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California's Electric Market: Are Customers Necessary?

Fortnightly Magazine - July 15 1998

the amount left over after the total bill is reduced by some fixed level of distribution charges and the rolling average monthly price of energy out of the PX. If this average PX price comes in low, the CTC becomes a greater percentage of the bill. If the average PX price remains high, a smaller CTC is imposed. The CTC whatever its size must not exceed the "headroom" that exists between the rate cap and the energy and distribution costs. In theory, if PX prices climb so high that the combination of fixed distribution level charges and PX energy exceeds the rate cap, the customer will still see only the capped rate; the CTC will be nonexistent for that billing period.

Mechanics: Bidding Through the

Power Exchange

Under AB 1890, the UDCs must bid all generation into the PX and purchase all energy needs out of the PX. By contrast, other suppliers may choose; they have the option whether to bid into and buy out of the PX. The utilities have been encouraged to sell non-nuclear generation to increase the likelihood of fair bidding and open market pricing in the PX. The PX price will be used, in retrospect, as a benchmark by regulators for determining the amount of utility generation costs that were truly stranded in the market for that period.

As this model is described, customers staying with the UDC don't care about the price of energy out of the PX; the total rate has been capped, and the relative portions assigned to energy and CTC only serve to make the bill longer and harder to read, but no different on the bottom line.

Customers who elect to take service with another provider see a different bill. For example, consider Southern California Edison Company's rate TOU-8. This tariff one of the standard tariffs for larger users states:

Direct Access Customers purchase energy from an Energy Service Provider and continue receiving supply and delivery services from Edison. The Averaged PX Energy Charge is determined as specified for a Bundled Service Customer. The customer's bill will be calculated as for a Bundled Service Customer, but the Customer will receive a credit for the Averaged PX Energy Charge %n2%n.

That means that the bill received by the customer equals their old bill minus the PX cost for the proceeding month.

The Customer's Perspective:

What Do Buyers Want?

What does a customer want who seeks direct access to electric energy? He wants a lower total bill. He wants to be in a better position than if he stayed with the standard rate. Accordingly, because of the mechanics described above, to attract customers a supplier must promise to beat the power exchange price over time. In addition, for those times when the exchange price exceeds the total 'headroom' under the rate cap, the supplier must be prepared to discount even more to keep the total bill under the rate cap.

What does this mean to customers?

First, the sheer complexity of the structure acts as a powerful disincentive for customers to contract for direct energy