UPDATE: US Power Markets Tighten Credit Requirements
January 13 2009 - 4:14PM
Dow Jones News
U.S. power markets are tightening credit requirements in the
wake of the global financial crisis, trying to reduce risks faced
by generators and other market participants.
Independent system operators, known as ISOs, have faced the
sudden exit of prominent investment banks from their markets, while
seeing increased concerns about the liquidity of some remaining
participants.
ISO New England may eliminate unsecured credit made available to
firms that trade in the six-state electricity market it operates.
The California ISO reduced similar credit limits last month as part
of changes to protect participants against defaults.
The California ISO was "confronted with the question of whether
we should reject letters of credit from certain prominent banks
that appeared troubled," said its chief financial officer, Philip
Leiber, during a Federal Energy Regulatory Commission hearing
Tuesday. "We also had market participants that were severely
strained due to bankruptcies of their major customers."
The changes come as power markets have seen liquidity diminish
as some banks cut their operations, while others such as Lehman
Brothers Holdings Inc. (LEH) - which filed for bankruptcy
protection last fall - completely exit the markets.
An ISO functions as a clearinghouse for a regional power market.
A generator sends electricity to a buyer, but the payment isn't
immediate, taking time to clear through the ISO. That creates risk
for market participants, which in some ISOs have to together absorb
the cost of defaults.
ISO New England extends $75 million of unsecured credit to
participants, usually requiring a corporate guarantee or strong
credit rating. But it's looking to eliminate unsecured credit all
together, requiring a letter of credit, cash or other secure
facilities.
"Recently there have been 'near misses' and one of the largest
investment grade players in the region publicly announced that
without financial relief it would have declared bankruptcy," ISO
New England Chief Financial Officer Robert Ludlow said in testimony
to FERC.
A spokeswoman for ISO New England declined to comment on the
"near misses," or name the company Ludlow refers to in his
testimony.
The elimination of unsecured credit would be the latest step to
address credit in ISO New England's market, which has grown from
clearing annually $500 million to nearly $10 billion in the last
decade. Ludlow said the ISO wants to prevent the encouragement of
"unmitigated risk-taking" by providing unsecured credit.
But some power market participants have concerns that increasing
collateral requirements could reduce liquidity and participation in
regional power markets.
"As a result of the current strain in the financial markets,
companies may find reduced access to liquidity impacting their
ability to take on further counter-party risk or grant credit.
Thus, the difficulty of satisfying potential liquidity calls on new
transactions may mean fewer transactions are consummated," said
Daniel Sarti, credit risk manager for Arizona Public Service Co., a
subsidiary of Pinnacle West Capital Corp. (PNW) that generates and
delivers power.
The California ISO last month decided to cut the unsecured
credit limit to $150 million from $250 million. Also, it changed
other credit rules, including financial penalties for companies
that default or make late payments.
Banks active in U.S. power markets, including Goldman Sachs
Group Inc. (GS) and Barclays PLC (BCS), couldn't be reached
immediately for comment.
Other regional power markets are looking at credit requirements.
PJM Interconnection, which oversees the market in 13 states,
including Illinois, New Jersey, Ohio, Pennsylvania and Virginia,
already was looking at the issue ahead of the global financial
crisis after facing defaults two years ago, a PJM spokeswoman
said.
-By Mark Peters, Dow Jones Newswires; 201-938-4604;
mark.peters@dowjones.com
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