U.S. power markets are tightening credit requirements in the wake of the global financial crisis, trying to reduce risks faced by generators and other market participants.

Independent system operators, known as ISOs, have faced the sudden exit of prominent investment banks from their markets, while seeing increased concerns about the liquidity of some remaining participants.

ISO New England may eliminate unsecured credit made available to firms that trade in the six-state electricity market it operates. The California ISO reduced similar credit limits last month as part of changes to protect participants against defaults.

The California ISO was "confronted with the question of whether we should reject letters of credit from certain prominent banks that appeared troubled," said its chief financial officer, Philip Leiber, during a Federal Energy Regulatory Commission hearing Tuesday. "We also had market participants that were severely strained due to bankruptcies of their major customers."

The changes come as power markets have seen liquidity diminish as some banks cut their operations, while others such as Lehman Brothers Holdings Inc. (LEH) - which filed for bankruptcy protection last fall - completely exit the markets.

An ISO functions as a clearinghouse for a regional power market. A generator sends electricity to a buyer, but the payment isn't immediate, taking time to clear through the ISO. The time lag creates risk for market participants.

ISO New England extends $75 million of unsecured credit to participants, usually requiring a corporate guarantee or strong credit rating. But it's looking to eliminate unsecured credit all together, requiring a letter of credit, cash or other secure facilities.

"Recently there have been 'near misses' and one of the largest investment grade players in the region publicly announced that without financial relief it would have declared bankruptcy," ISO New England Chief Financial Officer Robert Ludlow said in testimony to FERC.

The elimination of unsecured credit would be the latest step to address credit in ISO New England's market, which has grown from clearing annually $500 million to nearly $10 billion in the last decade. Ludlow said there are concerns that eliminating unsecured credit could reduce liquidity and participation in the regional power market. But the ISO wants to prevent "unmitigated risk taking."

A spokeswoman for ISO New England declined to comment on the "near misses," or name the company Ludlow refers to in his testimony.

The California ISO last month decided to cut the unsecured credit limit to $150 million from $250 million. Also, it changed other credit rules, including financial penalties for companies that default or make late payments.

Banks active in U.S. power markets, including Goldman Sachs Group Inc. (GS) and Barclays PLC (BCS), couldn't be reached immediately for comment.

Other regional power markets are looking at credit requirements. PJM Interconnection, which oversees the market in 13 states, including Illinois, New Jersey, Ohio, Pennsylvania and Virginia, already was looking at the issue ahead of the global financial crisis after facing defaults two years ago, a PJM spokeswoman said.

-By Mark Peters, Dow Jones Newswires; 201-938-4604; mark.peters@dowjones.com

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