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California's Electric Market: Are Customers Necessary?

Fortnightly Magazine - July 15 1998

A simple example explains how the current structure operates from the suppliers perspective. Assume that a 60-mill customer (one paying 6 cents per kilowatt- hour) makes a contract with a competitive energy supplier. After negotiations, the customer receives a 3-percent discount off its total tariff rate. The month of April 1998 would have looked like this (see Chart 1).

In order to make a profit, the supplier would have been required to pay the full CTC and the full distribution cost, and then "beat" the PX by 1.8 mills (3 percent of the total tariff of 60 mills.) In effect, the supplier is being "paid" the PX price minus 1.8 mills for the power required to meet the customer's load.

Whether the supplier can turn this deal into a profitable operation will depend on how efficient the regional markets are. Clearly, a supplier cannot buy at the PX price and then expect to make money selling at retail at a 1.8-mill discount to the PX price. However, a supplier that owns actual supplies faces a much simpler and more attractive calculation. This supplier also sells power at a the 1.8-mill discount to the PX price, but can also supply the PX with power from its own resources at the full PX price.

Did anyone make money in California over the first six weeks of the PX? The answer is almost certainly no. The following chart shows the comparison of on-peak PX prices to similar prices at the COB interface, the California-Oregon Border. Although some parties may have made accounting profits, the PX has had approximately the same price as the market since its inception. When a discount is added as well as the losses and wheeling tariffs necessary to provide power from COB to the PX, it is clear that it would cost more to supply a California load than simply selling the power at COB.

This result appears consistent with forecasts made before the start up of the PX that the PX prices would be pegged at a level just below surrounding markets %n4%n.

Off-peak prices show much more volatility south of the California border than north of the border.

This observation is also consistent with common sense. One would generally expect administered markets like the PX to be more volatile than open markets. Open markets have more freedom of entry and exit, are less easily manipulated, and do not suffer from problems of rule design or computer programming. One would also expect off-peak prices to reflect additional storage opportunities in the Pacific Northwest.

The bottom line is that life in the PX fast lane didn't confer additional profits or reduce risks. These are particularly discouraging results for suppliers seeking customers in California's "deregulated" market.

Market Anecdotes: Early Returns and Long-

Run Implications

The implications for the market are very clear. Competition for customer loads has fallen dramatically. The following chart is anecdotal comprised of data collected by McCullough Research from clients, personal interviews, and industry press releases but it reflects an honest sample of customer experience in the California market.