Power Market Netting Best Practices

Statement of Commissioner Scott D. O’Malia at the Joint CFTC/FERC Roundtable Discussion on CCRO Whitepaper

June 22, 2010

Good morning, I would like to thank everyone for coming and I would like to thank the panelists for their participation, but most of all I would like to thank Commissioner Moeller of the FERC for helping to arrange this joint meeting. The CFTC has a strong history of working with the staff and Commissioners of the FERC and it is more important than ever that the relationship continue.

Commissioner Moeller and I agreed that today’s discussion on the CCRO’s whitepaper is particularly timely given the fact that Congress is completing negotiations on a comprehensive financial reform package, which makes clearing a top priority, and that in January FERC proposed an Advanced Notice of Proposed Rulemaking entitled, “Credit Reforms in Organized Wholesale Electricity Markets.”

The members of the Committee of Chief Risk Officers have produced a paper exploring the benefits of expanding the utilization of clearing and netting among all ISO’s and RTO’s. It is my strong desire to have a full and open discussion about the pros and cons of this proposal and engage industry participants. It is my hope that this meeting will serve as a catalyst to provide input to policy makers like ourselves as we implement the new statutory authorities.

It almost goes without saying that this issue is complex and it is difficult to predict how electricity markets will evolve and how participants will prefer to their manage risk.

For the better part of a decade, the Committee of Chief Risk Officers (CCRO) has been working to shape best practices and reduce counterparty risk. This morning the CCRO will present its whitepaper entitled, Power Market Netting Best Practices, and outline their proposal for inter-ISO netting. Clearing has long been used in financial markets to successfully mitigate risk. Central clearinghouses protect buyers and sellers from loss by assuring performance on each contract. When multiple parties engage in the clearing process, trades can be netted which reduces credit risk and allows participants to offset the value of contracts by creating a single net exposure to counterparties. In the context of the energy industry, Inter-ISO netting gives energy market participants the ability to net positions between different ISO’s. It provides distinct advantages: more efficient use of capital and, a substantial reduction of counterparty and systemic risk.

Yet, there are organizational challenges and potential costs. Perhaps the biggest test for the industry will be: how will inter-ISO netting be implemented? The Whitepaper contemplates organizing clearing both within a RTO and utilizing a 3rd party for clearing to take full advantage of the bankruptcy protections. I am interested to learn more about the opportunities and challenges facing the electricity sector in order to take the next steps in netting and clearing trades on a larger scale.

I would like to thank Commissioner Moeller for joining me to highlight this issue and I would especially like to thank the staff of both Commissions, and the members of the panels for their hard work. Last but not least, I appreciate the efforts of the CCRO under the leadership of Bob Anderson and his member companies to help bring this roundtable discussion together.

I am going to turn to Commissioner Moeller for his remarks and then we will introduce the panels and begin the discussion. Following the presentation of both panels, we will conduct a discussion among the panelists and we will close with some questions from the audience, including the media present today.

Last Updated: June 22, 2010