February 2006 Market Clearing in the Energy Industry 4-15 © Copyright 2006, CCRO. All rights reserved. FIGURE 2-3. NORTH AMERICAN PHYSICAL CLEARING LOCATIONS3 4.2. Market Participants The wide array of market participant types creates a challenge for potential clearing providers to develop products that meet the expectations of all participants, and minimizes transaction costs. The potential use of clearing spans many types of market participants from hedge funds, who may rely almost exclusively on clearing services, to Provider Of Last Resort (POLR), LSE (Load Serving Entity) and Retail providers that view a clearing proposition as only adding additional costs to their operation. In a clearing model, highly rated counterparties – or unrated counterparties, such as co-ops - that may not typically be required to post collateral in bilateral credit arrangements are required to post initial margin (and/or maintenance margin) as well as variation margin in the event of negative price movements for cleared transactions. Thus, market clearing may increase the cost of capital for some participants. Market clearing mechanisms for the physical real-time electricity markets are also difficult to design due to the issues of load metering (i.e., the data is not immediately available), and related billing cycles (i.e., billing and settlement take place well after the transaction date), especially in those markets with direct access. Additionally, regulatory uncertainty surrounding the treatment of a POLR bankruptcy creates other risks and challenges. 3 Note that the map identifies only locations where physical clearing is offered and where transactions have been reported to have cleared. Malin Malin NYMEX NECC via ICE NECC via ICE NGX NGX Huntingdon Station #2 Station #2 Intra Alberta US/MMBTU NGX Atco North NGX Atco North NGX Intra-Alberta NGX Empress NGX TEP NGX TEP Emerson Great Lakes Emerson Great Lakes NGX Ventura NGX Ventura NGX Chicago NGX St. Clair NGX St. Clair NGX Union Dawn NGX Chippawa NGX Chippawa NGX Niagara Falls NGX Niagara Falls NGX Union Parkway NGX Iroquois NGX Iroquois Mid-Columbia Mid - Columbia Palo Verde Palo Verde PJM PJM ERCOT North ERCOT South ERCOT South ERCOT North East ERCOT North East ERCOT West ERCOT East ERCOT East Houston Henry Hub