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Electric Competition, One Year Later: Winners and Losers in California

Fortnightly Magazine - March 1 1999

by the runoff from the Columbia River, where melting snow fuels a huge expansion in hydroelectric generation in the late spring and early summer.

We have almost 20 years of data on wholesale prices in the WSCC. Although price reporting has improved immeasurably since 1995, this large market operated on an open competitive basis throughout the 1980s, and monthly data for specific utilities is available.

The major players in the West Coast markets have been the three large California utilities - San Diego Gas & Electric Co., Southern California Edison and Pacific Gas & Electric - and the Bonneville Power Administration to the north. Other key players are Portland General Electric and Pacific Power & Light, partial owners of the intertie south to California, and the Public Generating Pool, the owners of much of the hydroelectric generation along the Columbia River.

The price of electricity at the California-Oregon-Border (COB) node is a continuing issue among market participants on both sides of the intertie. For most of the 1980s, the major investor-owned utilities (IOUs) in California asked the Federal Energy Regulatory Commission to cap prices on imports to California, arguing that it was "dump hydro" and was selling far above its 2.5-mill cost ($2.50/megawatt-hour). Pacific Northwest actors accused Californians of monopolizing the purchase of electricity on the southern end of the intertie.

Not only did the FERC frown on the price-cap arguments, but other, smaller California utilities launched a long, controversial attempt, known as the "E Quad 7" case, to access Northwest supplies through the FERC. Ultimately, they built their own transmission line north to participate in the market. Bonneville faced years of similar pressure to allow its customers access to the southern marketplace, culminating in several litigious "Intertie Access Policies" in the later 1980s.

The basic problem is that the concentration of market power in the South gave the big California utilities the upper hand in the spring and summer, when flows south dominate the market; many Pacific Northwest sellers would meet few California buyers. The resulting situation was like the reverse of buying a car in a small town with only one dealership: The Small-town buyers usually pay list price.

In power markets, with many sellers to the North and few buyers to the South, "oligopsony" would be the best label. Oligopsonistic markets are those in which the buyers have market power and can control prices and quantities by adjusting their offers. Traditional economic theory describes this market structure with the diagram in figure 1.

Buyers with substantial market power will avoid paying the price indicated by the intersection of the supply and demand curves (P1). Instead, the oligopsonistic buyer will deduce the relationship between increased purchases and the increased prices, and by reducing purchases (Q2), can force down prices (P2). In this way, the division of value between the consumer and the buyer can be adjusted to favor the buyer - even though the total value available to society diminishes.

Consumer value is the area bounded by the oligopsonistic price below, the quantity purchased and the demand curve above. This