July 1, 2001
L.A. Loves a Loophole
There's no getting around it...
WE HAVE SEEN THE FUTURE AND IT IS THE HOURLY pricing of electricity.
In California, the power exchange serves as the cornerstone for a restructured electric industry. The raison d'être of the PX is to reveal the hourly marginal cost of electricity. Now add PJM to the list. Like California, an integral aspect of the restructured Pennsylvania-New Jersey-Maryland Interconnection, as approved by the Federal Energy Regulatory Commission by order dated Nov. 25, 1997, is the mid-Atlantic market, which intends also to fix an hourly price for electricity.
This hourly market is supposed to send accurate price signals, permitting an efficient ordering of production and consumption, all to the economist's delight.
The new world order, however, will soon run headlong into an immutable feature of the old: the residential meter. While the market works to develop the hardware and software to measure receipts and deliveries on the bulk market at hourly intervals, the residential meter spins faster or slower with the daily ebb and flow of electricity, but most of the time, no one is listening. Rather, the meter is read monthly to reveal the total electrical consumption over the previous 30 days. To date, this state of affairs has posed no problem, since utilities have sold electricity to residential users at average cost. Even in the brave new world, utility distribution companies may continue to bill residential customers on an average-cost basis even though they may acquire power on an hourly cost basis.
The rub arrives, however, with retail choice. In Pennsylvania, the Klaxon is sounding loudly to allow consumers to choose their own supplier of electricity. And in response to the apparent demand, a multitude of potential suppliers is lining up to make choice a reality (though perhaps an irritant to the telemarketing-averse). SuperJuice Marketing, a hypothetical marketer seeking to enter the Pennsylvania market, may attract the requisite number of customers to meet threshold requirements. It may line up generation at a cost low enough to make good on promises of 10-percent savings. But how can SuperJuice synchronize its deliveries to the grid to match the consumption of its diverse class of residential consumers? And how is the ISO/PX or utility distribution company to know when and if SuperJuice power deliveries come in over or under? Or, more importantly, how will it identify the moment when those imbalances occurred, such that a price may be assigned to them?
Unanticipated and unavoidable imbalance charges may be the anvil against which SuperJuice is crushed, and derivatively meaningful competition at the residential level.
Bulk Power Markets: So Far So Good
The mid-Atlantic market is designed to facilitate the exchange of wholesale electricity and related services at competitive prices by all qualified buyers and sellers on a comparable, nondiscriminatory basis. The market structure uses an hourly bid-price mechanism to ensure that competitively priced energy remains available to serve load. Sellers wishing to sell into the mid-Atlantic market will submit offers setting prices and other operating data specified by the independent system operator.
Similarly, buyers within the PJM control area will submit appropriate load forecasts, along