In 1996 Governor Wilson signed off on a bill drafted by the state legislature of California to provide electricity users in CA with competitively priced electricity. Assembly Bill 1890, also known as The Electric Utility Industry Restructuring Act, became law on September 23, 1996. It wasn't until March 31, 1998 that the bill went into effect.
Prior to this bill a single utility provided each customer with the generation, transmission, distribution, metering, and billing of electricity. Customers were forced to buy their electricity from local companies. Under the new bill, the electric industry was deregulated and consumers were provided with choices of where to shop for their electricity . .
In California, energy was produced and distributed by three large IOUs (investor-owned utilities): Pacific Gas & Electric (PGE), Southern California Edison (SCE), and San Diego Gas & Electric. AB 1890 created two entities, the ISO and the PX to take some of the power out of the IOUs" hands. .
The purpose of the ISO (Independent System Operator) is "to increase reliability and provide new power producers equal opportunity and ability to deliver their supplies". The IOUs still owned their transmission facilities but control of those facilities was turned over to the ISO. They regulated how much energy was passed through transmission lines and to who it went to. They based this on the supply and demand given to them by the Power Exchange.
The Power Exchange (PX) was created to shoulder the responsibility for buying and selling electricity. The "Big Three" were required to buy and sell their power through the exchange. In a sense, the Power Exchange functioned as a middle man between the ISO and electricity users and retailers.
The PX creates a "pool" or "spot market" where price information is publicly available. The PX solicits bids from electricity buyers and generators and chooses the lowest generation bidders until the PX has enough electricity supply to meet requests for power.