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The Role of Power Exchanges in Restructured Electric Markets

Fortnightly Magazine - October 1 1999

equated to about 12 percent of the ISO market.[fn.18] (The remaining 3 percent of the ISO market is hour-ahead, real-time and reliability must-run energy dispatched by the ISO.) Further, CalPX prices are freely available to all. Its volume and transparency have made CalPX's prices the benchmark for California and Western markets. There is significant evidence that Western U.S. markets rely on CalPX day-ahead prices as critical benchmarks for bilateral transactions at the wholesale and retail level.[fn.19].

Because CalPX has experienced significant volume that is not tied to the mandatory buy/sell, it has shown its value as a commercial market. The smooth functioning of the CalPX market and its success in attracting most, if not all, of the major Western traders to its market demonstrate the viability and usefulness of power exchanges and their contribution to an efficient marketplace.[fn.20] Even some power marketers that initially were skeptical, and in some cases very much opposed to an exchange in California, have expressed surprise and delight with the liquidity of the CalPX, where any size trade can be executed in any hour at a representative market price.

Similarly, regulators and government officials have expressed pleasure with the CalPX market, particularly its price discovery function and market transparency.[fn.21] The CalPX price forms the basis for billing credits to customers who select alternative energy providers, as well as the determinant of monies to offset stranded costs under a fixed-rate structure known as the competitive transition charge (CTC). Many regulatory intervenors that initially were opposed to the creation of a power exchange in California now argue for its sustainability as a central element of California's competitive market.[fn.22] The IOUs have been pleased with the representative prices resulting from the CalPX auction. In fact, these low prices have contributed to San Diego Gas & Electric Co.'s ability to end its CTC collection less than a year-and-one-half since market opening. While there has been some debate as to whether CalPX's energy prices are higher or lower than they would have been in the absence of restructuring, and whether suppliers reap profits higher than marginal costs, almost all agree that the transparency of the market fosters increasing efficiency.

New Trading Products. Since its initial opening on March 31, 1998, CalPX has implemented five major software upgrades that have provided enhancements from hour-ahead trading to better download capability and improved screen functions. In April 1999, CalPX opened a "green market," and later that month introduced a "bookout" product that allowed its participants to save significant wheeling and ISO fees when trading at the interties.

During the summer of 1999, the block forward contract was introduced. This forward contract allows buyers and sellers to contract forward for monthly blocks of on-peak power. Block forward contracts can be purchased up to six months before the transaction month and go to delivery either in the CalPX day-ahead market or through other bilateral means. As in Nordpool, it is the first in a series of new time-differentiated instruments CalPX will offer to provide trading flexibility with reduced risk to its participants while enhancing the efficiency of