The Yellow Book and the Blue Book

1
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

2
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

3
Reaction to the Blue Book I

• Pro Independent power, marketers, large users,
  some small users, some environmental groups, and
  PGE
• Anti SoCal Edison, San Diego Gas Electric,
  some environmentalists, and small users
• Ultimately anti A majority of the PUC
• Hopelessly split Economists

4
Reaction to the Blue Book II

• PGE endorses opening existing market, slowly
  with guaranteed stranding recovery
• SCE and SDGE 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

5
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

6
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)

7
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

8
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

9
AB 1890 III

• SCE and PGE but not SDGE 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.

10
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11
California Power Exchange
Changing Times Then
Now
POWER GENERATORS
POWER GENERATORS
POWER MARKETERS
SCHEDULING COORDINATORS
UTILITY
CALIFORNIA ISO
ESPs
CUSTOMERS
UTILITY
CUSTOMERS
12
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

13
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

14
Market Structure
15
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16
The First Year of PX Prices

• Day-ahead market running smoothly
• average price less than 2.5 cents/kWh
• Price volatility
• 90 of time price less than 4 cents/kWh