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Electric Restructing and the California "MOU"Alex Henney

Fortnightly Magazine - October 15 1995

PoolCo's roles of providing a market and operating the system. (Namely, it might be tempted to provide lower prices to its market by favoring its transactions when scheduling across constraints compared with bilateral trades.) Although proper governance and a FERC-approved nondiscriminatory code should prevent such bias, they demanded a clear separation between monopoly and market activities, as in the gas market. Rather than one "black box" that was supposed to act pro bono publico, they wanted two black boxes with a transparent interface.

At the behest of the large consumers and power marketers, the MOU proposes splitting the PoolCo into two organizations \(em an independent system operator (ISO) and a power exchange (WEPEX) \(em which would both operate under FERC regulation in a fiduciary manner, with no financial interest in power trading. Power generators, local distribution companies, and large customers (acting independently or by aggregation) would conduct business through WEPEX (using Contracts for Differences to hedge risk), or would contract directly on a bilateral basis. The MOU proposes a four-year schedule for direct access, depending upon customer size:

s 8 megawatts (Mw) or greater in 1998

s 2 Mw in 1999

s 500 kilowatts (Kw) in 2000

s 100 Kw in 2001

s 50 Kw in 2002.

Customers with multiple sites could aggregate internally to qualify for the competitive market.

The WEPEX would conduct an auction in a manner similar to the flexible PoolCo. The ISO would then schedule both the WEPEX trades and the bilateral trades, and would manage constraints based on preferred schedules, reliability factors, real-time load balancing, and other operational requirements. When constraints arise, the ISO will allocate access to the transmission grid, based on nondiscriminatory comparable protocols approved by the FERC to make "the most efficient use of scarce network capacity."

The ISO would price imbalances in bilateral trades at its cost of procuring power, which would be the WEPEX price rather than a penalty (as is done for gas pipelines and was proposed by the FERC in its Mega-NOPR). This arrangement would eliminate one source of distorted price signals and remove one disadvantage for small players in the market. The ISO would offer FERC-approved, nondiscriminatory transmission tariffs for both WEPEX and bilateral transactions.

Theory and Practice

In principle, the proposed split between the ISO and WEPEX could function virtually identically to a single PoolCo; the institutional divide would prove only cosmetic. If WEPEX is designed as an efficient pool, and the transmission pricing and constraint management arrangements are economically and equitably devised, then the WEPEX price will drive short-term contract prices for both contracts for differences and bilateral contracts. There should then be no advantage in the latter, but rather, strong incentives to trade via the exchange. But in practice, the key lies in managing constraint scheduling and transmission pricing. Since constraints are neither precise nor fixed \(em and depend upon what happens in other parts of the system \(em any opportunities to profit from system inefficiency will depend upon how well the ISO can integrate the two sets of schedules. The MOU is an outline only.