THE CALIFORNIA DEBATE OVER ELECTRIC RESTRUCTURING IS now nearly four years old. And though it is nearing its final stages (the opening is now set for March 31), some of the most important questions as to how this will work in practice are just emerging.
The original bargain had called for the state's three large investor-owned utilities to vest basic control of their transmission networks in the new independent system operator in exchange for maintaining combined ownership of generation and transmission assets (and for a good level of assured stranded cost recovery). That bargain didn't last, however, owing to concerns over market power.
With transmission access apparently resolved, one might have thought that most concerns over abuses of market power would dissipate. That assumption proved to be a dangerous illusion, however. Instead, there emerged a whole new set of regulatory concerns over "horizontal" market power. These concerns related to utility concentrations in generation, generation units strategically located to take advantage of or needed to relieve transmission constraints ("must-run" units in California's jargon). Concerns even arose that individual units could exercise market power in setting market clearing prices in auction markets by virtue of their typical placement on the supply curve. Similar concerns have been expressed in the ISO New England restructuring and surely will be raised in others.