The Role of Power Exchanges in Restructured Electric Markets
As the FERC ponders RTO structure, California's incumbent PX defends its unique design.
The great California debate - what role and structure for a power exchange? - once again is rearing its head, this time on the national scene. The resurgence of interest in regional transmission organizations, or RTOs, spurred by the recent Notice of Proposed Rulemaking[fn.1] issued in May by the Federal Energy Regulatory Commission, raises questions about the relationship between RTOs (designed primarily to manage grid operations) and power exchanges (seen as vehicles to facilitate trading).
The RTO NOPR raises two questions in this regard, the first of central importance to the FERC initiative, and the second one perhaps more tangential:
* Integrated or Stand-alone. Should an exchange operate as an integrated part of the RTO (grid manager), or instead carry out a wholly separate commercial and market function?
* Public vs. Private. Do exchanges represent public institutions necessary to facilitate open markets, subject to regulatory mandates, or are they private concerns, whose presence and sustenance is better left to their competitive prowess in the wholesale market?[fn.2]
After more than a year of market operation, we believe the California Power Exchange (CalPX) has proven a viable stand-alone institution, a critical element of California's restructured market and a valued source of price discovery that facilitates competition in Western wholesale markets. Its roots as a not-for-profit public benefits corporation have provided necessary credibility and neutrality to attract more than 60 participants from all over North America. Further, California's model is supported by the success of other commodity exchanges dedicated to serving their members' needs, independent of geography.
The performance of CalPX demonstrates that there clearly is a role for an exchange to facilitate competition in restructured electricity markets. However, in order for an exchange to be efficient and meaningful, it must have a deep and liquid market. In California, this liquidity was assured for the transition period whereby state-regulated investor-owned utilities were required to buy and sell all of their requirements through CalPX. Without some institutional provision to assure volumes, it is unlikely that the CalPX market would have developed in California.[fn.3]
As California's experience shows, separation of the power exchange from transmission operations and management helps build and maintain a transparent and highly competitive energy market. And due to advanced electronic trading technologies, there is no physical or technical reason that a power exchange need be tied solely to a particular RTO. In fact, the scenario of separate exchanges tied to each RTO's service area could fracture broader energy markets and deprive the market of liquidity.
Furthermore, electricity marketers now trade nationally and internationally. Therefore, the ideal model ultimately may be a large and diverse member-based institution similar to other commodity exchanges, not limited to the geographic service area of a particular RTO.
A power exchange with a common platform, processes and trading tools should not be prohibited from serving all markets in which its participants chose to trade. The success of a commodity exchange is based on its members' perception of how well they can hedge risks and/or achieve profits