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A New Index Prices the Market

Fortnightly Magazine - March 1 1995

and sale risks to third parties that specialize in risk management. For example, the New York Mercantile Exchange (NYMEX) electricity futures contract, expected to be in place in 1996, will specify an amount of electricity to be delivered at a specific place for a price fixed in the contract months ahead of time. Market players will use the futures contract to hedge against price fluctuations. It would be difficult for the futures contract to develop without price transparency in the spot market. Finally, the detailed work put into developing the indices paves the way for a Southwest/Arizona index to shore up the West.

How Does it Work?

The broad-based collaborative group that developed the COB Index decided to start with indices for five different electricity "products": 1) daily onpeak firm energy, 2) daily offpeak firm energy, 3) daily peak nonfirm energy, 4) daily offpeak nonfirm energy, and 5) monthly firm energy. To report their transaction information to the publisher, the group agreed to a common definition for firm and nonfirm energy as well as onpeak and offpeak hours.

The trading place locations that will be captured by the indices will be the California-Oregon Border and the Nevada-Oregon Border (COB/NOB). COB/NOB is not a substation, but is considered a single transaction point for the three 500-kilovolt (Kv) AC and single 1000-Kv DC transmission lines that interconnect Northern and Southern California and the Northwest. The COB/NOB area was chosen because it provides trading or transaction points for power sales between entities in the Northwest, California, and Southwest. It forms the equivalent of a trading hub, with a significant amount of energy transacted (about 16,000 gigawatt-hours between January and November 1994). Many market participants have transmission access in or out of the area. Eventually, as occurred in the natural gas market, these types of indices will develop for almost all electricity transaction points. Indices are also likely to develop at the Palo Verde Substation and the Four Corners Substation, both of which are in the Southwest.

Each participant will report to Dow Jones their weighted average price for sales and megawatt-hour volume at COB/NOB by 10:00 am daily for transactions completed the previous day. Dow Jones will calculate the indices and broadcast the results to their electronic news service subscribers (Dow Jones Telerate) and to index participants. The indices will be distributed by Dow Jones to any interested parties, including other publishers, through a low-cost electronic service such as CompuServe, within an hour after distribution to Telerate subscribers. The Wall Street Journal will publish the indices the next day in the commodities section.

Whether you're a customer, utility, broker, or power marketer, the new competitive power marketplace holds new challenges and opportunities. All players are likely to benefit from more efficient markets and innovative new products as whole new areas become open to competition, such as reliability services and energy futures. Pricing transparency is a key element in assuring the creation of these new markets. The COB/NOB indices significantly enhance the cash market for electricity that is essential for liquidity, and serve as the basis