July 1, 2001
L.A. Loves a Loophole
There's no getting around it...
PoolCo, Bilateral Trading, and Technology
Alex Henney is associated with Energy Economic Engineering Ltd. in London, and has consulted in many countries. As early as February 1987, Henney advocated competitively restructuring the electricity supply industry and incorporating a pool as a real-time spot market. He is the author of A Study of the Privatisation of the Electricity Supply Industry in England and Wales.
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Last year, the Norwegian Market Co. decided to stick with bilateral trading and a spot market. I advised the British gas regulator to facilitate bilateral trading, and the British electricity regulator to stick with "PoolCo."
That is not to imply that the English pool does not have problems. It does. But to understand them (em and more importantly, how to avoid them and do better next time (em one has to look at how the pool was developed and work out the lessons of experience.
The fire and thunder of the U.S. debate lead me to wonder whether the theological point escapes me, or I am unduly eclectic and broad church. Alternatively, can it be that some of the participants in the U.S. debate do not know what they are talking about? Or perhaps some know only too well and have agendas for making money (em not out of "fierce competitive" markets and mother's blueberry pie, but out of obfuscated market imperfections.
Emotive armwaving from the New York Mercantile Exchange (NYMEX), caricaturing a PoolCo as a monopoly with a "big appetite" across two pages of ill-informed assertions, adds to heat but not to light.
As Professor Hogan and Larry Ruff pointed out, the basic economics of PoolCo with contracts for differences (CfDs) and of bilateral trading plus a spot market are similar in principle. As in other commodity markets, the pool or the spot price will drive short-term contract prices, however trading is arranged. Using CfDs around a pool allows two parties to enter into any form of commercial relationship they want. Indeed, the English system can be regarded as a contract-based system with the pool automatically pricing the uncontracted trading.
There are, however, some important differences between the two:
s By requiring all generators to bid, PoolCo may be more liquid than a spot market associated with bilateral trading, because it is not in the interests of dominant players to develop such a market.
s In a system comprising a number of modest-sized companies with thermal plants, PoolCo is better able to retain the benefits of scheduling. (This is not so important in a hydro-based system.)
s PoolCo is more transparent than bilateral trading, which is why some large customers in England supported the latter (em they hoped opacity and confusion would help them to better (that is, discriminatory) prices.
s Accounting will be easier with a PoolCo than with bilateral contracts, which have to be reconciled every hour or half-hour. As the number of contracts increases, so do the data problems.
s PoolCo automatically provides the benefits of aggregation or portfolio scope and is more equitable for smaller generators and customers.
s A properly designed PoolCo provides