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July 2014

July 2014. Bob Laurita. Internal market monitoring. Fuel Price Adjustment Verification Requirements. Background (Section III.A.3.4). The IMM is required to review and verify every Fuel Price Adjustment (FPA) request.

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July 2014

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  1. July 2014 Bob Laurita Internal market monitoring Fuel Price Adjustment Verification Requirements

  2. Background (Section III.A.3.4) • The IMM is required to review and verify every Fuel Price Adjustment (FPA) request. • The Supply Offer based on the FPA may be no greater than 110% and no less than 90% of the marginal cost based Reference Level • Participants can submit one of the following forms of documentation to support their FPA: • Invoice • Supplier Quote • Price from a Public Trading Platform (i.e., ICE) • Plus a pre-approved adder to the quote or trading platform price • The FPA may be no greater than 110% of the fuel price in the submitted documentation

  3. Background (Winter 2013/14 Experience) The majority of the FPA requests were received during the winter months.

  4. Background (Winter 2013/14 Experience) Many FPA requests occur on days with high natural gas prices and volatility

  5. Background (Winter 2013/14 Experience) Less than 50% of Supply Offer Energy Segments were within +/- 10% of Reference Level.

  6. Concerns • Recent experience shows that the number of FPAs is likely to increase during times of natural gas market uncertainty and price volatility. • The IMM knows that some Supply Offer components may exceed Reference Levels due to modeling differences and FPAs reflecting marginal fuel costs. • The IMM knows that documentation from natural gas suppliers can be difficult to obtain especially for purchases after the “normal” gas nomination cycles and during times of price volatility. • The IMM remains concerned about the accuracy of FPAs because they effect the accuracy of the resource’s Reference Level which the IMM uses to mitigate Market Power

  7. Market Power vs. Reference Level Error High Problem Zone Mitigation Tests Work Ability to Exercise Market Power Little or No Market Power Low Low Reference Level Error High FPA Inaccuracy Low High

  8. Proposed Change: Narrow the Field • Limit the IMM’s FPA documentation and Supply Offer reviews to resources and Participants that are in a position to exercise market power. • The Participant entered an FPA and the resource was mitigated • Why review submission? The FPA increased the reference level and the Participant may be compensated above marginal cost. • The Participant entered an FPA, the resource was not mitigated and the resource satisfied one of the following conditions: • The Participant was a pivotal supplier (real-time energy market only) • The resource was located in a constrained area • The resource was operated for reliability • Why review submission? The Participant was in a position to exercise market power and by increasing the reference level the participant may have limited the IMM’s ability to impose mitigation.

  9. Proposed Change: Modify Documentation Review Criteria • Documentation must be consistent with the FPA • The 110% rule may be too restrictive during periods of price volatility • Trade confirmations are an acceptable substitute for invoices • The IMM can consider any other documentation or analysis submitted by the Participant, as well as supporting documentation submitted by other Participants on the same pipeline facing similar market conditions • All FPAs must be accompanied with documentation. • The IMM will select, as a minimum, the FPAs to review based on the market power criteria described on the previous slide. • Every participant must be prepared to justify every FPA when they enter the value.

  10. Proposed Change: Modify the +/- 10% Supply Offer Test • The Supply Offer must be consistent with the FPA • If an FPA reflects a Participant’s expected marginal fuel cost, then some components of the Supply Offer may be less than 90% of the marginal cost based Reference Level • If an FPA is capped at the threshold, then some components of the Supply Offer may be greater than 110% of the marginal cost based Reference Level

  11. Supply Offer and FPA Monitoring • FPAs entered equal to or greater than threshold price may be the result of the participant “hunting” for the IMM’s threshold price and therefore may not be based on the participant’s expected fuel price. • If a participant enters an FPA below the threshold price, the participant will know the FPA was accepted, however the threshold will not be revealed • If a participant enters an FPA above the threshold, the participant will know the FPA was capped and the threshold price will be revealed. • All FPAs entered for a time interval are saved. Therefore, the IMM will be able to determine if a participant was “hunting” for the threshold price by entering a high value and then re-submitted an FPA at a lower value. • A Participant should be prepared to explain and justify every FPA entered, even FPAs for an interval that are later modified or withdrawn. • If a Participant is suspected of “hunting”, all FPAs in the Participant’s resource portfolio may be investigated and the IMM may pursue further actions.

  12. Summary of Proposed FPA Tests

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