Trading on the Index: Spot Markets and Price Spreads in the Western Interconnection

Fortnightly Magazine - October 1 1996
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Using cash and futures markets, traders can tie contracts to a price index.

But which one?

And how to adjust for different delivery points?FOR THE PAST 20 YEARS, THE WESTERN

Systems Coordinating Council (WSCC) has built a reputation for innovation in electric markets. Today, with members in the United States, Canada, and Mexico that serve customers from the Pacific Ocean to the Plains states, and with over 140,000 megawatts (Mw) of generation and transmission stretched across three countries, the WSCC continues to lead change in power markets.

Transparent pricing has become a reality throughout the region.

Last year the Pacific Northwest subregion of the WSSC counted eight large (50 megawatts or more) industrial contracts with spot pricing. Puget Sound Power and Light recently proposed to shift all of its major customers to spot pricing when its current merger proceeding closes. The New York Mercantile Exchange (NYMEX) offers futures trading at Palo Verde and the California/Oregon border (COB). Alberta's new power pool adds a third market-price indicator. Soon we may see spot pricing for bulk power throughout the Western Power Exchange (WEPEX). This growing emphasis on spot pricing turns attention to pricing mechanics.

In one sense, spot pricing is nothing new. Commodity contracts have often included a spot-pricing component. For example, many utility contracts employed stack-pricing components during the 1980s. "Stack pricing" (also known as system lambda or real-time pricing) became more common during the 1980s. But many stack-pricing contracts proved difficult to administer. Sharp turns in the market often required an audit of the mathematics of the stack-pricing calculations (em an unpleasant task for both seller and buyer.

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