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Brisk Trading Marks Opening of Eastern Electric Futures

July 13, 1998
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Brisk Trading Marks Opening of Eastern Electric Futures

The New York Mercantile Exchange (Nymex) reported a fairly active first day of trading for the eastern electricity futures contracts on Friday, with a total volume of 939 contracts traded. This, however, was 282 fewer contracts than the number traded during the first day of the western electricity contracts in 1996, a Nymex official said.

The volume of contracts traded for delivery into the Cinergy Corp. system was 573, while the number of contracts for delivery into the Entergy Corp.-based system was slightly lower at 366, noted Nymex spokeswoman Maria Gonzalez. Both figures were estimates and will be finalized today. The price for the Cinergy- and Entergy-based contracts settled at $58 and $62.50, respectively, she said. The contracts are for delivery in September.

The launch of the two eastern electricity futures contracts comes a little more than two years after the successful kick-off of the western power contracts at the California/Oregon border and at Palo Verde, AZ, which together now trade an average of 2,500 contracts daily "There's no real basis for an expectation" that one of the new futures contracts will be more widely used than the other, said Neal Wolkoff, executive vice president at Nymex. "I think that both areas have become important pricing points on their own, independent of each other.

"We've seen in the western markets that two pricing points in similar regions, although not exactly the same, are able to sustain themselves and be traded actively and looked [upon] equally as far as important pricing points. Right now we expect that that will be the same" with the new eastern futures contracts, Wolkoff noted. The Cinergy system includes about 7,000 miles of transmission lines that serve portions of Ohio, Indiana and Kentucky; it has major interconnections with companies in the East Central Area Reliability Coordination Agreement (ECAR) region. New Orleans, LA-based Entergy owns 15,500 miles of transmission lines serving customers in Louisiana, Arkansas, Mississippi and Texas; it interfaces with utilities in the Southwest Power Pool, the Mid-America Interconnected Network and the Tennessee Valley Authority (TVA).

Nymex selected Cinergy and Entergy for the pricing points over several other possible candidates, including the Pennsylvania-New Jersey-Maryland (PJM) power pool, the TVA and Commonwealth Edison. They won out in the end because they are nationally recognized as reference points for the pricing of electricity, have a high number of transactions occurring on or near their systems, and are located adjacent to other important power transmission systems, according to Nymex officials.

The terms and conditions of the Entergy- and Cinergy-based futures contracts are standardized. Each contract unit is 736 MWhs of firm electric energy; delivery will occur during a 16-hour period between 7 a.m. and 11 p.m. eastern time on each business day of the delivery month; delivery will occur at the rate of 2 MWhs each hour during the delivery period; and trading will end on the fourth business day prior to the first day of the delivery month. Prices will be based on delivery requirements. The minimum daily price fluctuation for the monthly futures contract will be one cent/MWh, while the maximum price fluctuation will be $6/MWh in either direction - except for the first two months - and could be increased to $12/MWh in the event the preceding day's price settles at the $6 limit. For the first two contract months, the maximum daily price fluctuation will be $15/MWh above or below the previous day's settlement price.

"I don't think the jury's [ruled] out" the PJM interconnect completely as a reference point for a futures contract, said Robert Levin, senior vice president for product development at Nymex. "We are looking at it very strongly. It's very possible we will submit a contract on PJM" in the future, he told reporters at a press conference in Washington, D.C last week.

Nymex, however, wants to see some changes in the regulatory structure of the PJM and in the locational marginal pricing (LMP) policy there before it seriously can reconsider the power pool as a site for a futures contract, Wolkoff noted. As a result of LMP, PJM is no longer the most actively traded cash market on the East Coast, the number of transactions has dropped "dramatically," and the market has lost fungibility - or the ability to make a transaction with a known price in different areas of a region. "We think the pricing uncertainties are not really healthy for the development of competition in that market. So we're hoping that there'll be a review of the regulation" at FERC, he said.

In response to reporters' questions, Helmig dismissed the "popular comment" that speculators are "running amok" in the cash market. He noted that participation by speculators was minimal, and, in fact, said a certain level of speculative activity should be welcomed because it dampens the volatility of energy prices.

In fact, "I will argue, if you will, that some of the activity that you saw a few weeks ago in the Midwest electricity [market] would have been substantially different in a transparent futures market with speculators," Helmig said.

Susan Parker

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