UPDATE: US Power Markets Tighten Credit Requirements
By Mark Peters
Of DOW JONES NEWSWIRES
NEW YORK -(Dow Jones)- 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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Publié le 13 janvier 2009 Copyright © 2009 Dowjones
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