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The Role of Power Exchanges in Restructured Electric Markets

Fortnightly Magazine - October 1 1999

use of competitive bidding for all energy products and resultant dispatch decisions.[fn.11] There was concern that because the bidding and selection process would be administered by the ISO, the commercial function of the market would suffer as a result of efforts to achieve the ISO's mandate to assure system "reliability."Further, it was argued that an ISO, as a regulated entity, would lack incentive or the appropriate culture to operate an efficient market. Other criticisms concerned the complicated and costly systems that would be required, as well as the method proposed to determine the market clearing price - a single-price, blind auction inconsistent with continuous trading in wholesale markets.[fn.12] However, there were plenty of criticisms lodged against the "bilateral market model," as well. Most notably, there didn't seem to be a concise plan for how the bilateral model would work. Most arguments for the bilateral model were couched as criticisms of the poolco model. It was clear that the bilateral model was not a centralized market. It would operate on the premise that wholesale access could be provided to retail markets, perhaps under existing rules that had been enacted by the FERC to provide more open access in wholesale electric markets. Presumably, a competitive supplier could negotiate a bilateral contract with a retail customer and use open access tariffs filed with the FERC to deliver electricity.

Besides its vagueness, the bilateral model was criticized because it clearly favored incumbent participants and limited entry by new service providers. It was criticized as being inconsistent with the physical market realities. Because electricity cannot be delivered directly from a particular seller to a particular buyer, it was argued that it would require expensive metering to measure congestion management, ancillary services, load following and other control area services provided by parties outside of the bilateral contract. Further, it was argued that the bilateral model would exploit consumers because there would be no clearly visible market price and unchecked discriminatory pricing could result. Large participants and incumbents would have the clear market advantage because of their existing trading relationships and access to information. advantage could limit, rather than expand, markets.[fn.13].

A Functional Compromise. The great debate culminated in a negotiated memorandum of understanding (MOU) among the parties that allowed for full recovery of stranded costs in exchange for a hybrid version of poolco and the bilateral market model. The MOU resulted in a California Public Utilities Commission compromise order that would create a power exchange separate from the ISO and allow for the coexistence of a bilateral marketplace. It required that the CPUC-regulated IOUs buy and sell their retail energy through the power exchange during a defined transition period. effectively would remove any possibility that the utilities, through their bidding processes, could exercise undue market power and influence the market clearing price calculated by the power exchange. Finally, the compromise order and resulting legislation (AB1890) in September 1996 set Jan. 1, 1998, as the date for full and open access.

Thus, a new model was conceived in California that is not poolco and not the bilateral model, but