Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

East vs. West: Comparing Electric Markets in California and PJM

While neither is perfect, the former has done better than its critics would admit.
Fortnightly Magazine - July 15 2000

the bid price of the highest increment of generation requested to operate. In the presence of congestion, the system operator will dispatch "one or more of the generating units out of economic merit order to keep transmission flows within limits." 6 LMPs reflect the cost of delivering energy to the congested node. The resulting prices for each node are posted on the PJM website in real time in five-minute increments. Until PJM implemented its forward market (initiated in June 2000), buyers did not know in advance the transmission costs or what price they would pay for power. In similar fashion, suppliers did not know what portion of their offer price curve would be dispatched. While it is too early to analyze the effectiveness of PJM's new day-ahead market, early reports from traders suggest that it has helped to stabilize prices and make the market more predictable.

By contrast, California chose to separate grid management from market activities, and established the California Independent System Operator (CAISO) and the California Power Exchange (CalPX). The CAISO balances the grid, determines "real-time" prices, and ensures reliability through its ancillary-services market. The CalPX operates a series of forward markets: the day-of, day-ahead hourly, and a block forward market. California's three largest investor-owned electric utilities initially were required to purchase and schedule power only through the CalPX. (The state PUC lifted that requirement on June 8, when it ruled that the state's wholesale power market had matured sufficiently to allow the three utilities to buy power on other "qualified" exchanges. 7) Bilateral trading by "scheduling coordinators" is allowed, but the CalPX handles nearly 90 percent of market volume. Congestion differentials for managing the grid are determined by the ISO, based on adjustment bids that accompany day-ahead schedules.

The centerpiece of the California market structure is the CalPX's day-ahead hourly market. Pricing in the day-ahead hourly market is a two-step process. First, participants submit "portfolio" demand and supply price offer curves. 8 The CalPX aggregates these bids, and an unconstrained market clearing price (umcp) is determined for each hour. Once a participant's bid is accepted, initial proposed schedules for each zone are submitted, along with adjustment bids in the event of congestion. The CalPX's schedules, along with schedules of other scheduling coordinators, are submitted to the CAISO, which determines their feasibility and makes adjustments, if necessary. If there is no congestion, the UMCP is the price for all zones. In the presence of congestion, zonal prices are adjusted down or up to account for the ISO's differentials.

The CalPX day-ahead hourly auction is held once each morning, which concentrates liquidity, rather than spreading out bidding through a longer period. 9 The first step of the auction also concentrates liquidity because portfolio bids do not differentiate between zones. With the participants and volume thus concentrated, this system is intended to reduce the risk that localized market power at specific nodes will put upward pressure on the aggregate price level. The CalPX also offers a block forward market, for month-long and quarterly advanced purchase and sale of on-peak blocks of