Nymex Power Futures Anything But Electric
The chips are stale; the drinks are flat, and people are
leaving. The New York Mercantile Exchange electricity futures
contracts aren't very festive, and now the host is wondering what
it can do to liven up the party.
Despite much fanfare over their respective launchings, the five
electricity contracts have largely languished for lack of activity.
"I think there is widespread interest in trading the contracts once
they become liquid but very little interest in trading the
contracts to help reach that critical mass of liquidity," said Tim
Evans, senior energy analyst with Thomson Global Markets in New
York City. John Saucer, an analyst with Salomon Smith Barney, said
he doesn't follow the contracts simply because they aren't liquid,
and he doesn't expect to be paying much attention to them anytime
One thing Nymex could do to boost liquidity is eliminate all but
one contract in the East and one contract in the West, suggested
Randall Gibbs, owner of BTU Energy Futures. Cinergy should remain
in the East, and California-Oregon Border (COB) should be the
western contract, he said. Gibbs said his firm is leaving the Nymex
electricity trading ring this month after failing to get the
exchange to waive the cost of its $6,500 to $8,000 monthly lease.
Gibbs said if he were Nymex, "I would pay locals to stay in the
ring for six months to get that contract going. I would offer
substantial subsidies to those companies."
Gibbs doesn't like talk he's heard of Nymex removing the
contracts from the pit and trading them electronically. Others who
have left the Nymex electricity ring are Paribas Futures Inc.,
Cogent, and ABN Amro Bank.
Robert Levin, Nymex senior vice president for planning and
development, conceded the exchange is examining various proposals
for bringing liquidity to the contracts, particularly with an eye
to bringing in more market makers. "The contracts themselves are
fine, and so it's a matter of, I think, supporting market-making
and then getting back out to the customer base, the commercials,
and reinforcing with them what we're doing and attract them back
in. I think that's pretty much it."
Levin wouldn't comment on traders who have left the electricity
pits or say what, if any, suggestions they have given the exchange
for improving liquidity. While he conceded the contracts are
anything but robust, Levin said that's not entirely the fault of
Nymex. "We're still talking about an industry where the
overwhelming lion's share is still tied up in longer-term deals as
it is. Some of it is freed up, but most of the part that's freed up
is focusing on the very, very near-term, which is traditionally not
the realm of futures contracts."
Augmenting this scenario against liquidity is an industry that
sees long-term electricity deals as largely high-risk plays. Energy
industry executives on the conference circuit often warn the
farther out you go with power deals, the farther you have to fall.
Levin blames faulty and slow progress of electricity
deregulation for the dearth of activity in electricity futures.
"Natural gas feeds electricity, and yet the natural gas commercial
market is far larger [than electricity]. I think we're still in
that holding pattern of when do the regulators allow [electricity]
to be a real market.
There's no denying electricity futures suffer from comparision
with natural gas. The volume record for the much longer running
Nymex gas futures contract traded at Henry Hub is 203,807 set July
23, 1999, while the Palo Verde contract set the highest record of
all five electric contracts Feb. 19, 1998 at 2,026. The
California-Oregon Border (COB) contract record is 1,581, set Dec.
18, 1997. The Cinergy record stands at 1,086, set Oct. 23, 1998.
Entergy and the Pennsylvania-New Jersey-Maryland (PJM) contracts
have yet to break 1,000.
While Levin blames regulators, others point out Nymex has
handled the electric market much differently than it did natural
gas, jump-starting multiple contracts at locations with limited
trading. For many years the only contract for gas was at Henry Hub,
and that contract was only brought on line after Nymex had
extensive discussions with industry leaders across the country and
set up traveling educational forums. Part of the problem with
electricity futures has been the regional nature of the industry
and pressure from competing exchanges threatening to set up
The California Power Exchange last recently touted the matching
of 250 contracts for electricity delivery in August and September,
marking the first significant trading activity for the PX Block
Forwards Market. To Levin, though, comparing California PX
contracts to Nymex contracts is akin to comparing apples to
"We have continually been disappointed that California utilities
have been held captive to any market, and we think the sooner
they're allowed to participate in the free market, the better for
California deregulation and the better for everybody."
Levin said the exchange has no plans to abandon any of its
electricity futures contracts. Nymex, in fact, is looking to launch
its sixth electricity futures contract, Mid-Columbia next year.
Randall said it's a point of pride for Nymex to hold on to the
contracts and not de-list them. "They are the energy hub of the
country in terms of trading any form of energy. They're not going
to go down easy on these contracts. I think the contract right now
is going to go to sleep for a protracted period of time. I don't
know if there will be a Prince Charming coming along to kiss it and
bring it back to life."
Joe Fisher, Houston