A Futures Market under EWPC

The elements of a futures market under R1E2 EWPC to lead to an stable and competitive electric markets environment are explained.

A Futures Market under EWPC

By José Antonio Vanderhorst-Silverio, Ph.D.
Systemic Consultant: Electricity

Copyright © 2007 José Antonio Vanderhorst-Silverio. All rights reserved. No part of this article may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, without written permission from José Antonio Vanderhorst-Silverio. Please write to javs@ieee.org to contact the author for any kind of engagement.One of the key elements to develop competition between generation, retail and both of them, without price controls, is the guarantee of the development of a vibrant future market. Electricity markets are no longer radically different after the R1E2 discoveries.

As I expressed in the Conspiracy Theory Against Mr. X “An underlying intention of the conspiracy theory is to send a strong message to investors and Wall Street, that the unstable environment of the industry is about to end, and that financial capital is set to be replaced by production capital, as the industry becomes once again very predictable with the implementation of EWPC.” A key instrument for predictability is futures contract, which facilitates power generation development and financing, without the need for contract signing by monopoly retailers.

I agree that under E1R2 deregulation it is not possible hedge electricity. However, under R1E2 EWPC re-regulation, a futures market can be developed to satisfy the original NYMEX electricity contracts, which require high physical reliability.

John Flory, at the time with Tabors, Caramanis & Associates, wrote: “To maintain the integrity of this future market, NYMEX insists that the future contract clearly provide for physical delivery,” which could never be accomplished with E1R2 deregulation. Under R1E2 EWPC, NYMEX requirement is fulfilled with the ultra-quality imperative.

Flory added: “Thus, the futures contract’s main value is providing a tool for price risk management, but, it is defined in such a way as to not jeopardize the reliability of physical delivery… Futures contracts provide another important function in addition to price risk management. That function is price discovery. That is, by following the transaction prices in the futures market, a participant discovers the market price for electricity for the next 12/18 months.”

The key to such high physical reliability is the ultraquality imperative, which was explained as follows in EWPC: People Coordinating and Cooperating with Electrons Part 2:

Eberhart Rechtin and Mark Maier, in their book “The Art of System Architecting,” explain that “social system quality… is less a foundation than a case-by-case trade-off; that is, the quality desired depends on the system to be provided. In nuclear power generation, modern manufacturing, and manned space flight, ultraquality is an imperative. But in public health, pollution control, and safety, the level of acceptable quality is only one of many economic, social, political, and technical factors to be accommodated.” [I published this insight on March this year [2006] at the Academy of Science of the Dominican Republic.]

In the first case, the experts are the engineers. For the center stage, controlled market, system engineer institution to assures that electrons and people have the same purpose, as I mentioned on 12.30.06, ultraquality is an imperative to manage short run and long run systemic risk, with both supply side and demand side resources.

In the second case, according to Rechtin and Maier, the accommodation is done by the architect with “a professional response to the public needs and perceptions.” It is such unjustified perceptions that fueled the decade long debate. Bill Hogan mistake was that he didn’t understand what Fred Schweppe meant by the fourth criterion: “consider the engineering requirements for controlling, operating and planning an electric power system,” which can only be met by ultraquality. As time has advanced and new digital technology market share becomes larger, electricity demand for quality is only increasing. A professional response is needed, however, for the remaining, non real-time, free market activities of retail and generation. EWPC for the customers is such a response.