The Yellow Book and the Blue Book

• 1993: PUC staff produces Yellow Book– Blames high prices on regulation and planning– Proposes alternative forms of competition

• April 20,1994: Blue Book endorses most radical Yellow Book proposal - “Direct Access.”– Intends to let retail users make same types of transactions

utilities have benefited from.– Utility wires will be regulated “common carriers”– Provisions for utilities to recover stranded costs

Stranded costs

• If competition comes utilities need ways to recover costs of uneconomic plants– This becomes the real central issue

• With no explicit legal right to recovery, they claim a metaphorical contract exists– They take on service obligations in return for a low-

risk return instead of a competitive one– Claim that PUC required building of nuclear plants

and above-market PURPA contracts

Reaction to the Blue Book I

• Pro: Independent power, marketers, large users, some small users, some environmental groups, and PG&E

• Anti: SoCal Edison, San Diego Gas & Electric, some environmentalists, and small users

• Ultimately anti: A majority of the PUC

• Hopelessly split: Economists

Reaction to the Blue Book II

• PG&E endorses opening existing market, slowly with guaranteed stranding recovery

• SCE and SDG&E [monopolists from birth] propose “PoolCo” to bring competition

• PoolCo takes bids and sets hourly prices– Said to be patterned on U.K. pool

• Utilities remain monopolists who pass on PoolCo price and bill for other costs

The PUC picks PoolCo, and then...

• Nearly a year passes, the centralized market gains no support but PUC votes for it– Probably because its easier to regulate and maintains

power of retail monopoly utilities

• Legislature concerned about PUC instituting massive change without its approval

• PUC fears that Poolco opponents will sway legislature, brokers a compromise in Sept. 1995

The market compromise

• There will be a statewide power exchange [PX] that functions like Poolco

• Utilities must do all their purchases and sales through it

• Non-utilities can use the PX or arrange bilateral transactions (“schedules”)

• Both bilateral and PX schedules will be executed by an Independent System Operator (ISO)

Assembly Bill [AB] 1890 [I]

• Extensive negotiations lead to unanimous passage of comprehensive law Sept. 1996

• Bilateral and PX markets will coexist

• ISO and PX to be nonprofit corporations governed by “stakeholders”

• Bill creates Electricity Oversight Board of political appointees to oversee ISO and PX

AB 1890 [II]

• Large power users get rates frozen at 1996 levels

• Small ones get a 10 percent reduction, financed by bonds payable through 2010

• Utilities must collect stranded costs using “headroom” in frozen rates

• Headroom = rate - fixed costs - PX energy cost – Headroom fluctuates with PX price

AB 1890 [III]

• SCE and PG&E [but not SDG&E] must divest half of their in-state gas-fired plants

• All three decide to sell all of these plants

• Premium prices on plants are applied to stranded costs

• Most stranded costs must be collected by Mar. 31, 2002.

Changing Times

Then Now

POWER GENERATORS

UTILITY

CUSTOMERS

POWER GENERATORS POWER MARKETERS

SCHEDULING COORDINATORS

CALIFORNIA ISO

CUSTOMERSUTILITY

ESPs

California Power ExchangeCalifornia Power Exchange

Clearing the PX Markets

• Demand and supply bids accepted - 24 settlement periods

• Bids aggregated to form demand and supply curves

• MCP is intersection of supply and demand bids

• May be adjusted for congestion

Determining the Market-Clearing Price

0 10 11 15 20 22 30 35 40200

400

600

800

1,000

1,200

1,400Aggregate Demand

Aggregate Supply

MCP Hour

The PX as a Commodity Exchange

• Role of exchanges in commodity markets– Facilitate trading by acting as counterparty– Provide price discovery– Provide liquidity– Allow construction of new derivatives– Clearing and settlement– Credit management

Market Structure

PX Auction

Bids

Schedules ofOther Schedule

Coord

PX Schedules

DayAheadMarket

DayAheadMarket

PX Auction

Bids

PX Schedules

HourAheadMarket

HourAheadMarket

Schedules ofOther Schedule

Coord

RealTime

Market

RealTime

Market

Ancillary Services MarketAncillary Services Market

Bids from PX Participants and Other Market Participants

Resources for Real Time Energy

Day-Ahead & Hour-Ahead

Trade Deliveries

CalPX Daily Pricesfrom April 1 - March 31

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CalPX Daily Pricesfrom April 1 - March 31

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The First Year of PX Prices The First Year of PX Prices

Day-ahead market Day-ahead market running smoothlyrunning smoothlyaverage price less average price less

than 2.5* than 2.5* cents/kWhcents/kWh

Price volatilityPrice volatility90% of time price 90% of time price

less than 4 less than 4 cents/kWhcents/kWh

Day-Ahead HourlyPrice Duration Curvefor April 1 - March 31

Min MCP: $0 Max MCP: $190.94 Avg. MCP: 24.44

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Day-Ahead HourlyPrice Duration Curvefor April 1 - March 31

Min MCP: $0 Max MCP: $190.94 Avg. MCP: 24.44

$0

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