The Assembly Bill was predominantly enacted to restructure California’s electricity industry and implement retail access on the whole. The electricity industry was, however, unlike international practice not gradually opened but instead exposed both wholesale and retail markets to competition escorted by a complex set regulatory framework.
The restructuring programme mandated the creation of two separate wholesale electricity market institutions, the California Power
Exchange (CalPX), a spot market for wholesale energy, and the
Independent System Operator (ISO), the market for real-time energy. Even within the United States the separation of the ISO and CalPX is an exclusive feature of California’s restructuring programme. The proposal required the state's three large investor-owned utilities to put part of their generating capacity on the market and at the same time discouraged them from entering into long-term supply contracts with independent power producers. As a result, the utilities had to rely on the newly created spot wholesale market for about half of the electricity that their customers demanded. Hence from this time forth the three largest utilities were required to turn the operation of their transmission networks over to ISO and procure their electricity through the CalPX whereas the CalPX and ISO in turn operated public markets with transparent hourly market clearing prices for electricity as well as
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"As it turned out, the computers required for the transition were not ready – the first glitch – and opening day was postponed to April 1, 1998 – by tradition, April Fools day." See: Hall/Weinstein, page 8.
Even when the market was finally opened on April the first, several important software functionalities were still not working properly, the co- ordination between the new market institutions was imperfectly organised, the congestion management, the protocols for planning and investment in transmission and the interconnection of new generating plants, the real time balancing markets, the ancillary services markets and other services started to work insufficiently designed which evidently made wholesale prices increase.
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operating reserves and managed congestion by using market mechanisms.
The CalPX was set up as a non-profit public trading exchange to conduct auctions for wholesale electrical energy which then is being dispatched in each hour of the next day. The market clearing price for a megawatt-hour of electricity is set by an interaction between buyers, primarily the investor-owned utilities, and sellers, the power generating entities. When there is an excess of supply, prices can be established by the assets of the investor-owned utilities, and will be very low. However, when there is a shortage of supply, the price is set almost totally by the buyers as they compete against each other. If there are a number of buyers, the ultimate price will be established by the highest bidder.
More specifically, this day-ahead market establishes price and quantity of electricity for delivery during each hour of the following day. This means, that each day 24 hourly auctions are conducted to produce unconstrained market clearing prices and quantities. After congestion management is performed, the CalPX issues therefore final day-ahead schedules and calculates hourly zonal market-clearing prices, which is determined by the intersection of the aggregated demand and supply curves formed out of the incoming bids. The winning supply bidders in each hour made up the CalPX’s preferred day ahead schedule which was then put forward to the ISO. The electricity price, charged to consumers who did not choose their own electricity service provider (ESP)16, was set equal to this wholesale spot market price determined on the this short-term forward market. Price regulation, as a consequence of such transactions which are wholesale in nature, now became subject to FERC regulation.
All the three Independent Operating Utilities are requested by legislation to place all of the day-ahead demand from their default service customers through the CalPX on an hourly basis and must also bid all of the energy supplied from the remaining own generating units or power supplied to them under pre-reform long-term contracts into the
16 "no more than 12% of retail demand migrated to ESP".
Joskow/September 2001, page 13.
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CalPX as well. Other generators and demand serving entities may voluntarily trade in the CalPX.
Operational control was – as already mentioned – transferred out of the hands of the utilities to the Independent System Operator (ISO), the second private non-profit market institution which is intended to manage about 80 percent of the transmission system and – similar to the CalPX – operates as well an hourly auction market for operations such as energy balancing, ancillary service and congestion management. All supply from generators selling into the ISO and all demand of the load serving entities must be physically scheduled with or dispatched by ISO17. Scheduled by ISO protocols generators now transmit their power to serve demand over ISO’s network through intermediaries called Scheduling Co-ordinators (SC), any wholesale entity that has been licensed to schedule power on the ISO network. The CalPX as well was required to interact as an SC with ISO. ISO accepts hourly schedules form SCs on a day-ahead basis and an hour-ahead basis to operate the system and balances out variations in demand and supply in real time. This new market structure actually meant that the three investor-owned utilities sold power from their remaining assets into the wholesale market operated by CalPX and ISO and then bought it back to meat their default service demand. However, since this type of operation is as well subject to regulation by FERC, the responsibility about repairing old and building new transmission had been removed from local control too.
Strong incentives were put in place to encourage utilities to sell their fossil fuel generation to unregulated power companies located within the state of California. The legislation mandated to divest half of their fossil fuel generation, and gave incentives to get rid of the rest in order to moderate horizontal power problems.
The utilities were as well required to provide open access to their transmission and distribution systems at prices determined by the FERC and PUC but actually retained ownership and control of the distribution
17
"Load" is the technical term for total demand for electricity. It is the amount of electricity that customers are pulling out of the grid at any given moment. This amount is monitored in real time by the ISO, and published every ten minutes. The ISO load accounts for about 80% of total electricity use in California. See: Coughlin/Meier/Van Buskirk.
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system as well as of nuclear and hydro assets and their existing long- term contracts. As a consequence distribution systems remained regulated under the so-called incentive regulation mechanism.
Since the primary motivation for reforming the electricity industry was getting cheaper power for consumers, legislation also planned to reduce rates by a minimum of ten percent within a four year period. Based on the assumption that wholesale prices would be lower than the regulated retail price of generation service, a charge was added on to consumers’ bills (amounting to about one third of consumers bills) for reimbursement of stranded investments, which mainly resulted from long-term uneconomic contracts and construction costs for nuclear plants. The net result of the rate was frozen until 2002 or until the utilities recouped their stranded investments. In view of the fact that wholesale but not retail prices had been deregulated the customers had no incentive to conserve energy or to switch the supplier.