California’s two government-created, private sector nonprofitcreatures of electric industry restructuring, the power exchange(PX) and grid operator (ISO), continued enhancement of theiroperations with an eye toward becoming regional entities withinfluence through the 12-state Western Systems Coordinating Council(WSCC) and parts of Canada and Mexico.

The California PX earlier in the month said Mexico’s federalelectricity commission (CFE) decided to participate in the PX spotmarket, and the state ISO auctioned firm electric grid transmissionrights for $41 million covering 19 interface points (includingMexico) either into or out of California.

The sale totaled almost 10,000 MW worth of firm transmissioncapacity. The oversight boards of both public-chartered privatenon-profits over the past year have clearly stated they want thetwo state-focused organizations to expand regionally once thestate’s transition to market-based electricity operations iscompleted after 2001. The California ISO is already the secondlargest electricity control area in the United States and the fifthlargest in the world. The PX is the largest of 15 such powertrading entities in the world that deal with all customer classes.

Both entities are sensitive to steady criticism from privatesector participants about the costs of creating their massivecomputerized operations and ongoing operating. One assessment isthat because the two organizations were created in less than ayear’s time, their information technology infrastructures wereoverbuilt in a monolithic fashion and a paring down is under way.

In completing its first firm capacity auction last week, the ISOstressed that the firm rights “include both financial and physicalrights, maximizing the efficiency of the (California) transmissionsystem.” And noting that the auction’s proceeds “will go to thetransmission owners (three major investor-owned utilities) and willbe applied toward their transmission revenue requirements, reducingthe transmission access charge for ISO users.”

At the PX, COO John Yurkanin said operating costs “are reallypretty high, but we’re working on bringing those down. Over thenext few years we want to streamline some of the systems and someof the commitments to infrastructure that proved to be too big forour needs.” Yurkanin likens the PX hardware and software investmentas akin to building a “16-lane highway when traffic turns out toonly need four lanes.” He cites the example of the PX buying enoughfiber optic bandwidth to accommodate thousands of ISO and PXcustomers. (Current participants at the PX number 78, double whatit began with 20 months ago.)

The PX will be concentrating in two areas next year: 1)expanding its products to satisfy what market participants say theywant (ancillary services contracts and forwards contracts in otherareas of the West), and 2) negotiating separate deals with thestate’s two huge investor-owned utilities, Pacific Gas and Electricand Southern California Edison. Southern California Edison recentlystruck a five-year deal with San Diego Gas and Electric Co. Thatdeal is awaiting state regulatory approvals as part of a largerproceeding examining how electric rates will be established after2001 when the last of the current rate freezes are gone. (SDG&Eeliminated its rate freeze last July. Rates now fluctuate hourly.)

“A contract, rather than regulation, is a more natural way to dobusiness,” Yurkanin said. “From a PX perspective, a contract sendsthe signals that there is a sustaining value we bring to themarketplace, and that is obviously what we believe and what wewould like the marketplace to confirm. “Longer-term, having acontract is probably a more definitive way for the PX to grow. Notknowing what will happen at the end of March 31, 2002 (when thecurrent transition and frozen rates end), it is important that weknow what our relationship will be with our three largestcustomers.” (The three IOUs account for about 85% of the PX volumesand revenues, or something in excess of $50 million annually.)

Some of the jurisdictional arguments with FERC have now beenresolved, such as the California electricity law’s prohibitionagainst non-California residents being on the oversight boards forthe PX and ISO. When new boards are formed, people from out of thestate will be included, said Yurkanin, noting that from his pointof view “the outcome was very good.”

Yurkanin said that California’s 1996 electricity law, whilelaunching the state into energy restructuring, created a”commercial disconnect” in the overall WSCC region, which is a verylarge, interconnected geographical area. He said he thinks mostparticipants now see the PX and ISO as beneficial to California’svery large electricity market, but also that they “eventually willbe quite beneficial to the entire West as well.”

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