In an attempt to boost the liquidity of energy trading companies and restore confidence in energy markets, Edison Electric Institute (EEI) and member utilities introduced Tuesday a new “master netting agreement” that they claim will help limit the credit exposure for traders of electricity, natural gas and financial instruments.

The new contract, which would replace a standardized trading agreement developed by EEI in 1999, would allow trading counterparties to “net” their collateral requirements when transacting wholesale energy trades, and would offset positive balances of one transaction with the negative balances of another, according to Washington, DC-based EEI, a trade association that represents mostly investor-owned utilities. Netting would help limit counterparty exposure and capital required to trade, it noted.

In its simplest form, netting would work like this: if Trader A sells to Trader B $1,000 worth of energy, and then Trader B sells $1,500 of energy to Trader A, under a netting contract, Trader A could simply secure the difference of $500 in the event that Trader B defaults on its contractual obligation.

“This new master netting agreement is an essential tool that will help stem the tide of shrinking liquidity and lack of access to capital markets that our industry now faces,” said EEI President Thomas R. Kuhn. “Easing the liquidity crisis may help begin to restore some of the confidence that has been lost.”

The “master netting agreement” was developed over several months by EEI member utilities, major independent energy traders, financial institutions and law firms, according to EEI. The contract is available on EEI’s web site at https://www.eei.org. In addition, EEI has prepared a companion document, entitled “Legal Landscape,” to explain how a netting agreement could be affected by bankruptcy and commercial laws, as well as other issues to consider when entering into a master netting agreement.

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