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The Power Exchange: California Goes Competitive

Fortnightly Magazine - March 1 1996

period of either an hour or a half-hour (i.e., a "last price" auction), with users of electricity (distribution undertakings, power marketers, end-use customers) making demand bids. The bids will create an unconstrained schedule, which will be coordinated by the ISO with the bilateral nominations and, after taking account of constraints and iteration of bids, will form a constrained schedule.

Successful generator bidders will be paid the market-clearing locational prices determined by the ISO, but "end-use customers will see one clearing price." This is a curious provision that if taken completely at face value will undermine the Exchange. Not only will it lose the value (and equity) of locational price signals to customers and make it more difficult to hedge purchase risk by introducing "basis risk" between sales to and purchases from the Exchange; worse, customers in lower-price generation hubs would quickly gravitate to bilateral trading. Surely the wording is poorly drafted.

Market Power

The CPUC learned from the major mistake in England and Wales of creating only three generators. The CPUC observes that, "[p]ractically speaking, the existence of market power can undermine our goals for restructuring and should be avoided." The CPUC envisions an important role for the ISO in mitigating vertical market power, but goes further. It wants the three IOUs to restructure themselves at the corporate level to separate their generation, transmission, and distribution businesses, and then not to contract between their own generation and distribution.

To mitigate market power in generation the CPUC asks Southern California Edison (SCE) and Pacific Gas & Electric Co. (PG&E) to voluntarily divest at least half of their fossil plant. To provide an incentive, the CPUC will increase the allowed rate of return on the equity component of the nonnuclear and nonhydroelectric stranded assets by 10 basis points for each 10 percent of such assets divested.

Access for Customers

Customers buying from generators or marketers will gain direct access for increasing increments of capacity, starting with 1,800 megawatts in 1998, leading to complete deregulation in 2003. Only a cross-section of customers will enjoy access, but there is no definition of which customers will be chosen, or how. Customers that remain with utilities will be offered either conventional tariffs, spot prices that they can hedge if they wish, or a rolling spot price. A phase-in schedule requires all sites above 100 kilowatts to introduce time-of-use meters by 2002, which seems very slow.

These proposals (em and the views expressed in the minority dissenting report (em are by far the weakest part of the Order because the debate focused on the wholesale market. Little thought has been allotted to the customer end of matters. The Order does not discuss how to unbundle the wires business from power retailing, whether and on what terms the utilities can own power retailing affiliates, or how to regulate either business. Both should be ring-fenced; the wires should be required to provide nondiscriminatory access. Then it becomes necessary to determine what should be done about metering, about right of access to metered data, and a whole host more of procedural, legal,