-----Original Message-----
From: Edward Cazalet [mailto:ed@apx.com]
Sent: Friday, August 25, 2000 9:12 AM
To: dhunter@smithandkempton.com
Cc: Robert Berry (E-mail); Edward G. Cazalet
Subject: APX Comments on Letter to the Governor.


Would you please distribute the attached APX comments on the letter to the
Governor to the AB1890 list?  The comments are attached both as a Word file
and below in the body of this e-mail.



A core purpose of restructuring through AB1890 was to decrease reliance on
regulation and increase reliance on the market to allocate resources in the
California electric power market.  However, as it is now written, the letter
to the Governor does not include any direct reference to the way forward
markets can address the problem of high and volatile prices.

Several reports have expressed serious reservations about the CalPX and
CAISO use of "call auctions".  An example of a call auction is the CalPX's
daily auction that sets a single price for electricity in each hour of the
next day.  The CAISO uses several call auctions for real-time energy and
ancillary service procurement.

A call auction provides no opportunity for market participants to react to
each other's bids.  A call auction lacks the feedback from offer to
counter-offer which is the source of efficiency in forward markets.  Because
a call auction lacks feedback and clears at a single price, it is more
likely that attempts to manipulate the single price will be more successful
and will have a greater impact because all transactions are at the same
price.

Instead, all other commodity markets rely on continuously traded forward
markets, which allow participants to use price feedback and gradually
develop their contract positions.

APX recommends that the Letter include the following:

The CAISO has recently announced its intent to acquire up to 3000 MW of
ancillary services through forward contracts of at least a year.   The CPUC
has recently granted both PGE and SCE the opportunity to make contracts
through 2005 to serve their load.  These policies represent a wise shift
from the almost exclusive reliance on short-term (day-head and hourly)
markets by both the CAISO and the UDCs.  However, adoption of such policies
will tend to create a bifurcated market with very short-term markets and
long-term contracts.

In most commodity markets, participants can trade a variety of contracts of
different duration.  Contracts are standardized so that the published prices
of these traded contracts are meaningful.  Trade occurs continuously, which
allows continuous price discovery.  The efficiency of the power market
improves considerably when such continuous forward trading occurs and the
opportunities for price manipulation are less.  And the existence of such
forward markets provide the basis to establish the prudence of both forward
and spot purchases of power by the UDCs.

As an example, encouraging loads to participate in continuous forward
markets will dampen price volatility because as the forward price rises load
will begin to reduce its demand by not contracting or by selling back
previously contracted positions.  Generators can use forward markets to
support decisions to invest in new power plants and properly time
maintenance decisions to reduce the impacts on prices.  Open, continuous
forward markets with published prices will allow all West Coast buyers and
sellers to contribute to market stability and lower prices in California.

The CAISO does not need to provide such continuous forward markets but can
encourage their development and use by encouraging inter-SC trades and
self-provision of ancillary services.


==============================
Edward G. Cazalet, Ph.D.
Chairman
Automated Power Exchange, Inc.
TechMart Building, Suite 522
5201 Great America Parkway
Santa Clara, CA 95054
Company Voice : (408) 517-2100
Voice :(408) 517-2102
Fax: :(408) 517- 2985
E-mail : ed@apx.com
Web Page: www.apx.com

 - Forward Markets.doc