German Power Derivatives article

FYI - I found this on the internet today:

=ABB: Power Derivatives Trading In Germany Still Long Way Off

[Dow Jones News Service via DowVision ? Rcvd: Mar 18, 05:51 AM ]

By Axel Revheim

OSLO (Dow Jones)--Derivatives trading in the German electricity market won't
take off until certain structural blocks in the
power industry are cleared, paving the way for a spot market to develop as a
first step, Jonas Kollberg, head of ABB Financial
Energy told Dow Jones this week.

ABB Financial Energy is a division of Swiss-Swedish engineering and
construction conglomerate ABB Asea Brown Boveri Ltd.
(ABBBY).

A small number of large, vertically integrated German electricity companies
are effectively hindering the development of free
trade - presenting a stumbling block by both owning the production of
electricity and controlling the means of transmission, or
grids.

Currently, if a third-party wants to transport power, it must separately
negotiate access and prices for each grid - an impractical
arrangement for the spot market, Kollberg said.

'The advantage of the Nordic model is that you have great liquidity for
derivatives based on a broadly acknowledged system
price. You also have several producers creating a well-functioning spot
market. I can't see how they're going to solve this in
Germany. They have too many isolated (monopolized) grid areas,' Kollberg
said.

Financial power contracts like futures, forwards and other derivatives are
based on an underlying reference price, often an
average of spot price throughout a region or country. There won't be any
power derivatives trading in Germany before an
acknowledged reference price is established, he said.

A Liberalized Market In Law Only

The practice among German utilities of pricing electricity transmission based
on the distance traveled, is a powerful barrier to
trading, Kollberg said. In the fully liberalized Norwegian power market, for
example, independent producers are charged fees
for access to grids based on an established point system. Producers pay the
same tariff, regardless of how far the electricity is
transported.

Germany's new energy law, in effect since April 1998, paves the way for all
German consumers to choose who supplies them
with electricity. However, without clear, published grid access tariffs or a
national reference price, few customers have, in
reality, been able to move away from their regional supplier.

No decision has been made yet as to how Germany will organize its spot market
for electricity sales. The first German electricity
bourse is likely to be set up in either Frankfurt, Dusseldorf, Hamburg or
Leipzig. But interested parties such as the Deutsche
Boerse in Frankfurt have acknowledged that a physical spot market needs to be
in place before futures trading can be
introduced.

Nord Pool, the joint Swedish-Norwegian power exchange, recently joined up
with Germany's Landesbank Sachsen
Girozentrale, the Leipzig town authority and the Saxony state government to
establish a power exchange in Leipzig.

Using expertise gained in the Nordic market, Kjetil Knutsen at Nord Pool
Consulting told Dow Jones that the plan is to develop
a spot market in Germany along the lines of the Nordic model.

There will be one system price for the whole of Germany, based on spot prices
in the seven regions which are controlled by
Germany's 'Verbund' regional transmission companies, he said.

'One can solve the spot price problem,' he said. The question isn't whether
Germany will have a functioning spot market, but
rather when, he said.

Separation Of Producers, Grids The Key

Even if Germany eventually establishes a reference price, the problem of
vertical integration remains. One needs unbundling
(between producers and grids) to open the way for competition, ABB's Kollberg
said.

According to ABB's own analysis, between 78% and 83% of German power
transmission lines are owned and controlled by
the big German power producers.

As long as domestic producers have such grid control, power imports and
exports from Germany won't be free, said Kollberg.

Any overcapacity of French power generation could be imported to the benefit
of German consumers. however, because
German producers control transmission, the tendency is to shield the domestic
market from competition, observers said.

French electricity imports could lower prices sharply for German end-users of
electricity. According to Kollberg, there's an
overcapacity of 40 terawatts of electricity in France, while Germany too has
an overcapacity of 31 TW.