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Regional Power Markets: Roadblock to Choice?

Fortnightly Magazine - October 1 1997

seller's, unless peak capacity is overbuilt in true business-cycle fashion.

Marketers and Brokers: Key to Choice?

Can power brokerage (em now a multi-billion-dollar-a-year industry (em bridge the gap from wholesale competition to true consumer choice?

Today more than 300 power marketing firms are operating, the largest of which sell more power than some of the largest utilities. For example, in 1996 the leader Enron sold about 60 billion kWh, a figure greater than the wholesale trade of some entire NERC regions. Of course, some sales are between marketers, and others are hedges and futures contracts used to establish a firm market, not for physical delivery. But many of these deals are for delivery. On the face of it, marketers are doing the jobs that the independent system operators and power exchange spot markets were created for, but seem unable to perform.

The growth in brokerage activity is explosive. According to the Edison Electric Institute's Power Marketers Yearbook: "Power marketers in 1996 sold approximately 230 billion kWh (em more than eight and a half times the 26 billion kWh sold by marketers in 1995 (which was nearly four times 1994 sales). This total represents between $3.3 to $7.1 billion in 1996 sales, compared to roughly $450 to $670 million in 1995. Subtracting the cost of power purchased, marketers are estimated to have netted approximately $240 to $770 million."

In 1994, power marketer sales composed about 1 percent of wholesale sales. In 1995, that number leaped to 6 percent and to more than 20 percent in 1996. In some cases, the power is sold six or eight times before it is delivered. In fact, the power marketing industry in many respects looks like a derivatives market, not a supply market.

Nevertheless, this secondary derivatives market may be just what is needed to make competition flourish at retail.

William Daniel Fessler, former president of the California Public Utilities Commission and an architect of that state's restructuring plan, said, "The idea of customer choice is a convenient fiction, the so-called contract path." Fessler, who taught contract law for many years, said: "So long as the customer takes delivery of electric energy off of a high-voltage transmission grid, the energy is fungible and utterly commingled. Bilateral contracts are, in the final analysis, financial transactions aimed at risk apportionment." In other words, derivatives.

Whatever power brokerage is, it is taking off, and taking the electric industry with it.

David E. Wojick P.E. is an independent consultant on the dynamics of the electric power industry. His clients have included the AES Corp., Duquesne Light Co., Allegheny Power System Inc. and the Chief of Naval Research.

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