Futures Shock

Electricity contracts may help deregulate utilities

Platinum futures, fine. Natural gas and crude-oil futures, sure. But is the New York Mercantile Exchange serious about trading futures in electricity? After all, the price of electricity has long been tightly regulated--and for the most part remains so.

No matter. Nymex is readying a new pit in downtown Manhattan that on Mar. 29 will begin trading in electricity futures, contracts that promise delivery of electricity at a specified price on a particular date. Sure, the introduction of many futures contracts has failed in the past. But experts say the market for electricity is large enough to eventually make these futures work.

The new contract is as much a political event as a financial one, because it could help finish off the last great bastion of regulation. Today, electricity prices are generally set by regulators. But market-based pricing is creeping in, mainly on sales between utilities. The Nymex move should increase interutility trading by making prices more visible.

WILD PRICE SWINGS. That's just the first step. Once utilities have free-market pricing, their customers will demand the same. Says W. Robert Parkey Jr., general manager of Aquila Power Corp., the unregulated power-marketing arm of UtiliCorp United Inc. in Kansas City, Mo.: "The whole regulatory compact is being thrown up against the wall."

While electricity rates for customers have been generally stable, spot prices for utilities are extremely volatile. Because brownouts and blackouts wreak such havoc, utilities can't afford to delay purchases for even five minutes in hopes that prices will become more reasonable. Last summer, when Chicago suffered a severe heat wave, the local spot price spiked from around $20 per megawatt-hour to as much as $120, says Shannon B. Burchette, senior vice-president for marketing at Duke/Louis Dreyfus, a Wilton (Conn.) power marketer. Futures contracts should help utilities insulate themselves from wild price swings.

Exchange President R. Patrick Thompson says he hopes the electricity futures contract will set a free-market example that will hasten wider competition. If so, those guys in the funny jackets may do more to change the utility industry than a legion of bureaucrats.

    Before it's here, it's on the Bloomberg Terminal.