Derivatives Bill May Raise Electric, Gas Rates, Industry Says

[phantom power]

Sept. 17 (Bloomberg) -- Utilities will raise gas and electric prices if Congress imposes higher capital and margin requirements on energy hedging as part of legislation meant to rein in over-the-counter derivatives, industry leaders said.

Energy companies use forward contracts and other derivatives to lock in lower costs for coal, oil and other commodities that can have frequent or extreme swings in prices. Derivatives legislation, which primarily targets Wall Street traders, may make this type of hedging too expensive for smaller utilities, forcing them to raise rates, said Glenn English, chief executive officer of the National Rural Electric Cooperative Association, which covers 47 U.S. states.

“We’re not an industry that has a lot of cash on hand,” English, a former U.S. representative for Oklahoma, said in an interview. “You start getting into margin calls, we could end up having to borrow a lot of money at unaffordable rates.”

http://www.bloomberg.com/apps/news?pid=20601072&sid=aXeFJQ1UbnQ0

[no_hypocrisy]

1. For a stable economy, it's worth the extra money unless Congress

can stop the utilities from passing on the penalties to consumers.

[DJ13]

2. It seems the higher price would be lower than the speculated price

Oil would never have reached $147 per barrel based on a stable pricing model, no matter how much extra is charged.

[kristopher]

3. I'm not sure about that...

I'm not exceedingly familiar with the regulations governing co-ops, but one thing I know is that they are able, by simple majority vote of members, to exempt themselves from the normal regulatory oversight that controls the behavior of all other utilities. Their membership doesn't normally include anyone qualified or willing to play the role of watchdog, so they are essentially operating in an environment without any form of accountability.

When I see an article like this it makes me worry even more that there are underlying shenanigans.

[phantom power]

5. I'm not real sure about that either.

I am interested in the idea that "speculation" mechanisms can be used for useful purposes by economic agents. For that matter speculation represents one mechanism of economic look-ahead, where real economies typically fall far short of the classical "ideal agent" models.

How one goes about allowing "legitimate" speculation while minimizing the downsides of speculative bubbles, I don't know. If I were in charge of figuring it out, I would approach it as an algorithm tuning problem. Find the knee of the curve in terms of effectiveness, and then live with the residual side-effects.

For that matter, I wish most government policies were approached as algorithm tuning problems. It would side-step a lot of the traditional idiocy of people claiming that because they've figured out some possible failure-mode of a solution we have to shit-can it. Like scare-tactics involving welfare queens or illegal immigrants getting elective plastic surgery off of our tax dollars, or whatever the conservatives are hyperventilating about these days.

[kristopher]

7. I said nothing about the efficacy of speculative contracts.

I'm pointing to a lack of oversight and accountability in the co-op system that is an open invitation to theft and bad management.

[phantom power]

8. A little regulation might go a long way.

I was sort of hoping for more of that, what with Democratic control of the WH and Congress.

[kristopher]

9. You said a mouthful...

It's a very large ship we are trying to turn. The push to deregulate has progressed so far that it will take decades to fully install oversight in all the areas that are exposed. And that presumes we maintain just a basic level of sanity in recognizing there is a needed balance between private/government entities.

[RDANGELO]

4. Nationalize the energy industry

and you wouldn't have to worry about it.

[excess_3]

12. Mexico --> economic success story

[Historic NY]

6. They have already been steadily raising rates here in NY...

our school district found a way to tap them for a 3% raise on the total cost of your monthy bill. MY G&E bill has gone up from $215 to $271 in a 2 yr period and thats a budget plan.

[NNadir]

10. Anything that raises the price of dangerous fossil fuel energy is a good thing

in my view.

Let's view it as a back handed carbon tax.

[JohnWxy]

11. I don't know what English is talking about. NYMEX offers energy (electricity) futures contracts

trading. This does not require over-the-counter trading using Credit Default Swaps.

"Energy companies use forward contracts and other derivatives to lock in lower costs for coal, oil and other commodities that can have frequent or extreme swings in prices. Derivatives legislation, which primarily targets Wall Street traders, may make this type of hedging too expensive for smaller utilities, English said. "

Trading on exchanges does NOT NECESSARILY mean the trading is more expensive. Actually, having a regulated market (with rationally limited leverage allowances) produces a less volatile market which generally businesses NOT involved in just trading, would prefer. Any company that is actually a utility does NOT want market volatility (in energy futures) which massive leverage directly contributes to. Using huge amounts of leverage (which was enabled with the unregulated use of CDSs) just introduces another risk factor into your business, which unless you like betting on energy price movements, one would want to avoid (or try to eliminate). Maybe he represents people who want to try to be another ENRON (we know how THAT worked out!) - that is they think they can make money trading in energy futures.


Any utility buys contracts for natural gas or coal months before they need delivery. Sounds like English is speaking for individuals who think they are nimble enough to make money trading in energy futures and are not stricly-speaking in the power delivery business (in other words they think they can do the ENRON thing and not get burned - good luck). Also, when you buy using leverage you are still paying to borrow money. And it ain't cheap either.



Generally speaking the companies involved in businesses where they actually take delivery of a commodity and make something with it want to try to remove all the volatility in the market they can. They are not in the business of trading they are in a business of delivering something which requires them to buy a commodity and they prefer more orderly markets in those commodities. Traders on the other hand like volatility it gives them an opportunity (being optimists) to make money. Of course, if the bet wrong they get burned. But nobody ever thinks THEY will be the ones to get burned. That's what makes a speculator.


The takeaway is going to exchange trading and a more orderly and more liquid market doesn't necessarily mean higher utililty prices. the individuals quoted in the article are revealing a traders temperment thinking only of the transaction costs of trading and none of the risks of price volatility. A utility or any company that buys commodities to make or supply a value added product can also lose money in a volatile market. Traders always think of a volatile market as an opportunity to make money. Companies that are in a business other than trading but must deal with market volatility when buying raw materials generally abhor price swings and want to hedge the hell out of the market in an attempt to eliminate losses due to price changes in commodities. They also aren't very interested in leveraging to make money. That's a traders strategy.