Games or opportunities: Bidding in the California markets

Electricity Journal

Volumn 14, Issue 1, 2001, Pages 99-108

  Quan, Nguyen T ^a,b   Michaels, Robert J ^c  

^a Digital Safetynet Inc   (United States)

^b CALIFORNIA STATE UNIVERSITY   (United States)

^c Econ One Research and Consulting Inc ^*  (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 4444255482     PISSN: 10406190     EISSN: None     Source Type: Journal    
DOI: 10.1016/S1040-6190(00)00179-2     Document Type: Article

References (23)

1. See, e.g., Complaint of California Electricity Oversight Board vs. All Sellers of Energy and Ancillary Services, Federal Energy Regulatory Commission (FERC) Docket No. EL00-104-000, filed Aug. 28, 2000.
2. Arthur S. De Vany and W. David Walls, Cointegration Analysis of Spot Electricity Prices: Insights on Transmission Efficiency in the Western U.S. 21 ENERGY ECON. 1999, 435. There are disputes about the completeness of arbitrage between the day-ahead and real-time California energy markets, but all parties agree that interactions between them are significant.
3. FERC and the California ISO and PX use a standard of "workable competition," a situation with no generally agreed-on measures to distinguish it from unworkable competition.
4. See Severin Borenstein, Understanding Competitive Pricing and Market Power in Wholesale Electricity Markets, ELEC. J., July 2000, at 49. This useful introduction to market power points out (at 50, 56) that the relevant cost for a PX bidder is the return available in its next best alternative. Anyone claiming that a generator has market power in the PX after a comparison of PX prices and fuel costs should make a preliminary showing that the owner has no choice but to sell into the PX. Reasoning from opportunity costs does not invalidate findings that the old U.K. pool, a near-mandatory exchange with a single commodity, was vulnerable to exercise of market power. There, the next-best alternative often was to leave a generator idle.
5. The Commission turned down San Diego Gas & Electric Company's recent request for an immediate $350 / MWh price cap at the PX, on grounds that included the utility's failure to document "a single instance of a seller exercising market power during times of scarcity." San Diego Gas & Electric Company, Order Initiating Hearing, 92 FERC ¶ 61,192, Aug. 23, 2000, Slip Op. at 8. One recent study claims to have found significant withholding of generation capacity. See Paul Joskow and Edward Kahn, A Quantitative Analysis of Pricing Behavior in California's Wholesale Electricity Market during Summer 2000 (rev. Jan. 15, 2001), http: // www.mit.edu / people / pjoskow / JK_PaperREVISED.pdf (Jan. 19, 2001).
6. San Diego Gas & Electric Copmpany, 91 FERC, at 61,294 (Dec. 15, 2000).
7. For details, see California PX, Market Compliance Unit, Electricity Markets of the California Power Exchange, July 31, 2000, at 51; http:// www.calpx.com / regulatory / fercfilings / index_market_ monitoring.html (Jan. 19, 2001).
8. The PX Market Monitoring Committee has filed three major reports, on Aug. 17, 1998, March 10, 1999, and June 6, 2000. All are available at http: // www. calpx.com / regulatory / fercfilings / index_ market_monitoring.html. The ISO's Market Surveillance Committee submitted major reports on Aug. 19, 1998 (http: // www.caiso.com / docs /1998 / 12 / 18 / 1998121806493813577.pdf), June 4, 1999 (http: // www.caiso.com / docs / 1999 / 06 / 04 / 1999060416162424876.pdf), Oct. 18, 1999 (http: //www.caiso.com / docs / 1999 / 10 / 20 / 199910201045345098.pdf), and Sept. 5, 2000 (http://www. caiso. com / docs / 2000 / 09 /14 / 200009141610025714.html) (all last accessed Jan. 19, 2001). Both the PX and ISO have internal monitoring (compliance) units that also report to FERC.
9. In addition to RMR contract reform and the rational buyer protocol (to ensure that lower quality AS usually cost the ISO less than higher quality), the ISO is also redesigning its congestion management procedures and developing a market for so-called firm transmission rights. For details, see see ISO Market Surveillance Committee, June 4, 1999 report, supra note 8, Ch. 6;
10. and Ziad Alaywan, Evolution of the California Independent System Operator Markets, 13 ELEC. J. July 2000, at 69.
11. Rajat Deb, Rethinking Asset Values in a Competitive Environment, PUB. UTIL. FORTNIGHTLY, Feb. 1, 2000, at 48.
12. In actuality, market participants bid schedule adjustments, real-time, and AS into the PX, which sends them on to the ISO for further processing. The PX also operates the block-forwards market, the post-close quantity match, the green exchange service, and book-out services. The block forward market trades a contract delivering 1 MW for 16 on-peak hours Monday to Saturday over some future month. Between their inception in June 1999 and the end of March 2000, 23 million MWh of the contracts were traded, some not yet delivered (see supra note 7, at 47). The post-close quantity match market allows participants to round the quantities they have scheduled in the initial PX auction. It traded only 339,000 MWh in the last year, relative to an overall PX volume of over 194 million MWh (id. at 7, 29). The PX states that the green exchange (for environmentally friendly power) and book-out markets (for netting of counterflows) have "thus far been unsuccessful" (id. at 7).
13. Supra note 7, at 50-57. Their regression equation has greater explanatory power for off-peak periods than for on-peak hours.
14. For example, the ISO's Aug. 10, 2000, report (at 27) shows that the supply curve into the day-ahead market typically becomes vertical at about 30,000 MW, potentially useful information on a hot day when total load will be over 40,000 MW.
15. Bids are actually "piecewise linear," with up to fifteen segments, i.e., the generator specifies several price-quantity points and promises to supply a linear interpolation of the energy bids if price lies between two of the values it has submitted. It can trade with others to round off the numbers in the post-close quantity match market.
16. For details about these topics, see James G. Kritikson, California Electricity Market Primer, May 2000, http: // www.calpx.com / news / publications / index.htm (Jan. 19, 2001).
17. Supra note 7, at 29, 42.
18. The PX further specifies that an incremental SAB must be equal to or higher than the UMCP, and a decremental bid must be lower. Buyers making SABs face the opposite restrictions.
19. For example, during three peak hours on Oct. 1, 1999, the statewide average UMCP was $68 per MWh, while in NP15 it was $725 and in SP15 only $35. Perceptive market participants probably understood the two causes. First, Path 15 capacity from south to north had been derated for most of the day. Second, heavy congestion on southbound interties across the California-Oregon border meant that the Northwest could not make up for much of the shortfall in northbound power along Path 15. Since generators in NP15 had submitted only a limited number of incremental adjustment bids, the ISO had to go well up the "bid stack" to elicit production of enough power in northern California.
20. Supra note 5.
21. Id. Slip Op. at 8.
22. Also see Price Behavior in the CalPX Markets May-June 2000, PX Compliance Unit presentation to the Electricity Oversight Board, June 29, 2000, http: // www.calpx.com / regulatory / marketcompliance / index.htm (Jan. 19, 2001). A similar phenomenon can occur when the PX clearing price is below $250 but transmission congestion threatens to raise some zonal prices above that level.
23. As noted above, a unit whose capacity bid has been accepted will only be operated if its energy bid is below the real-time price.