Abstract--In September of 2000, the Chilean Energy Commission published a draft of a new electricity services law. One of the main changes was the replacement of the Chilean electricity pool by two new organizations, the Power Exchange and the Independent System Operator. Based on the experience of the electricity markets of California, England/Wales, Scandinavia, Colombia and Spain, and considering the characteristics of the Chilean market, an analysis is done in this paper on the consequences of such change and the effect on prices and dispatch. Topics such as market power, horizontal concentration, transmission constrains, the withdrawal of the capacity payment, must be carefully analyzed in a market design, considering the effects these issues may have in the competitiveness of the sector and the search for efficiency. Keywords —Market Power, Power Exchange, Independent System Operator. I. INTRODUCTION uring the second half of the 90’s, the deregulation process of the electricity markets evolved toward new organizational models. Power exchanges developed, integrating aspects of the pools and the private bilateral contracts, two of the traditional structures of deregulated markets. Chile has not been absent from this process and in a recently proposed new law; major changes are considered in the pricing and dispatch mechanisms. A Power Exchange (PX) or Market Maker and an Independent System Operator (ISO) would manage the tasks previously performed by the Chilean Pool (Centro de Despacho Económico de Carga - CDEC). Independent of the organizational form the electricity markets adopt, it is possible to recognize three essential functions that allow them to operate: the Physical operation, responsible for the grid operation in terms of reliability and stability; the Economic operation, whose purpose is manage energy markets and supplying the system demand at minimum cost, and the Commercial operation, as a result of the two others, in charge of the settlement and conciliations of the obligations contracted in the market. This work was supported by Fondecyt Project 1000517. D. Watts, P. Atienza and H. Rudnick are with the Department of Electrical Engineering, Universidad Católica de Chile, Casilla 306, Correo 22, Santiago, Chile (e-mail: dwatts@ing.puc.cl). II. THE POWER E XCHANGE AND THE INDEPENDENT SYSTEM OPERATOR’S MODEL (PX-ISO) Unlike centralized models, in which only one institution assumes the three main functions of the market, the PX-ISO model contemplates an explicit separation between the market and physical functions. As a result of this dichotomy the PX becomes the energy market operator and the ISO is in charge of the physical operation of the grid. The separation of functions is supported by the assumption that the principles behind the market and the grid operation are quite different. While the markets operated by the PX are based on economic principles, the ISO must operate according to physical and safety requirements. A. The Power Exchange The PX is an institution created by the regulatory framework and its main objective is to employ and run competitive auctions of energy, on non-discriminatory basis, supplying the electricity demand at market prices. The PX assumes as counterpart in each purchase and sale operation, and for this reason it usually manages the settlement process, establishing guarantees and processes of conciliation to smooth differences among the agents. Normally the PX is not authorized to make purchases and/or sales on its own behalf, since it has access to privileged information that can be used for its own benefit. 1) How does a PX work? The PX is a virtual forum where the agents concur to trade blocks of energy according to their requirements. The PX receives daily and hourly supply bids from the generators. With these bids it builds a merit list, sorting the prices supplied from least to most expensive until the generation match up the aggregate demand curve, obtaining as result of this operation the Market Clearing Price. The work of the PX is the accomplishment of periodic auctions for the different markets it operates. The most frequent ones are a day-ahead and hour- ahead markets that contemplate the deliveries of energy for the following day and during the same day, respectively. Additionally the PX usually manages the bids in the real time and ancillary services markets. However, the decision to purchase, in this case, is made by the ISO, and the job of the PX is purely administrative. Application of the Power Exchange- Independent System Operator Model in Chile David Watts, Paulo Atienza and Hugh Rudnick, Fellow, IEEE D