Robert Blohm and Professor William Hogan recently traded op-ed letters in the Wall Street Journal on the "poolco" and "bilateral" models for wholesale power markets:
Writing first, Blohm (an advisor to Ontario's Macdonald Committee on electric competition) praised bilateral trading (individual buyers and sellers agree on price). He criticized the poolco idea of allowing some sellers "to pocket a surplus" by collecting the highest price of any block of power dispatched by the pool, regardless of the seller's costs.
He also predicted that poolcos would end up imposing monopoly-type regulation to plug what he saw as leaks in a well-functioning market:
"To prevent buyers from seeking a lower price on a competing type of trading exchange, the single-price poolco exchange would need some compensating advantage, bringing it closer to the monopoly it enjoyed prior to deregulation."
(em Robert Blohm,
"Don't Give Utilities a Monopoly on Power,"
WSJ, Mar. 11, 1997, p. A23.
William Hogan (professor of public policy and management, JFK School of Government, Harvard University), a long-time poolco proponent, saw no windfall for sellers. He defended the poolco model to ensure reliability, suggesting that a pure bilateral model would ignore the unavoidable cost of physical dispatch and operating the transmission grid:
"It is true that buyers and sellers could agree individually on the sales price for power in bilateral trades (em indeed, such trades will occur in a poolco. ... However it is not true that, on average, the sales price for these contracts will be below the market-clearing price for electricity. ... If we ignored the physics and assumed the pure bilateral model were possible, on average the price in either [approach] would be the same."
(em William W. Hogan,
"A 'Stock Market' for Electricity,"
WSJ, Apr. 2, 1997, p. A15.
But on March 31, the Trustee for the California Independent System Operator Corp. and the California Power Exchange Corp. filed its Phase-II plan with the Federal Energy Regulatory Commission. In an accompanying letter, the Trustee acknowledged the need to "correct" the poolco model to prevent power producers of the Pacific Northwest from "dumping" low-cost hydropower into the California market to collect the higher, pool-wide price:
"We believe that the situation of the Bonneville Power Administration ... could lead to unintended results in the PX [power exchange] market."
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"[I]n the absence of a mitigating rule, BPA will have the ability to bid its entire supply into the PX (limited only by transmission capacity over the Northwest interties) and receive the market-clearing price for the entire amount accepted in the PX auction.
"Perhaps this result could be justified if the higher price enjoyed by BPA fostered market entry by new, lower-cost, more-efficient energy producers. ... But for the supply in question BPA's costs are so low that it can undercut virtually any new competitor."
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"Due to [these] factors, the Trustee proposes a special transitional rule ... [For] any entity within the WSCC that ... actually supplies 25% or more of the non-must-take or must-run energy sold through the PX in a given hour ... [s]uch