The chips are stale; the drinks are flat, and people areleaving. The New York Mercantile Exchange electricity futurescontracts aren’t very festive, and now the host is wondering whatit can do to liven up the party.
Despite much fanfare over their respective launchings, the fiveelectricity contracts have largely languished for lack of activity.”I think there is widespread interest in trading the contracts oncethey become liquid but very little interest in trading thecontracts to help reach that critical mass of liquidity,” said TimEvans, senior energy analyst with Thomson Global Markets in NewYork City. John Saucer, an analyst with Salomon Smith Barney, saidhe doesn’t follow the contracts simply because they aren’t liquid,and he doesn’t expect to be paying much attention to them anytimesoon.
One thing Nymex could do to boost liquidity is eliminate all butone contract in the East and one contract in the West, suggestedRandall Gibbs, owner of BTU Energy Futures. Cinergy should remainin the East, and California-Oregon Border (COB) should be thewestern contract, he said. Gibbs said his firm is leaving the Nymexelectricity trading ring this month after failing to get theexchange 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 thering for six months to get that contract going. I would offersubstantial subsidies to those companies.”
Gibbs doesn’t like talk he’s heard of Nymex removing thecontracts from the pit and trading them electronically. Others whohave left the Nymex electricity ring are Paribas Futures Inc.,Cogent, and ABN Amro Bank.
Robert Levin, Nymex senior vice president for planning anddevelopment, conceded the exchange is examining various proposalsfor bringing liquidity to the contracts, particularly with an eyeto bringing in more market makers. “The contracts themselves arefine, and so it’s a matter of, I think, supporting market-makingand then getting back out to the customer base, the commercials,and reinforcing with them what we’re doing and attract them backin. I think that’s pretty much it.”
Levin wouldn’t comment on traders who have left the electricitypits or say what, if any, suggestions they have given the exchangefor improving liquidity. While he conceded the contracts areanything but robust, Levin said that’s not entirely the fault ofNymex. “We’re still talking about an industry where theoverwhelming lion’s share is still tied up in longer-term deals asit is. Some of it is freed up, but most of the part that’s freed upis focusing on the very, very near-term, which is traditionally notthe realm of futures contracts.”
Augmenting this scenario against liquidity is an industry thatsees long-term electricity deals as largely high-risk plays. Energyindustry executives on the conference circuit often warn thefarther out you go with power deals, the farther you have to fall.
Levin blames faulty and slow progress of electricityderegulation for the dearth of activity in electricity futures.”Natural gas feeds electricity, and yet the natural gas commercialmarket is far larger [than electricity]. I think we’re still inthat holding pattern of when do the regulators allow [electricity]to be a real market.
There’s no denying electricity futures suffer from comparisionwith natural gas. The volume record for the much longer runningNymex gas futures contract traded at Henry Hub is 203,807 set July23, 1999, while the Palo Verde contract set the highest record ofall five electric contracts Feb. 19, 1998 at 2,026. TheCalifornia-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) contractshave yet to break 1,000.
While Levin blames regulators, others point out Nymex hashandled the electric market much differently than it did naturalgas, jump-starting multiple contracts at locations with limitedtrading. For many years the only contract for gas was at Henry Hub,and that contract was only brought on line after Nymex hadextensive discussions with industry leaders across the country andset up traveling educational forums. Part of the problem withelectricity futures has been the regional nature of the industryand pressure from competing exchanges threatening to set upcontracts.
The California Power Exchange last recently touted the matchingof 250 contracts for electricity delivery in August and September,marking the first significant trading activity for the PX BlockForwards Market. To Levin, though, comparing California PXcontracts to Nymex contracts is akin to comparing apples tooranges.
“We have continually been disappointed that California utilitieshave been held captive to any market, and we think the soonerthey’re allowed to participate in the free market, the better forCalifornia deregulation and the better for everybody.”
Levin said the exchange has no plans to abandon any of itselectricity futures contracts. Nymex, in fact, is looking to launchits sixth electricity futures contract, Mid-Columbia next year.
Randall said it’s a point of pride for Nymex to hold on to thecontracts and not de-list them. “They are the energy hub of thecountry in terms of trading any form of energy. They’re not goingto go down easy on these contracts. I think the contract right nowis going to go to sleep for a protracted period of time. I don’tknow if there will be a Prince Charming coming along to kiss it andbring it back to life.”
Joe Fisher, Houston
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