To what extent should the independent system operator (ISO) and the spot market (Power Exchange) remain separate? Thinking about how the ISO must operate leads to certain conclusions.
Of necessity, the ISO will operate a noncontract market. That is, the ISO will match some supply and some demand that are not covered by generator-customer contracts. If we want the ISO to operate at least cost, it must acquire at least part of its supply by soliciting hourly offers from generators, producing what amounts to a supply-side spot market. Then, it must charge a variable hourly rate for balancing energy that tracks the supply-side variations in cost. This two-fold process produces a market-clearing price (em a price that balances supply and demand. The issue of "separation" is really a question of access: Whether we will allow all generators and customers to participate in the ISO's spot market (em or require them to trade through a separate spot market called the "Power Exchange." Consumers receive no benefit if they are excluded from the ISO's spot market. Moreover, broader participation will make the ISO's job easier and more efficient.
The ISO's basic job is load balancing. To match aggregate load and supply, the ISO must be able to increase or decrease the output of certain generators to offset the aggregate imbalance of all contractual arrangements. To offset positive imbalances (contract generation greater than contract load), the ISO must hold some dispatchable capacity at all times, producing power that can be backed down.