PROSPECTS FOR AN ELECTRICITY FUTURES MARKET - LESSONS FROM PETROLEUM AND NATURAL-GAS

This paper explains why the authors are pessimistic whether a viable futures market will soon appear for electricity in the USA. This pessimism stems from reflection on the characteristics that led to the successful experience of futures markets for natural gas and for crude oil and its derivative products. The critical issue is whether the electricity industry will present the necessary combination of need and opportunity for the operation of organized futures exchanges in the near future. To understand this issue, the authors trace the key changes in petroleum and natural gas market structure that first created robust cash commodity (spot) markets in these industries and then summoned up successful energy futures contracts. This examination reveals critical differences in electricity trade stemming from entrenched state and federal regulatory conventions. These differences suggest that the market for power sales will be unlikely to foster and sustain a viable futures market until significant policy changes are made and executed.