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New regulations address credit in the wholesale electricity markets

Read Accenture’s report about how FERC’s regulatory reforms are forcing participants in wholesale electricity markets.

Overview

In response to the financial crisis of 2008, which severely disrupted credit markets, the US Federal Energy Regulatory Commission (FERC) introduced two new orders—Orders 741 and 741-A—to strengthen credit practices among participants in the organized wholesale electricity market and reduce potential disruptions in the flow of power.

The orders will have significant impact on utility companies including regional transmission organizations (RTOs), independent systems operators (ISOs) and market participants, affecting their businesses, organizational processes, systems, tools and people. These companies are now faced with the challenge of implementing organizational change to bolster their risk management practices and meet the requirements in seven areas outlined by the new FERC rules. While seemingly a herculean task, utility companies that succeed in implementing the required changes can potentially transform their risk management practices into value-enhancing capabilities, gaining a competitive edge over other players.

 

Download PDFRead the report [PDF, 1.06 MB]

Background

The financial crisis left the economy of the United States crippled on several fronts. Credit markets faced a major jolt, severely limiting the availability of capital. Companies in the wholesale electricity market were vulnerable to the effects of this liquidity crisis, fueling concerns that an RTO or ISO may not have access to the capital they need. This would inevitably leave several utilities at risk, causing a potential disruption in the flow of power.

Anchored by its mission to provide reliable, efficient and sustainable energy to its customers, the FERC laid out new rules—Order 741 and 741-A—to mitigate risk and strengthen credit practices among companies in the wholesale electricity market. The new FERC rules focus on seven areas to improve risk management practices including:

  • Length of the settlement cycle

  • Use of unsecured credit

  • Ability to offset market obligations

  • Minimum criteria for market participation

  • Use of material adverse change

  • Grace period to “cure” collateral posting

  • Elimination of unsecured credit for Financial Transmission Rights (FTR) markets

This paper emphasizes the need for utility companies to take a holistic approach to tackle these reforms by developing a master plan to strengthen their risk management practices and gain the competitive edge needed to stay one step ahead of the new financial landscape.

Analysis

Utility companies need to quickly determine whether they can meet the seven requirements laid out in the new FERC rules. Specifically, they need to evaluate and understand the impact new rules will have on their business and competitive standing. Utility companies will also benefit by assessing their organizational models and business objectives, highlighting operational areas most at risk from the new regulations, as well as whether the new regulations can provide opportunities for improved risk-adjusted decisions.

Recommendations

A comprehensive approach to risk management is critical for responding strategically to the changes set out in FERC’s regulatory reform. Creating and implementing integrated risk management capabilities will not only result in higher economic returns, but also increase stakeholder confidence. Additionally, assessing the status of current systems and business processes against FERC requirements will help identify gaps and provide valuable recommendations for utility companies.

Accenture has identified four actions that will help utility companies respond successfully to the new FERC rules and transform risk management into a value-enhancing capability and competitive differentiator. These actions are:

  • Aligning business strategy and risk capabilities to evaluate market options and drive profitable growth.

  • Embedding risk management capabilities across the organization and supporting a risk conscious culture.

  • Adapting to industry and geographic regulations in a holistic manner while focusing on the business impact and outcome.

  • Providing capabilities to collect, model and analyze business information for better risk-based decision making.