You've heard talk lately about the convergence of electricity and natural gas. That idea has grown as commodity markets have matured for gas and emerged for bulk power.
Nearly three years on from the Yellow Book,1 after many long hours and thousands (em if not millions (em of pages, and following much bitter debate (linked with some murky politics), the California Public Utility Commission (CPUC) by a 3-2 majority has at last published an Order2 to introduce competition for retail customers.
The decision contains four main proposals:
s market structure
s access for customers
s stranded assets
s public policy
The Order follows the broad principles of the September Memorandum of Understanding (MOU)3 agreed between Southern California Edison (SCE), and representatives of power marketers, independent power producers (IPPs), and large customers. The Order requires the creation of an Independent System Operator (ISO) and a separate Power Exchange (Exchange) that will coexist with physical bilateral trades (the so-called flexible pool). The Order also addresses the issue of market power, which has bedeviled the market in England & Wales, where two generators control the margin (em hence prices (em most of the time, a result that has created considerable distortions and problems.
The ISO's responsibilities will be to ensure reliability and efficient operation of transmission, and
to offer nondiscriminatory and transparent transmission access to all players. To that end it will have operational control of transmission, plant scheduling, system balancing, and managing constraints, while the utilities retain ownership of their transmission assets. The ISO will have no financial interest in the market, nor any economic interest in any load or generation. It will be regulated by the Federal Energy Regulatory Commission (FERC). Although not spelled out, the board of directors of the ISO presumably will be structured either to balance competing interests or to avoid such interests.
To fulfill its responsibilities, the ISO will have to perform several tasks:
s Procure ancillary services, competitively where possible.
s Coordinate and schedule bilateral transactions between
generators, power marketers, and customers based on their nominations, together with transactions from the Exchange, in an economic and non-discriminatory manner.4
s Administer a system of transmission congestion payments and provide a set of tradable instruments to support long-term commercial transactions across locations in the system.
This arrangement meets the broad structure of the MOU, reflects the realities of the physics and economics of electric systems, and avoids the confusion from which some of the advocates of separation may have hoped to profit. The two organizations will effectively operate in an integrated manner.
The Order stresses the value of price revelation to customers, particularly small ones, since large customers can look after themselves. Based on the view that it will need a kick start, the Exchange will for five years be mandatory for capacity owned by the three major investor-owned utilities (IOUs), and voluntary for other parties. Like the ISO, the Exchange will remain independent, regulated by the FERC, and "prohibited from owning generation, transmission, or distribution facilities and will have no affiliation with any companies that own those facilities." It will operate in a nondiscriminatory and transparent manner.
Bids will be based on generators offering minimum-run prices for each unit for each