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The Role of Power Exchanges in Restructured Electric Markets

Fortnightly Magazine - October 1 1999

instead a unique structure whereby "scheduling coordinators," or "SCs" (of which the CalPX is the largest), bring supply and demand together in balanced day-ahead and hour-ahead schedules that are submitted to the ISO for delivery.[fn.14] Unlike the poolco model, the California model gave market participants (other than IOUs) great latitude to trade in markets other than the hourly spot market and not be forced to be price takers in a centralized pool for energy. In this way, each market participant can manage its purchases against its supply portfolio and the particular demand characteristics of its loads.[fn.15].

The CalPX functions are transparent and separate from the ISO's market functions. The ISO operates the real-time balancing and ancillary services market based on bids from all SCs, including CalPX. The CalPX operates auctions to create day-ahead and day-of hourly forward markets. To date, 80 percent to 90 percent of California's energy is traded in the CalPX day-ahead market.

In California, unconstrained prices and quantities are converted to locational prices through auction bids rather than ISO dispatch decisions. Exercise of market power thus easily is identified and observable. In addition, this transparency provides a reliable basis for valuing transmission contract paths, or "fixed transmission rights," as they are termed in California. In the auctions, aggregate hourly supply and demand curves determine market clearing prices and quantities in the day-ahead and day-of markets. The resultant unconstrained market clearing prices, or UMCP, are adjusted later for congestion based on adjustment bids submitted to the ISO by all SCs. Thus, congestion adjustments also are based on market bids. Once the ISO selects from bids to determine the most cost-effective means to clear congestion, it provides revised adjusted schedules to the CalPX and other participants. CalPX then determines zonal prices based on adjustments made to the initial schedules that were the basis for the UMCP.

Separation of the CalPX and the prescheduled forward markets from the ISO is central to separating the energy market from the ISO's real-time dispatch decisions. Each SC is required to supply the ISO balanced schedules in these markets and thus, uses CalPX for balancing as well as other energy trading needs. The result is transparency and clear price discovery around CalPX unconstrained market clearing prices and zonal prices based on market bids. This provides market participants with information on where and when congestion exists and confidence that final prices reflect market conditions.

Unlike other "tight pools" that rely on complex marginal cost-based nodal pricing and centralized dispatch decisions by the system operator, the California market model maximizes competition in each energy market.[fn.16] The result is a commercially viable and transparent wholesale energy market.

First-Year Performance. It took California 15 months to design and construct an ISO and create an independent power exchange. Today, after more than a year-and-one-half of operation, CalPX maintains more than 80 percent of the ISO market.[fn.17].

During the first year of operation, more than 500,000 megawatt-hours per day was traded in the CalPX day-ahead market, comprising about 85 percent of the total ISO market, while the other 30 SCs' day-ahead volumes