Industry Submissions
Futures Offset Arrangements (FOAs)
Mon 11 Feb 2008
FOAs would allow NSW electricity retailers to reduce spot market guarantee requirements by up to $1.5 billion.
On 10 January 2008, the AEMC received a joint Rule change request from Australian Power & Gas, Infratil Energy Australia and Momentum Energy relating to Futures Offset Arrangements (FOA).
The Rule change would immediately address many of the shortcomings of the current NEM spot market settlement arrangements which were highlighted by the incidents of Q2 2007 (including the Retailer of Last Resort incident and the loss of a NEM Retailer).
The Rule change would enable substantial reductions in operating costs for NEM Retailers and allow NEM Retailers to utilise their existing futures hedges to meet emergency NEMMCO spot market margin calls in many instances. For example FOAs could potentially reduce NSW Electricity Retailer's spot market bank guarantee requirements to NEMMCO by as much as 76% or $1.5 billion (approximated basis the Q2 2008 NSW Base Load electricity futures price as at COB 19/02/08).
The Rule change request has essentially two parts:
1) It proposes to define and accommodate Futures Offset Arrangements (FOAs) within the Rules. FOAs would be commitments entered into by a SFE Clearing Participant on behalf of a Market Participant to redirect positive cash flows associated with the Market Participant’s futures position to NEMMCO (to be held in a Security Deposit Arrangement) to protect against the default of the Market Participant. In return, the Market Participant would only provide bank guarantee support to NEMMCO up to a level equivalent to the futures price at which the FOA was initiated and beyond which cash payment obligations from the Clearer to NEMMCO arise under the FOA; and
2) It proposes to modify the Maximum Credit Limit (MCL) guarantee calculation methodology. Rather than the MCL methodology using a backward looking price observation as a basis for predicting future pool prices, the MCL methodology would utilise SFE electricity futures prices as the key inputs of the model, representing a forward looking market-consensus view of future pool price outcomes.
The AEMC is currently considering this Rule change request under section 94 of the National Electricity Law. A copy of the Rule change request is available below.
