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Nymex Still Waiting for Contracts to be Electrified

Nymex Still Waiting for Contracts to be Electrified

If the Nymex electricity futures contracts were a party, by now the chips would be stale and the drinks flat, with only a handful of guests having shown. Despite much fanfare over their respective launchings, the New York Mercantile Exchange's five electricity contracts have largely languished for lack of activity.

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.

"I think originally we would have thought by now we would have seen more meaningful movement [in the contracts]," Levin said. For example, on Wednesday, Palo Verde was the most active Nymex electricity futures contract of the five. It traded 329 contracts, which is paltry compared to the Nymex gas futures contract traded at the Henry Hub. An average day for gas futures sees 60,000 to 70,000 contracts traded. The gas futures record is 168,057 contracts, set Sept. 26, 1997.

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. In the meanwhile, we're not just sitting and waiting." Issues with regard to competition that Nymex once thought of as short-term now have become medium-term, Levin conceded. "It's going to take some serious work. The market hasn't taken off. It hasn't completely ended either."

The Nymex Alberta gas futures contract "never really traded," Levin pointed out, noting the Nymex has a commitment to the industry.

The California Power Exchange on Wednesday 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 oranges. And Levin wouldn't put the California PX - with its captive utility customers-in the same category with other cash market exchanges, he said.

"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, and we even think for the California Power Exchange. They're sort of constrained in their own way."

Levin said the exchange has no plans to abandon any of its electricity futures contracts. Nymex, in fact, is seeking Commodity Futures Trading Commission approval to launch its sixth electricity futures contract, Mid-Columbia. Levin said a launch probably won't happen this year, partially because members of the commodities trading industry have agreed to limit the number of new product launches on the eve of Y2K.

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