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If there ever was an industry that needs ways to hedge price, the electric
power industry is it:
Electricity Traders for Northern States Power Work in Charged Atmosphere
Saint Paul Pioneer Press, Minn., Jun. 18--
Audrey Zibelman and her crew buy and sell electricity for NSP. It's
particularly volatile during hot weather peak times.
The traders sit at state-of-the-art computer terminals, and with a click of
the
mouse they place bets that can easily cost, or gain, their employer millions
of
dollars. The charts on the screens rise in steep trajectories and plummet
just as fast. On a wall, a cable television feeds the latest news.
The TV -- tuned to the weather channel -- is one of the few clues that these
traders aren't buying and selling stocks or bonds. Instead, they're trading
electricity for Minneapolis-based Northern States Power. And if you think
tech
stocks are volatile, you've never looked at the chart for a megawatt of
electricity.
The trading of energy is simple enough in concept. If a utility has
generated
more energy than it needs, it can sell it to another utility that finds
itself
temporarily short of electricity. Likewise, if NSP needs electricity it
doesn't have on hand, it can buy it on the open market. But actually
executing
a trade is a feat of both finance and science.
Unlike a stock, a unit of energy has no shelf life. You can't "buy-and-hold"
electricity: When you have excess, you sell it then or lose it. When you
need
it, you need it right away. A stock trade that goes awry can spark ill will
and
customer resentment, but if a utility doesn't feed its network with exactly
the
right amount of electricity, the integrity of the entire system is
threatened. Precision machines wouldn't work right. Clocks would slow down
or speed up.
Utilities have many safeguards against that kind of a worst-case scenario,
but
it's a real one that the traders must never ignore. It helps that at least
one
of NSP's traders, in addition to a financial background, is trained as an
engineer.
But NSP's trading department, which works on the fifth floor of the
Renaissance
Square in downtown Minneapolis, is more than just a wholesaler of
electricity.
Under the direction of Audrey Zibelman, president of NSP Energy Marketing,
the
trading department plays a kind of risk arbitrage, trying to maximize its
return on its own capital equipment and hedge against losses.
If the market price for electricity hits certain levels, traders alert
plants
to start generating to sell on the open market. If prices fall to certain
levels, they may take some of the more high-variable-cost generators down
because it's cheaper to buy than produce.
Energy trading, which becomes most volatile in the hot days of summer, is a
relatively new phenomenon in an industry that is beginning to see many
decades-old regulations fall away.
Staff writer Kevin Maler spoke with Zibelman about the risks and rewards of
energy trading. Her comments have been edited for clarity and space.
QUESTION: Summer is the most volatile time for trading because demand for
electricity spikes. How volatile does it get?
ANSWER: Right now, off-peak, electricity costs $15 to $18 a megawatt-hour.
During the on-peak time last summer, it cost $7,000 a megawatt-hour. It's
the
same commodity. For anyone who's used to trading (equities), this is just
unbelievable volatility.
Q: But $7,000 is an unusual spike. What's a "normal" range of trading?
A: Normally, you'd see it rise to $30 to $50. That's still very substantial.
There are opportunities for people to make a lot of money in a few short
hours,
or lose a lot of money in a few short hours.
Q: How many players are there in this field?
A: There are about 300 registered marketers. That's evolving. A number of
companies got burned a couple of years ago (and were forced to close).
There's
consolidation now. You need assets to handle the credit risk. I can't have
someone not deliver. It's still a physical market. We are very concerned
about
that as a buyer and a seller.
Q: Where is the market going?
A: There's going to be greater use of financial markets. The Grain Exchange
started a futures market, though it's been a little slow going. On the East
and
West coast, there are exchanges. That mitigates some of the credit risks.
There are more standard contracts.
Q: Your trading floor is open 24 hours. How intense is it to be a trader for
NSP?
A: It's very high stakes during peak hours. It's always busy. When it's
summer,
it's extremely intense. NSP is not just affected by what happens in our
systems, but what happens in others, as well. They have to forecast where
the
loads are going to be, what generators are online. They need to know where
are
the bottlenecks. They need to know the price and the cost of their own
generation so they know when to buy and when to sell.
Ross Kovacs
rossrk@xxxxxxxxxxxxxx
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