Electric Restructuring-CA Versus
IL
California Market Structure
 California has two market-making
structures- the California Power Exchange
(PX) and the CA ISO.
 The system was built around expected
electricity surpluses.
CA PX
 took bids for day-ahead hourly supply.
 The PX took as much power as needed for
the day starting with the lowest bid and
continuing until it had its quota.
 The price for the whole market was set by
the last successful bidder.
The CA ISO
 buys power on the spot market to make up
for any unforeseen shortages caused by
the PX not buying enough
Divestiture of Generation
 To collect stranded cost recovery, utilities
had to divest its non-nuclear and nonhydroelectric generating facilities to a
non-affiliated entity
 Three major IOUs – Pacific Gas and Electric,
California Edison and San Diego Gas and
Electric did this – purchase most power
from unrelated third parties
Retail/Wholesale Rates
 Res./Small Bus. Rates
• Reduced 10-20%
• capped until 12/31/01 or stranded costs were
fully recovered
 Wholesale rate of electricity
• No cap
Results
Prices dropped from 1998 to 1999
 June 2000 things changed. There was no
longer an excess of supply.

Tight supply was caused by
several factors:
higher than expected demand - CA economy kept
growing and environmental concerns among
other things caused new power plants not to be
built.
 low water levels in Pacific NW caused
hydroelectric plants to cut back on power
supplied to CA
 rising price of natural gas caused cost of gasfired generation to go up.
 gaming of the system by suppliers?

Results:
every bid was snapped up.
 avg prices jumped 259% for the year.
 Nov/Dec alone, utilities paid more 28% higher
than for all of 1999
 ISO regularly must buy on spot market to prevent
blackouts
 supplier snub PX because ISO spot market has
higher prices
 by Nov/Dec, ISO buys as much as 1/3 of demand
this way compared to 5% earlier

Did suppliers restrict supply to
drive up prices?:
 Frank Wolak, professor of economics at
Stanford and Paul Joskow, economist at MIT
say yes.
 FERC orders refunds and fines on suppliers
IL
 No required divestiture of generation
 No PX / long term contracts not prohibited
 Retail rates cut 20% and capped
 Wholesale rates not capped
 Utilities can petition ICC for rate increases
if ROR falls below certain levels
 There are transmission constraints into IL
Sources
 WSJ, “For Power Suppliers, The California
Market Loses its Golden Glow, ” 1/25/01, A-1,
A-10.)