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Trading on the Index: Spot Markets and Price Spreads in the Western Interconnection

Fortnightly Magazine - October 1 1996

indices, while good, reflect a very small volume compared to the market as a whole. A single large transaction could dominate the NYMEX futures market for either Palo Verde or COB.

A survey index prepared for the WSSC region could provide an alternative to the three active indices. Many such survey indices appear in industry journals, including Clearing Up/California Energy (News Data Corp.), Megawatt Markets (Pasha Publications), and Power Markets Week (McGraw-Hill). Dow Telerate also offers interesting indices. The most complete set of indices may be obtained from Economic Insight, a firm in Portland, OR. The firm conducts a survey daily and reports on one-day prescheduled power, both on and off peak.

Economic Insight's collection of Internet-based price indices cover five markets (COB, Palo Verde, the Canadian border, Midpoint, and Meade) plus six regions (northern California, southern California, the Pacific Northwest, Mid-Columbia, the central Rocky Mountain states, and the inland Southwest) (see Map opposite).

The region boasts three open markets for electricity (em Alberta's power pool, NYMEX COB, and NYMEX Palo Verde. The division of the WSCC into markets and regions reflects the gradual evolution of traditional bilateral transactions into organized markets. Although regulators in California may doubt whether such an evolution can occur without their inspired leadership, the natural evolution of open competition tends to create central markets.

The "Mid-Columbia" market offers an interesting example of how markets take shape. Almost all network transactions north of the California border involve network transmission provided by the Bonneville Power Administration (BPA). Although BPA's transmission tariffs vary, most transactions enjoy the benefit of a postage-stamp transmission charge for power movements from Canada in the North to California in the South (access to COB requires an additional postage-stamp rate). Logically, then, the market in the Pacific Northwest should remain the same for any location, as long as each generator has access to BPA's network.

This assumption proves largely correct. A review of specific utility transactions shows a high correlation for the values reported for Mid-Columbia. The importance of the Mid-Columbia index comes from the fact that its market participants in the area (em largely the owners of the huge Mid-Columbia dams (em are more accessible than the largest player in the region, BPA.

BPA's slow acceptance of competitive forces has simply moved the market 100 miles to the east. As BPA comes to realize the importance of the marketmaker role, the Dittmer office (BPA's dispatch center in the Portland area) should gradually usurp the relevance of the Mid-Columbia index.

Economic Insight's Canadian index shows up as the weakest among its set of indices, an unfortunate side effect of B.C. Hydro's market actions. Since B.C. Hydro dominates the electric business in British Columbia, pricing tends to be less market-oriented than elsewhere within the WSCC. Published prices from the utility (available through its marketing subsidiary, Powerex) bear little relevance to wider WSCC markets or even, in many cases, to conditions in the Pacific Northwest or Alberta. The logical hypothesis is that B.C. Hydro is attempting to monopolize the power system in its area, obscuring the price signals