April 01, 1998
WHICH NUCLEAR PLANTS WILL SURVIVE competition? To answer that question, senior managers at electric utilities must know a nuclear plant's true economic potential....
$267 million $238 million
Northwest $142 million $176 million
Total $410 million $415 million
This simple analysis indicates that the implementation of the PX and ISO has transferred approximately $100 million per year ($34 million during three summer months) from California to its suppliers.
Society as a whole has benefitted by $5 million during the three summer months - a relatively small $15 million dollars a year.
This analysis tends to understate the scale of the shift in market structure. The real world abhors straight lines. Only lecturers in economics ever see supply and demand curves this simple and easily estimated. Second, these calculations reflect a variety of dynamic factors not captured easily in a simple monthly diagram.
The estimation of the true oligopsonistic effect requires a far more detailed analysis. We have undertaken such an analysis using the limited data available, and our results indicate that the shift is on the order of twice the estimates given above. The detailed analysis is a hostage to detailed statistical data. Such data only now is becoming available, and it will be at least another six months before a full year of information exists.
A clear secondary impact of the PX/ISO system has been increased volatility of West Coast spot prices. Volatility from May 22, 1995 though March 31, 1998 was 39 percent. Volatility since that date has been 44 percent.
Valuation of volatility is always very subjective. Few ultimate consumers view electric price risk as a primary business issue, mainly because this risk is highly independent of their other business risks. Instead they diversify their electric price risk over a portfolio of raw materials purchases. Traders cannot afford to be so confident, however. A highly profitable business is the packaging of spot supplies into long-term offers. A change in volatility does have an immediate impact on the prices that traders can offer.
Industrials in the Pacific Northwest have seen an increase in long-term offers as traders increase their required margins to offset the increased price volatility. This is a market phenomena since different traders have different appetites for risk. Traders communicate their risk perceptions in the markets by making bids and seeing whether their bids are successful.
Our most recent purchases for large industrial clients have seen a small increase in one-year prices that can be ascribed to the effect of risk itself. Our estimate of the impact is only one half of a mill across an industrial market of some 6,000 megawatts - a nominal $26 million per year. It isn't clear how much of the volatility is borne by California. Since rates for California end-users are a combination of the PX price and stranded costs that offset directly the volatility in the PX figure, end-users are insulated completely from PX volatility. Out-of-state suppliers to California end-users are not, of course, and this is one of several reasons why competition for retail loads in California is gradually grinding to a halt.
Who's Winning After All?
The answer - preliminary as it may be - is that California's out-of-state suppliers may be ahead.