February 2006 Market Clearing in the Energy Industry 4 TABLE OF CONTENTS 1. Executive summary .................................................................................................................................. 1 1.1. Definition of Clearing 1 1.2. Clearing Models 1 1.3. Benefits and Challenges 2 1.4. Summary 2 TABLE OF CONTENTS................................................................................................................................. 4 2. Introduction .......................................................................................................................................... 2-6 3. The context for market clearing ........................................................................................................... 3-7 3.1. Clearing defined 3-7 3.2. The rationale and motivation for market clearing 3-7 3.3. Clearing in non-US energy markets 3-9 3.4. Clearing in financial markets 3-12 3.5. The nature of the challenge in energy 3-13 4. ISO/RTOs ............................................................................................................................................ 4-14 4.1. Vendor Solutions/Offerings 4-14 4.2. Market Participants 4-15 4.3. Regulatory / Legal 4-16 5. Key stakeholder perspectives: current positions and issues ............................................................... 5-17 5.1. Independent System Operators (ISOs) and Regional Transmission Operators (RTOs) 5-17 5.2. Merchants 5-25 5.3. Load serving entities 5-29 5.4. Trading organizations 5-30 5.5. Key regulators 5-33 5.6. The implications of market clearing 5-37 6. Vendor solutions.................................................................................................................................. 6-40 6.1. Market clearing needs of the energy sector 6-40 7. CCRO recommendations .................................................................................................................... 7-42 7.1. Bankruptcy considerations 7-42 7.2. continue to promote accelerated settlements and netting 7-43 7.3. Provider of Last Resort (POLR) 7-43 7.4. Competition versus consolidation 7-43 7.5. Other regulatory considerations 7-44 8. Appendix a: BENEFITS OF CLEARING IN REDUCING CREDIT COSTS ..................................... 45 9. Appendix B: USE OF CLEARING IN THE US ENERGY MARKETS .............................................. 48 10. Appendix C: CREDIT POLICY DIFFERENTIATION AMONG ISO/RTOS ................................... 50 11. Appendix D: BANKRUPTCY CONSIDERATION44 DETAILS ........................................................ 55 11.1. Expanded Discussion of Relevant Cases 58 12. Appendix E: MAJOR CLEARING VENDORS .................................................................................. 61