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California's Electric Market: Are Customers Necessary?

Fortnightly Magazine - July 15 1998

supplies. At a recent industry meeting I was amused to hear one of the largest federal government energy managers (and a very sophisticated purchaser) remark that the operations of the ISO and PX were a complete mystery. He only wanted to be assured of a rate reduction and would not sign any contract that left him in the position of guessing whether one would occur.

Second, suppliers have in the past year learned to simply give the customers what they demand. Almost all recent contracts have been signed on a discount to tariff or a discount to PX basis. In either case the supplier agrees to bear the risk and uncertainty of the complex California process.

Why would a supplier be willing to do this? Rational sellers in a truly competitive market will attempt to maximize their returns by selling to the highest bidders. The dilemma for suppliers in this market is: why should I sell energy to direct access customers at a discount off the power exchange when I can make more money selling into the exchange at the exchange clearing price, with no discount?

Most participants now believe that a powerful "press release" effect guides the California suppliers. They have been willing to face a high probability of loss in order to gain market acceptance. This explains why aggressive professional suppliers have prosecuted sales aggressively and then gradually lost interest when their order books are filled and their press releases released.

The Supplier's Perspective: Why Serve

Customers?

Although the consumer's mechanics are focused on the PX, the ISO is a risky place as well. The ISO has the ability to make significant surcharges to the supplier in two areas: 1) transmission congestion, and 2) imbalance charges.

As of the first six weeks the market was open, the ISO had yet to seriously disrupt the market with congestion charges, but the imbalance charges have already drawn some blood. The ISO determines whether ancillary services are sufficient to maintain the system and, if not, it will buy them from the lowest bidder. Some of these charges have been as high as 96 mills (9.6 cents) a high level considering the generally quiet nature of the West Coast power system since April 1.

These are charges that end users don't understand, aren't willing to bear, and are unlikely to accept in a final contract. They constitute risks created by AB 1890 and the PUC and assigned to suppliers by the market %n3%n.

To the degree a supplier is forced to speculate against the PX, serving actual end-use customers only adds additional costs. Bluntly put, the customer becomes an unnecessary burden. If the supplier's expertise and stomach for risk is great enough to create an opportunity to profit against the PX, the additional costs of customer relations, billing, and metering are a burden, not an advantage.

The only reason to deal with the customer is for the increased visibility and the hope that years in the future the customer will feel loyalty and stay with the supplier once the California market becomes truly deregulated.