A US power company has told an official hearing that it had to question whether it should reject letters of credit (L/Cs) from banks that appeared to be troubled as a result of the global financial crisis.

The company is one of several independent system operators (ISOs), which act as clearing houses in regional US energy markets, that have seen the sudden departure from their market of prominent investment banks and are concerned about the liquidity of other market participants.

L/C concerns

ISO New England was "confronted with the question of whether we should reject L/Cs from certain prominent banks that appeared troubled," its chief financial officer, Philip Leiber, told a Federal Energy Regulatory Commission hearing earlier this month.

He added that some market participants were also "severely strained due to bankruptcies of their major customers."

Credit restrictions

The ISO says it may stop extending unsecured credit hitherto made available to firms that trade in the six-state electricity market it operates.

The company has already lowered credit limits in its efforts to protect market participants from defaults.

Secure L/C payments

ISO New England, which currently extends US$75 million of unsecured credit to market participants, says it may insist that market participants provide a secure form of payment such as L/C or cash.

In December 2008, the ISO issued a notice that it would only accept L/Cs issued by banks that appeared on its list of eligible L/C issuers, except if a L/C from a bank not on its list is confirmed by an approved L/C issuer.

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