Product Design for Colombia’s Regulated Market

Peter Cramton, University of Maryland

Abstract

This paper presents a product design for Colombia’s regulated market (MOR), which is scheduled to began in 2008. The regulated market consists of residential and other small customers. Currently, regulated customers represent 69% of the total load. I propose a market based on a single load-following product in which each supplier bids to serve its desired share of the Colombia regulated load. Thus, a supplier that wins a 10% share at auction has an obligation to serve 10% of the actual regulated load in every hour of the commitment period. The supplier is paid the MOR clearing price for every MWh of energy supplied. Deviations between the supplier’s hourly supply and obligation are settled at the spot energy price or the scarcity price, whichever is lower. The spot settlement price is capped at the scarcity price, since the firm energy market provides price coverage for prices above the scarcity price (about US$125/MWh). One-hundred percent of regulated load is purchased on behalf of the regulated customers in a sequence of auctions. Thus, MOR together with the firm energy market provides 100% price coverage for all regulated customers. MOR provides price coverage from zero to the scarcity price, and the firm energy market provides price coverage above the scarcity price. This accomplishes two things: 1) it provides rate stability for regulated customers, and 2) it provides revenue stability for suppliers. The result is reduced risk for both sides of the market.