load obligation of each pool load serving entity (LSE) even if that LSE stops paying for services and products provided by the pool. The pool in effect becomes the provider of last resort (POLR). Each pool has a methodology for how the unpaid amounts for these POLR services will be shared among all other pool participants while the pool tries to collect for these unpaid for products and services through legal and regulatory processes. (Note that in California, default amounts are not re-billed to the rest of the pool, but rather net creditors in the month of a default receive only partial payments.) Providing a clear and efficient regulatory process for power pools to collect payments from defaulting pool participants is essential to ensure pool participation and continued operability following a significant default. 7.4. Competition versus consolidation It was observed earlier that competition among alternative energy market clearing platforms is at an early stage. Fostering competition will produce clearing services better matched to the needs of a wider profile of clearing participants. For competition to exist there must be multiple, separate market clearing solutions. However, by definition this leads to fragmentation of the breadth and depth of the netting pool. Yet, it is clear that a very wide, very deep netting pool is in the interest of clearing participants. If the evolution of energy market clearing follows the same trajectory as the evolution of financial market clearing, then we can expect to see the marginal benefits of innovation decrease. At some point the marginal benefit of widening and deepening the netting pool will 32 109 FERC 61,186, paragraph 31 33 109 FERC 61,186, paragraph 31
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