A commodity is a commodity, unless it’s electric power to be delivered in the United States. Similarly, a derivatives market is a derivatives market, unless the derivative products are linked to that electric power commodity. As the Obama administration and Congress consider changes in financial market regulation, or a whole new structure for commodity and derivatives markets, they must be sure to understand the nature of power markets.
For most, the differences are not obvious or significant. In general, power markets are different because of the unique characteristics of electricity as a commodity. Americans rely on electric power around the clock, and yet it cannot be stored in commercial quantities—the laws of physics require that it be consumed at the time it is generated. The physical commodity is generated and delivered regionally, because electricity cannot be transmitted efficiently over long distances. Also, power supply and demand can change instantaneously. As a result, power market prices are volatile. And power derivatives are highly customized to meet individual energy company needs.
In addition, the electric power markets in the United States are heavily regulated at the federal and state levels. These markets did not develop with a focus on financial market structure. For regulators, the predominant goals in both wholesale
and retail markets are reliability and affordability.
If policymakers regulate the markets for overthe-counter (OTC) power derivatives with the same sweeping principles as they propose to establish for other commodity or derivatives markets, they must address the unique nature of the power markets. Otherwise, there may be unexpected and unpleasant consequences for the electric power industry and America’s electric consumers—regulatory confusion, increased costs adding to high power prices and extreme price volatility, an exponentially expanded group of data and reporting requirements, tied-up operating cash, and the prospect of delivery interruptions.