Trading floor breathing last gasps in failure of deregulation

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Monday, January 29, 2001

Trading Floor Breathing Last Gasps in Failure of Deregulation

By ROBIN FIELDS, Times Staff Writer

Fair use for educational purposes only!

The big white board that chronicles action on the California Power Exchange has more blanks than bids. The ceremonial gong that opened trading sessions sits silent. The exchange is dying. Not long ago, its busy trading floor was a symbol of hope for deregulation of electricity. Now, it is a symbol of deregulation's collapse. It never had the teeming, sweaty masses who yell prices on stock or commodities exchanges. But at its height, the floor, tucked into an Alhambra office suite, was packed with people monitoring up to four computer screens at once as offers and bids zinged across them. From around the country, even from other countries, power producers offered electricity for sale. Utilities bid for it and the transactions set the price for California, just as trading determines prices on the stock exchange. But by the end of last week, volume had slowed to a trickle and a pall settled over the exchange's Alhambra trading room and its headquarters in Pasadena. The operation began with a high-tech start-up's near-religious fervor, fueled by its managers' passionate belief that they could turn the theory of an open, competitive power market in California into reality. But that zeal turned to anger and sadness in recent months as their toddler-aged creation collapsed and critics blamed it for driving up electricity costs and deepening California's power crisis. The first wave of layoffs hit the exchange's tightknit, 200-member staff this week. "I know I'm going through the grieving cycle," said Becky Kilbourne, the exchange's director of market development, who joined the agency in its infancy. "I'm probably still in the part where there's shock and disbelief." The California Power Exchange was created in tandem with the California Independent System Operator by the landmark 1996 law that restructured the state's electricity industry. Together, they were designed to give the new system both impetus and ballast, with the exchange serving as a matchmaker between buyers and sellers. "It was the cornerstone of deregulation," said Alan Vallow, electric utility director for the city of Lodi and an exchange board member. The state compelled Southern California Edison, Pacific Gas & Electric and San Diego Gas & Electric to buy nearly all of their electricity on the exchange for a five-year period ending in 2002. That was meant both to ensure volume for the embryonic exchange and to prevent the utilities from undercutting smaller competitors by signing direct, secret, long-term deals with power generators. The Independent System Operator was charged with backstopping the system, making emergency purchases at above-market prices when supply was scarce. The state gave the exchange $100 million as start-up cash. And it also gave it a brutal deadline: Jan. 1, 1998, later extended to March 31, 1998. That gave its founders less than a year to, in effect, to create a complicated marketplace from scratch. The pace bred solidarity in the youthful staff--a combination of freshly graduated economics majors, utility company refugees and traders from other exchanges. Market operations manager Dean Isa and his new colleagues helped build the Alhambra trading floor with their own hands, assembling computers, laying down wire, even installing its raised floor. "We were making history," Isa said. "California was leading the deregulation movement and we were on the forefront of that." As they toiled, regulators, utilities, large power users, consumer activists and politicians wrestled to establish how the exchange would work. It initially allowed trading only on the more volatile spot market, for power needed that day or the next. The exchange added longer-term contracts in mid-1999 to offer its users a way to hedge their risks. But the utilities did not embrace them and critics later lambasted the exchange for not persuading them to do so. The auction format also was set up so that the highest electricity price bid for each hour of consumption set the price for all of the trades during that hour, a design later faulted for exacerbating price increases. Some argue the structure doomed the exchange from the start. "The PX was a totally contrived market," said Robert Michaels, an energy industry consultant and an economist at Cal State Fullerton. "It was a creation of the politics of restructuring."

But its defenders said the exchange provided the crucial element of an open market. "It supplied transparent pricing and, just like on the New York Stock Exchange or the Chicago Board of Trade, that is the hallmark of competition," Vallow said. The exchange's early days were quiet, even with the state's imprimatur. With supply plentiful, sellers sometimes gave away electricity during the wee hours for lack of any offers. But gradually, the exchange gained members, and the collection of plaques with their call letters grew to blanket the trading room's wall. The Canadian and Mexican flags were hung beside their U.S. and California counterparts when their utilities started participating in the exchange. By last summer, the exchange had become the largest North American electricity market of its kind. Trading averaged an all-time high of 530,000 megawatt-hours a day. The Alhambra office buzzed and vibrated as about 20 traders worked at three horseshoes of computers. Phones rang, punctuated ever more frequently by the louder ring from the phone connected to the Independent System Operator as supplies diminished. Kilbourne racked up frequent flier mileage consulting with European electricity interests and advising state officials elsewhere on how to emulate the exchange or open offshoots of it. "There would be these moments where we'd say 'Yes!' " she remembered, raising her arms in triumph. But they didn't last. The Power Exchange absorbed a series of body blows triggered by summer supply shortages and the resulting dramatic escalation of electricity prices. First, state and federal regulators installed price caps. Fear shot through the exchange, Kilbourne said, as many power sellers fled to markets outside California and volume dropped by more than one-third. The exchange board's August meeting featured a bitter, if largely ceremonial, vote to accept price limits that had already become a certainty with the Independent System Operator's approval, Vallow said. "Politically, we knew we had no choice," he said. "The public was not going to accept that markets work in both directions. The finger-pointing had started." The exchange's fate was sealed in December, when the federal government said the utilities could buy outside power starting Jan. 31. At the same time, the credit-worthiness of its main users became suspect. The exchange suspended trading privileges for Edison and PG&E on Friday and is suing Edison, which has not paid for $215 million worth of purchases. The exchange and its suppliers want Edison to give them some of its long-term contracts in lieu of cash. The case was continued until Feb. 2. For those who said the Power Exchange shared part of the blame for both the power crunch and deregulation's woes, the exchange's closure was something to celebrate. "I won't miss it," Michaels said bluntly. "It was an incredibly expensive beta version of what we ought to have." But employees remain adamant that the exchange was undone by the utilities' poor buying choices and ham-handed government interference. "We don't feel anything was broken with us," exchange spokesman Jesus Arredondo said. "Perhaps the most severe disappointment was that we were never able to convince state government and the utilities that long-term hedging was in everyone's best interest. But it's easy to blame the dead guy." The exchange's coming dissolution has thrust those most heavily invested in deregulation into limbo, from large users who relied on the exchange for pricing leverage to the fledgling companies challenging the investor-owned utilities for customers. "We'd be forced to do our own auction, essentially asking the marketers if they'd be so kind as to sell us power," said Doug Grandy, chief of the state's Office of Energy Assessment, which purchases power for a multitude of state agencies. American Utility Network, a small Upland electricity service provider, had used the exchange to sell its surplus power and is now scrambling for alternatives, owner Frank Anunciado said. Meanwhile, his giant competitors will no longer have to go through the exchange, and it may be able to buy discounted power from the state. "If they're going to sell it to them, I want to know why they won't sell it to me," Anunciado said. "This may put me out of business. I have a lot of time and money wrapped up in this and it's here today, gone tomorrow." The California exchange's brief life span already has become much-debated fodder for both supporters and opponents of deregulation. "This is really bad PR," Michelle Michot Foss, director of the University of Houston's Energy Institute, said of the exchange's death and its part in California's mess. "For the naysayers, this may endorse the view that we should forget the whole thing." Other exchanges hope to learn from California's mistakes. Texas' deregulation framework, for example, allows for trading through multiple for-profit markets, rather than directing it to a single, nonprofit agency. What started with a bold gong will end with a whimper: The exchange has no set closing date, but will phase out gradually as its volume dies and its functions cease to be necessary. Isa's job has become as much about outplacement as management. Two-thirds fewer traders work at the Alhambra office than did during the midmorning peak trading hours last summer. As they leave, they add "good luck" messages to Isa on a framed square of poster-board with his Las Vegas magnet, formerly used to gauge whether he was in or out, at its center. "It's sad to see these guys go," he said, smiling ruefully. "We did something that had never been done before." Copyright 2000 Los Angeles Times

-- Swissrose (cellier@azstarnet.com), January 30, 2001


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