The New York Mercantile Exchange’s electricity futures contractsfailed to take off for a number of reasons but the market is worseoff because of their failure, according to Jack Cogen, president ofNew York City-based NatSource.

“I think [the failure of the Nymex contracts ] is a blow to theexpansion of the [power trading] business and certainly to bringingin speculative interest and paper markets. I won’t say the vastmajority of the natural gas market trades against the futurescontract. I’ll say all of the natural gas market trades against thefutures market. We were hoping the same thing would happen inelectricity. So why did the contract fail?”

A number of factors contributed to the downfall of the Nymexcontracts. For one thing, the contract size was not hourlyconstant, making it unattractive to locals and speculative traders.Calendar spreads were not possible. Cogen, who spoke Monday atPower Markets Week’s Day of the Trader conference in New Orleans,said in his discussions with traders he learned that localsbelieved they were squeezed out of the ring by utilities.

“They thought that at various points when this market wentballistic that people didn’t let them out, that there wasn’t muchliquidity, that they saw their job as adding liquidity. They feelthat the utilities held them to it. And it was instead of us allgetting together and taking honest profits, It was, ‘oh goody, Ican run this in your face and see if you can do it,’ and that theywere squeezed out. “‘If you don’t want me in the ring, I won’t bethere.'”

Another factor that threw water on electricity futures is theattractiveness of electronic trading, such as Nymex’s Access, fortrading electricity. Nymex is converting its electricity futurescontracts to electronic trading. “There are probably few markets aswell designed for an electronic system as short-term electricity.”

Finally, the electricity futures contracts suffered becauseindustrial power users never showed up to hedge their power costs,a big disappointment. The industrial hedgers never really enteredthe market to the extent that by now everyone thought they would bethere. We don’t see industrial firms trading futures to hedge theirelectricity needs.”

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