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Electric Restructing and the California "MOU"Alex Henney

Fortnightly Magazine - October 15 1995

for its hydro facilities (1,000 Mw); any difference from market revenues will credited or debited to the CTC.

Market Power

The FERC and the U.S. Department of Justice are both concerned \(em if not

obsessed \(em with market power. The Mega NOPR proposes that while new plant will be free to compete, utilities will first have to prove that their existing portfolio of plant cannot exercise market power. The parties to the MOU "understand that the FERC will not consent to market-based pricing if unacceptable market power exists or is unmitigated." SCE suggests that the PBR mechanisms to cap revenue should eliminate or at least mitigate market power.

Although contracts can mitigate short-term market power, the British experience \(em as shown by National Power and PowerGen \(em demonstrates that there are games to be played. In Britain, those two generating companies reached an understanding with the regulator to keep the time-weighted (base load) and system-weighted prices below certain levels for two years. Yet, with increases in the peakiness of the price-duration curve, their profits increased. No doubt, games could be played in California to boost profits for some at the expense of others by profiling the price-distribution curve.

If the PBR cap does not work adequately, then SCE "is committed to working with the FERC and the CPUC to identify and achieve these mitigation measures in the fastest and least disruptive way possible," which may include divestiture. If divestiture of generation is required, the gain or loss on sale compared with the net book value will be netted against the CTC.

(Note: the MOU focuses on lateral market power in generation, but says nothing about the vertical market power from the link between generation and customers.)

Market Structure

While the big short-term dollars in restructuring lie with stranded assets, the noisy (and generally ill-informed) debate has staked out the issue of PoolCo versus bilateral trading.

At first Pacific Gas & Electric Co. (PG&E) supported bilateral trading, joined by power marketers and large customers. By contrast, SCE, San Diego Gas & Electric Co. (SDG&E), and a majority of CPUC commissioners supported PoolCo, which would comprise both a system operator and a framework for a day-ahead market (through a sealed bid, single-price auction).1 PoolCo would act in a nondiscriminatory, pro bono publico manner, with no financial interest in general power trading. It would procure ancillary services, and submit to FERC regulation.

Later on, PG&E agreed to participate in the development of a PoolCo. In July, both SCE and SDG&E proposed a "flexible pool" that would allow bilateral trading outside the pool. This approach appears sensible on political grounds \(em it squares off the large customers and independent power producers (IPPs) \(em and avoids a possible legal challenge to a mandated pool. It also provides a measure of competition to ensure that ancillary services will be priced in a nondiscriminatory and appropriate manner, and brings a modicum of pressure to bear on PoolCo's efficiency of operation.

The large customers, independent power producers, and power marketers were concerned that there might be an internal conflict between