Energy Futures Trading Expected To Start Slowly, Then Grow Quickly

Industry officials in the Northwest expect a slow start to trading in energy futures, but quick growth as utilities and their customers become comfortable with the new market’s possibilities.

Activity in pits at the New York Mercantile Exchange, they say, will be another step toward complete deregulation of electricity markets, a trend that should ultimately lower energy prices for the consumer.

Officials at Washington Water Power Co. and Kaiser Aluminum Corp. said they already make use of similar contracts for natural gas.

Although relatively new themselves, the contracts have become a popular way to manage risk in the volatile gas market, they said.

At WWP, wholesale marketer Tom Johns said futures are used less than one of their offshoots - options.

Futures establish a price for the commodity - gas or electricity - that allow a trader to buy or sell for delivery as much as 18 months ahead, he said.

Johns said that gives WWP the ability to bid for a supply contract with another utility, then secure the gas or electricity needed to fulfill the contract with an option purchased at a fraction of the futures contract’s cost.

If the Spokane utility loses the bid, the company is out very little cash, he said.

The futures help set prices, Johns said, but are too rigid to be of much use to customers. Final prices are determined by how well a utility shapes an energy product to a customer’s needs.

“We’ve always tried to deliver a real customized product,” he said.

Johns said factors like reliability and quality of service will become even more valuable as futures trading opens up energy pricing.

“You’ll know every day what the market price for electricity is,” he said.

Kaiser Northwest Power Manager Peter Forsyth said futures contracts will give customers another way to manage their energy portfolios as they try to rely less on the Bonneville Power Administration, which supplies half of the region’s electricity.

He predicted the Nymex contracts would lower prices significantly. As a result, he said, charges of subsidization by various Bonneville customers and special interest groups should be put to rest.

Inland Power & Light Co. Manager Dick Heitman said open pricing will increase pressure on Bonneville to remain competitive.

That will help utilities like Inland that buy all their electricity from the federal power-marketing agency, he said.

Jim DiPeso, a spokesman for the Northwest Conservation Act Coalition, said the contracts may lower the short-term cost of electricity, but only by not allowing for non-economic factors like environmental destruction and less emphasis on conservation.

“That cost is transferred onto people who had nothing to do with incurring the cost, it gets passed on to taxpayers, it gets passed on to future generations,” he said.

Officials must develop new mechanisms for assuring that programs like weatherization survive in a deregulated market.

“It’s going to take a number of years to sort it out,” DiPeso said.

, DataTimes