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The Role of Power Exchanges in Restructured Electric Markets

Fortnightly Magazine - October 1 1999

its market.

Price Volatility. During its first year of operation, CalPX markets experienced more volatility than historically occurred in the former energy market. was expected given the short-term nature of the California restructured market. Similarly, the ISO experienced some price spikes for reserve capacity that caused it to cap ancillary services prices at $250 per megawatt and megawatt-hour. Much is being done to redesign and make the ISO's ancillary services market more competitive. During the first year of operations, the CalPX day-ahead price peaked at $190 per megawatt-hour in September 1998, and for some 174 hours it was $0 per megawatt-hour. However, the average price for CalPX during its first year of operation was $24.44 per megawatt-hour and it was below $30 per megawatt-hour roughly 80 percent of the time.

speaks well of a market that comprises approximately 25 percent of the Western System Coordinating Council area volume and essentially was converted to a day-ahead spot market. With the introduction of the block forward contract, a new tool exists for market participants to lock in price and avoid hourly price volatility. This CalPX contract and other exchange-traded instruments will go a long way toward improving market efficiency and providing flexibility to market participants.

Becky Kilbourne is director of market development and communications and George Sladoje is president and chief executive officer at the California Power Exchange.

1 Docket No. Rm 99-2-000, pp. 174-177 issued by the FERC May 31, 1999.

2 Also see comments of Automated Power Exchange Inc. in PL 98-5.

3 The Automated Power Exchange (APX) provides services in California and other states. To date, there is no published volume or price information to indicate active trading at APX.

4 The price of a seat on the exchange measures the exchange's value to its members. It is the member's equity investment and has little or nothing to do with the stated profitability of the exchange.

5 "[I]f you are going to have an electricity futures market, there must be a developed cash market for the financial future prices to key off of, and once the market was confident, would not be manipulated by regulators or others. ¼" Comments by P. Gregory Conlon, former commissioner (1993-1998) and president of the CPUC, for FERC's NOPR on RTOs, Docket No. RM99-2-000.

6 CalPX prices are tracked by major trade publications including Megawatt Daily, Power Markets Week, The Wall Street Journal and Energy Markets Report.

7 See "Defaults and Counterparty Risk in Electricity Wholesale Markets," a CalPX counterparty risk paper, at

8 Ibid. P. 7

9 See Docket Nos. ER98-210- and ER98-1729- California Power Exchange Corp. before the FERC, Prepared direct testimony of Dr. Merton Miller for the California Power Exchange Corp. Dr. Miller states: "The PX's market clearing price (MCP) is determined through a single price (Walrasian) auction; that is, the MCP is determined through a single auction rather than being subject to continuous adjustment. This is the same type of auction process used by the Arizona Stock Exchange and its optimality properties are well-known to economists. This process results in