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The Pits? | Brazil’s New Energy Trading Rules

Jornal da Energia has the following report on the terms for the migration of energy pricing to private-sector electricity trading in Brazil.

Decree 455 of the Mining and Energy ministry, which limits energy consumers in the open market to trading in ex-ante contracts — i.e., contracts dated prior to the date of execution — will have a significant effect on Brazil’s two electronic energy trading platforms.

I wonder whether CME Group has an appetite for this market as well? It has an operational agreement with the merged Bovesa-BM&F.

The provisions referred to are, roughly translated,

Starting on November 1, 2012, contracts executed in the context of the Free Electricity Market … must be registered with the CCEE — Chamber of Electrical Energy Trading — in accordance with the rules and regulations thereof and within the following timetable:

I. By June 30, 2013, all contracts will be registered on a monthly basis and the sums contracted for may be altered after the sale contract is registered and the contract amount is verified

II. Starting June 1, 2013, contracts will be registered on a weekly basis and the amounts contracted for may not be adjusted except during the week before the energy contracted for is delivered.

The CCEE is an industry-supported clearing house, it seems — it says it cleared some BRL 1.4 billion in transactions in 1Q12.

Jornal da Energia fills in some additional  back story:

Currently, the Balcão Brasileiro de Comercialização de Energia (BBCE) and the Brix trading platform deal mainly with short-term spot contracts, in which a client seeks an ex-post contract to satisfy a preexisting call.

Brix is an organized OTC market venue bankrolled by Brazilionnaire Eike Batista and the IntercontinentalExchange (NYSE: ICE), among others.

This market gambit, in which energy is contracted for after being consumed and the price is based on the PLD –the «liquidation of differences price» — is often used in the free market and has its own nickname. Traders call this gambit “surfing the PLD.” It may be used to take advantage of lower prices when surprised by a sudden spike in price, given that this short-term indicator takes into account such short-term variables as rainfall.

“They won’t be able to do this any longer because they will now have to enter into the contract before knowing the PLD,” says the president of industry group Conselho da Câmara de Comercialização de Energia Elétrica (CCEE), Luiz Eduardo Barata Ferreira.

But Barata recalls  that  the federal regulatory order will still allow ex-post adjustments on a weekly basis, prior to the beginning of the week in which delivery is made. “This reduces the margin of error,” he said..

On the Brix, which has business mogul Eike Batista as a partner, “spot” contracts make up some 75% of transactions. Brix CEO Marcello Mello, however, says he has no way of calculating the number of ex-post transactions, which will be banned starting in July 2013

Even so, the executive is optimistic about the rule change. “We were already thinking of offering a weekly contract, so this regulatory action actually feeds into our own aspirations … by creating a weekly adjustment. In this sense, the change will be positive. I believe the spot pricing will change from monthly to weekly,” he said. Mello also says that Brix aims to facilitate the execution of contracts that used to be closed over the telephone and required more time and effort. “This weekly adjustment will be harder on those who lack an efficient trading mechanism, such as Brix. It will take four times the work it takes our platform.”

At the BBCE, recently appointed CEO Victor Kodja says that Decree 455 is one of the first challenges he faces in his new position. “This change impacts not only the BBCE but the market as a whole, altering its customary trading methods These are changes we are still digesting.”

BBCE is responsible for more than 80% of the trading volume for spot contracts. “We are studying new products and trading mechanisms, how to make them more flexible, how to help BBCE users [to adapt],” Kodja says. “We, who run the platform, will adapt, and quickly,” he guaranteed.

Meanwhile, both Brix and BBCE are trying to push long-term contracts such as energy futures for an entire year. These sorts of deals should become more frequent as the trading platforms enter their second stage of development, with the creation of bona fide, fully functional energy markets. From here on out, under this model, financial institutions will be able to speculate in energy, which should shake up trading volume in medium and long term contracts.

“We are very confident about this,” says Brix’s Mello, who says he would rather not set a deadlinefor this stage of development. At the BBCE, meanwhile, Kodja has set the goal of completing the changeover sometime in 2012.

In October, Brix introduced two new contracts.

Rio de Janeiro, 25 de Outubro de 2012 – BRIX, the electronic trading platform for electrical energy, is rolling out two new trading mechansims: (1) Conventional Contract + Spread ILBRIX and (2) Premium Swap Indexed to the BRIX liquidation index.

ILBRIX is the arithmetic mean of the BRIX premium conventional contract divided by the PLD as of the final business day of the month and the first two business days of the following month.

Under the PLD + Spread ILBRIX contract  it will be possible to define, in advance, long or short positions based on the average monthly PLD — the weighted PLD published by the CCEE + the average price during the momento of greatest liquidity during the month.

This contract therefore uses a completely “post-fixed” pricing mechanism.

Overall, the ministry of mining and energy appears to support a transition to a mixed-market public-private model … about which more later.

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