California’s rural counties representing powerful water andagricultural interests that have always carried a lot of clout instate political arenas have stepped into the ongoing electricitypublic debate advocating changes in the auction process in thestate-run wholesale spot power market.

California Power Exchange (Cal-PX) sources are cool towardchanging the exchange’s auction process, although they don’t ruleout doing it if a consensus for doing so can be reached among thestate’s eclectic and large group of industry stakeholders.

The contention of the Sacramento-based Regional Council of RuralCounties is that the state need not make any “radical changes” toits ongoing electric industry restructuring if the Cal-PX wouldswitch to what it calls an “actual bid market” system, paying eachwinning generator bid the price it offered instead of onemarket-clearing price.

“What we have now is a system that pays every single supplier(generator) the amount being paid for the highest pricedelectricity used,” said Dr. Lon House, Ph.D., a business consultantretained by the rural counties group to examine the issue of summerelectricity price spikes. “This results in a huge inefficiency inpricing. Cheaply produced power is sold into the system at the samerate as the most expensively-produced.”

House’s analysis also recommends that demand-side management tohelp shave peak-load levels be instituted along with the Cal-PXbidding changes.

The Cal-PX since its inception in 1998 has run a “uniform priceauction,” which was the result of an almost two-year debate among acadre of economists, regulators and state policymakers. Cal-PXsources credit a Stanford University economist, Robert Wilson, withleading the discussions toward the uniform auction approach. Othersadvocated the so-called “bid-ask” system.

Arthur Andersen’s accounting practice was retained by the Cal-PXto look at the question, comparing the two approaches, andconcluded that over the first two years of the state-chartered,nonprofit exchange’s operations the results for consumers wouldhave been the same, according to the Cal-PX spokesperson.

No one within the Cal-PX is lobbying for a change, and accordingto the spokesperson, if one is pursued it will have to be donethrough the same widespread stakeholder discussion and debateprocess used in establishing the exchange’s current system.

“In California today, the price of electricity is notnecessarily based on power plant costs or even what consumers arewilling to pay,” House writes in his paper arguing the state’selectricity deregulation isn’t broken, but just needs somefine-tuning. “In the PX market, all electricity trades for a singleprice, a price set by the highest winning bid, even though otherpower plant owners are willing to sell their power at lower prices.This guarantees that customers do not receive the benefits ofcompetition.”

House cited an example in which the actual bid price system cutsconsumer costs nearly in half, compared to the Cal-PX system, whichhe contends is “marginal cost-based.”

“A marginal cost-based market will not work when the demand forthe product is driven by external nonprice variables,” Houseconcluded. “Or when the consumer does not have accurate pricesignals, when there is a limited amount of supply chasing demand,when the supply curve is artificially truncated by price caps, andwhen suppliers can split their supply bids into multipleincremental bids at ever-increasing prices to attempt to set themarket price.

“Operating under such conditions a marginal cost-based marketwill simply result in unnecessary consumer prices and excessivesupplier profits.”

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