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

Fortnightly Magazine - March 1 1999

They are receiving better prices since they can participate in the PX and ISO on equal terms with California players. A conservative estimate is that California has transferred approximately $100 million in additional revenues to out-of-state suppliers. Our best detailed guess is that the losses are at least twice that. Savings of this magnitude are more than sufficient to reimburse outside suppliers for purchasing firm supplies in a more risky market.

California does not fare so well. Changing the terms of trade costs California $100 million to $200 million per year - and Californians have to bear the costs of additional volatility to some degree.

Overall, the experiment may cost society more in additional volatility than it gained in the more efficient market for power between California and its out-of-state suppliers, but it is far too early to reach such a pessimistic conclusion.

In the meantime, the AB 1890 experiment proves the old adage: "Beware getting what you wish for." California's experience has not brought the state much more than a concession in the long debate with its neighbors over the price of imported energy.

Robert McCullough is the managing partner of McCullough Research, a firm specializing in bulk power and restructuring policy issues in the United States and Canada. He also is an adjunct professor of economics at Portland State University.

Administered vs. Market Prices

What do the PX and ISO do?

Some confusion exists as to whether California's Power Exchange and Independent System Operator report market prices or actually set market clearing prices. Are they serving as reporters or acting as price regulators?

The California experiment administers prices according to the theories prevailing at the ISO and the PX. The September price excursions amply demonstrate this fact. Changes in ISO and PX rules - not the market themselves - continually change ISO and PX prices.

Most markets avoid administered prices. The major world commodity markets like the London Metal Exchange and the Chicago Board of Trade provide little theoretical framework around the price-setting process. In Chicago, for example, brokers actually shout back and forth in pits to buy and sell commodities.

As a general rule, administered prices are easier to manipulate and tend to show greater volatility. As one market participant recently put it, "Traders are smarter than bureaucrats."

The ISO and the PX are the most expensive administered markets in history, so we will see in the near future whether "traders are smarter than many, many, many bureaucrats."

1 My firm's experience on the retail side of the California experiment strongly supports this view. Buyers, even the largest and most attractive, receive fewer and fewer offers when they approach the market. One of our clients, one of the largest California industrials, recently was approached by its supplier with an offer to pay off the discount if they would release the supplier from the California market. See also, "California's Electricity Market: Are Customers Necessary?" by Robert McCullough, Public Utilities Fortnightly, July 15, 1998, p. 36.

2 Energy Market Report's On-Peak Index at COB, average highs and lows by day.

3