Future Market Implementation Requirements - way forward

Future Market ImplementationRequirements - way forward MWG – March 23rd, 2009 – Decision Session #2

WebEx Instructions • Please submit questions to host. If it is a long question – you can type a summary until we are available to discuss • We will break throughout the presentation for additional questions and discussion on the phone

Target Audience • Primary audience is the MWG members that will be making design decision • Secondary audience is Participant and Staff education about Future Markets

Requirements Gathering Process Review MISO BPMs Pull decision points Research RTOs Info Session #1 Info Session #2 Info Session #3 MWG Decision Session Review Protocol Language from previous Decisions

Topic Schedule March 30th Canceled due to CHTF April 6th Modeling Pseudo ties and JOU Virtuals Demand Response April 13th BA Functions April 27th Resource Adequacy May 4th Emergency Condition Load Forecast May 11th Settlements I May 26th Settlements II June 1st Reserve Sharing June 8th Credit June 22nd Market to Market June 29th Formulations July 6 Losses July 13th Technical Business Continuity Other Feb 2nd Market Structure Product to be Offered Resources Feb 9th Registration Resource Qualification Market Timeline Feb 23rd Market Functions I March 2nd Market Functions II March 9th Energy Transactions March 23rd Make Whole Payments Market Mitigation

This Presentation – A Bit Different • Input into MMU process instead of decision session • Many of the details are not to the same level as previous presentations becasue of that

March 23rd • Make Whole Payments • Market Mitigation • Real Time Mitigation • Day Ahead Mitigation • Make Whole Payment Mitigation

Revenue Sufficiency Guarantee (RSG) Midwest ISO has the responsibility to ensure that adequate capacity is available and committed to meet demand and reserve obligations with the Market Footprint. RSG is a mechanism that ensures Generation Resources that are committed by the Midwest ISO are guaranteed cost recovery of their three part offer described as start-up costs, no load costs, and energy offer, collectively referred to as production costs, when appropriate. These payments will be reflected as part of the Day-Ahead and Real-Time RSG Make Whole Payment Amounts and funded through the Day-Ahead and Real-Time RSG Distribution Amounts.

Revenue Sufficiency Guarantee (RSG) MISO splits this into 5 components • Day-Ahead RSG Make Whole Payment Amount • Day-Ahead RSG Distribution Amount • Real-Time RSG Make Whole Payment Amount • Real-Time RSG First Pass Distribution Amount • Real-Time RSG Make Whole Payments Second Pass Distribution Uplift

Day-Ahead Revenue Sufficiency Guarantee Make Whole Payment Generation Resources and Demand Response Resources – Type II that are committed by the Midwest ISO and scheduled in the Day-Ahead Energy and Operating Reserve Market are guaranteed recovery of their Start-Up, No-Load, Energy and Operating Reserve Offers, collectively referred to as production Offer On an hourly basis, the DART determines whether a Resource has met the eligibility requirements to have their production Offer and Operating Reserve Offer guaranteed.

Day-Ahead Revenue Sufficiency Guarantee Make Whole Payment The Day-Ahead settlement calculation compares whether the asset's combined Energy, Regulating Reserve, Spinning Reserve and Supplemental Reserve market value for all of the eligible hours for the Operating Day exceeds the combined value of the production Offer and Operating Reserve Offers for those same hours. If the total daily value is less than the total daily production Offer amount, the difference is credited to the AO as a Day-Ahead RSG MWP (Make Whole Payment) Amount. Day-Ahead RSG MWP Amounts may be mitigated for Generation Resources by asset by day when production Offer and Operating Reserve Offer for the Operating Day exceed the Market Monitor's (MM’s) pre-determined reference tolerances.

Day-Ahead Revenue Sufficiency Guarantee Make Whole Payment All Resource Offers that have been committed by the Midwest ISO will be eligible for Day-Ahead RSG Make Whole Payment. Resource Offers with a commit status of Must-Run (Self Committed) are excluded from the Day-Ahead RSG Make Whole Payment because a Market Participant has self-committed this unit. Eligibility to receive Day-Ahead RSG Make Whole Payment is based upon the Midwest ISO committing that unit.

Day-Ahead Revenue Sufficiency Guarantee Make Whole Payment Eligibility • Not change offer from DA case when picked up (All Components of Offer – would include current resouce plan at SPP) • Follows dispatch instructions (no Uninstructed Deviation in the hour) • Not self committed

Day-Ahead Revenue Sufficiency Guarantee Make Whole Payment More MISO detail and examples • http://www.midwestiso.org/publish/Document/10b1ff_101f945f78e_-743c0a48324a?rev=4

Real-Time Revenue Sufficiency Guarantee The Real-Time RSG MWP Amount credits are the direct result of having insufficient Generation Resources cleared in the Day-Ahead Energy and Operating Reserve Market to meet the expected requirements of the Real-Time Energy and Operating Reserve Market. The Day- Ahead process only clears generation to cover the Load requirements bid into the Day-Ahead Energy and Operating Reserve Market. As such, the RAC process commits additional Generation Resources to meet Load expected in the Real-Time Energy and Operating Reserve Market. Some of the causes for additional Real-Time Load are: • Load not bid into the Day- Ahead Energy and Operating Reserve Market, • Generation Resources not showing up as expected in the Real-Time Energy and Operating Reserve Market, and

Real-Time Revenue Sufficiency Guarantee Resources that meet eligibility requirements that are committed by the Midwest ISO in the RAC process for the Real-Time Energy and Operating Reserve Market are guaranteed recovery of their Start-Up, No-Load, and Energy Offer (or Shut-Down, Hourly Curtailment and Energy Offer for Demand Response Resource-Type I) as well as Operating Reserve availability cost in this charge type. Start-Up, No-Load, and Energy Offer (or Shut-Down, Hourly Curtailment and Energy Offer) are collectively referred to as production costs

Real-Time Revenue Sufficiency Guarantee Eligibility • The Resource must offer flexibly for the Hour • Dispatchable range greater than 1MW • The as-committed (DA or RUC) Offers must remain unchanged when submitted as Real-Time Offers • Ramp greater than .5MW per minute • All ramp rates used in the Real-Time Energy and Operating Reserve Market within the Dispatch Interval must be greater than one-half of one percent (0.5%) of the real-time Hourly Economic Maximum Limit of the Generation Resource per minute.” • Follows dispatch instructions (no Uninstructed Deviation in the hour • Committed by RTO

Real-Time Revenue Sufficiency Guarantee More MISO detail and examples • http://www.midwestiso.org/publish/Document/10b1ff_101f945f78e_-70540a48324a?rev=3

Other RTOs • NY-ISO is very similar to MISO. In fact MISOs was based on NY making modifications for the hourly settlement instead of 5 minute [Cost guarantees Payments]http://www.nyiso.com/public/webdocs/documents/tariffs/market_services/att_c.pdf • PJM very similar - the resource is guaranteed recovery of all costs including start-up, no-load and minimum energy costs.

March 23rd • Make Whole Payments • Market Mitigation • Real Time Mitigation • Day Ahead Mitigation • Make Whole Payment Mitigation

Market Power Market power is the ability to raise Locational Marginal Prices (LMPs) or Market Clearing Prices (MCPs) significantly above competitive levels and/or unjustifiably increase the value of Offer Revenue Sufficiency Guarantee Payments (ORSGPs) Market power can be exercised by an MP by withholding Capacity, output, or facilities from the market (physical withholding); by excessively raising the price or changing the value of a component of an Energy or Operating Reserve (OR) Offer (economic withholding); by failing to arrange in advance for most of its supply of Energy for a Load Serving Entity (LSE) (sustained pattern of under-bidding Load that contributes to an unwarranted divergence of the LMPs between the Day-Ahead and Real-Time Markets); or by uneconomic virtual bidding.

Market Power Raise market price above competitive level – • Physical withholding • Economic withholding (Mitigation) • Offer price > Marginal Cost • No output when Price > Marginal Cost • Export when export price < internal price • Transmission related • Create congestion

Market Power Subtle and complex ways to exercise market power • Market power is generally not aggregate market issue • Exempt units and local market power • Operating reserves • Bid parameters • Retirements/mothballing • Ramp violations • Loop flows • FTR/Inc/Dec • Creation of congestion

Market Power • Competition is benchmark • Price > Marginal Cost is the basic test for market power • Market price may exceed marginal cost due to scarcity or market power • MMU goals: • Develop/modify market rules to facilitate competition–Limit returns to market power • Provide incentives to competitive behavior • Make exercise of market power more difficult

Testing The MM process first compares the actions of MPs against various Conduct Thresholds to determine whether Mitigation Measures may be required. If a Conduct Test fails, then the MM process tests LMPs, MCPs and/or ORSGPs against Impact Thresholds to determine the effects of those actions on the markets operated by the Midwest ISO. The MM process minimizes the adverse effects of market power through the use of Mitigation Measures consisting of substituting Default Offers for excessive components of Energy or Operating Reserve Offers, assessing Penalty Charges, and constraining certain bidding behavior when an MP’s conduct has caused a substantial increase in Day-Ahead or Real-Time Energy and Operating Reserve Market LMPs or MCPs or in ORSGPs

Conduct The types of conduct that may warrant mitigation are categorized in one of four ways: • Physical withholding • Economic withholding • Uneconomic production • Uneconomic Demand Bids/uneconomic Virtual Transactions.

Transmission Constrained Areas Mitigation Measures are applied in response to the presence of Binding Transmission Constraints (including constraints in neighboring areas such as PJM), local reliability constraints that recognize unique local area characteristics, Operating Reserve requirements or reliability needs, or market design flaws in rules or business practices that operate differently than expected under market conditions and that impede competitive operation. Some transmission constraints isolate narrow market areas with a limited number of suppliers, enabling at least one supplier to have significant market power. Other constraints isolate market areas that are broader and contain a larger number of suppliers. These two types of areas, NCAs and BCAs, are treated differently under the MM Plan.

Narrow Constrained Areas A NCA is defined as an electrical area in the Midwest ISO Region where both of the following apply: • One or more Binding Transmission Constraints or Binding Reserve Zone Constraints into or in a common electrical area are expected to be binding for more than 500 hours during a given twelve-month period • At least one supplier is pivotal in the electrical area The MM designates in advance the NCAs in the Midwest ISO Region. At least once a year (more often when necessary), the IMM evaluates congestion patterns in the Midwest ISO Region to identify NCAs.

Broad Constrained Areas A BCA is an electrical area where the presence of Binding Transmission Constraints generally does not result in substantial market power. Even when the constraints that isolate a BCA are binding, the market generally remains competitive because of the large number of suppliers with available Resources in the area. However, under high Load conditions when most competing Generation Resources are producing at full output, the market may be vulnerable to substantial price increases. In addition, unusual transmission or supply conditions arising from Electric Facility outages may give rise to opportunities to exercise market power within a BCA.

Conduct Thresholds Established to Trigger Mitigation The first part of the two-part MM test process screens the behavior of MPs to identify conduct that may warrant mitigation. For example, Conduct Tests identify components of Generation Offers that exceed their Reference Levels by more than defined threshold amounts. The Conduct Test differentiates between scarcity and market power for purposes of mitigation (i.e., if suppliers are not withholding physically or economically, any price increases are the result of scarcity rather than market power).

Conduct Thresholds Established to Trigger Mitigation BPM Details This section describes the specific thresholds of conduct that may trigger mitigation and how Reference Levels are determined and applied. Conduct Thresholds are categorized as follows: • Physical withholding conduct thresholds for a Generation Resource • Physical withholding conduct for a Transmission Facility • Economic withholding conduct thresholds in BCAs • Economic withholding conduct thresholds in NCAs • Economic withholding conduct thresholds in Reserve Zones • Uneconomic production conduct thresholds. The MM also monitors Demand Bids, Virtual Transactions and Demand Response Resources

Physical Withholding Conduct Thresholds for Generation Resources BPM Details Physical withholding of a Generation Resource makes it partly or totally unavailable. The primary reasons to consider a Generation Resource physically withheld are any of the following: • Taking an unapproved derating or outage • Refusing to provide Generation Offers or schedules for Designated Network Resources • Falsely declaring a Generation Resource derated, unavailable or forced out-of-service • Using a time-based Generation Offer parameter or a Generation Offer parameter expressed in units other than time or dollars that causes capacity from a unit to be unjustifiably unavailable to the market (e.g., zero ramp rate for a unit that is at part- Load).

Remedies Measures may be taken when mitigation is triggered by exceeding both Conduct and Impact Thresholds, including: • Substituting Default Offers for Generation Offers • Applying Penalty Charges for physical withholding, uneconomic production, exceeding an LSE’s Allowance Level, or operating transmission equipment so as to cause transmission congestion • Requiring LSEs to purchase most of their Energy day-ahead • Placing restrictions on Virtual Transactions

PJM Offer Cap • Three pivotal supplier test • there are three or fewer generation suppliers available for redispatch • Cap either: • Weighted average LMP at bus • Incremental Operating cost +10% • Incremental Operating cost + ($20, $40) for often capped units (> 60% of the time)

PJM • Required submission of cost data by unit • If maximum economic output specified in day ahead offer is less than in real time, forced outage ticket • If unit classified as Max Emergency in day ahead and not in real time, forced outage ticket

PJM BPM Details • Energy market offer cap = $1,000/MWh • Energy market offer cap includes operating reserve payments • Start up and no load costs can be modified 6 months • Only one market-based offer curve per day • Hourly price offer changes not permitted • Local market power mitigation • Must run units are cost capped for determining LMP – Receive greater of cost plus 10% or LMP • Alternative methods to determine payment cap • Three Pivotal Supplier Test

PJM BPM Details The Market Monitoring Unit may, consistent with the PJM Market Rules, recommend to PJM that it take specific mitigation action that PJM is authorized to take under the PJM Market Rules to address market behavior or conditions. The Market Monitoring Unit shall not, however, have authority to require modification of PJM operational decisions, including dispatch instructions. If PJM does not accept the Market Monitoring Unit’s recommendations regarding mitigation actions, the Market Monitoring Unit may report its mitigation recommendation to the Authorized Government Agencies, Commission staff, State Commissions or the PJM members, as the Market Monitoring Unit deems appropriate.

March 23rd • Make Whole Payments • Market Mitigation • Day Ahead Mitigation • Real Time Mitigation • Make Whole Payment Mitigation

Day Ahead Automated Mitigation Procedure (AMP) The Midwest ISO employs an Automated Mitigation Procedure (AMP) for the day-ahead market. Under the day-ahead AMP, the impact test is performed and mitigation is implemented on the same market day that the conduct occurred. If the AMP becomes unavailable to complete such functions in a timely manner, the following process will be employed: • Resources with DA Generation Offers that fail the conduct test will undergo the impact test • If these Resources fail the impact test for the given OD, all Generation Resources owned by the same supplier in the same NCA or active BCA will be considered for mitigation for the following day;

Day Ahead Automated Mitigation Procedure (AMP) • When the day-ahead market is run for the following day, Resources considered for mitigation in Step 2 and submit a conduct test-failing Offer will have a Default Offer substituted for the failing Offer • If the same supplier submits day Offers that exceed both conduct and impact thresholds for the same NCA or active BCA within the next 90 days, the supplier’s Generation Resources in that NCA or active BCA will be considered for mitigation in the day-ahead Market for the following seven days • If in any of these seven days, the Resource identified in Step 4 submits an offer that fails conduct, a Default Offer shall be substituted for the failed Offer.

March 23rd • Make Whole Payments • Market Mitigation • Day Ahead Mitigation • Real Time Mitigation • Make Whole Payment Mitigation

Substituting Default Offers in Real-Time The substitution of Default Offers in the Real-Time Energy and Operating Reserve Market is tested and applied during each hour of real-time operations. Conduct testing for the Real-Time Energy and Operating Reserve Market is performed once an hour just after the Real-Time Energy and Operating Reserve Market closes (i.e., beginning just after thirty minutes before the start of each Operating Hour (OH), designated as “OH-30m”). During this period, prior to the start of the next OH, the MM process performs economic withholding and uneconomic production Conduct Tests on all Real-Time Generation Offers and flags any Generation Resources that fail one of these tests.

Substituting Default Offers in Real-Time Once the OH begins, the MM process tests flagged Generation Resources for Price Impact during every Dispatch Interval and substitutes Default Offers for Real-Time Generation Offers submitted for that hour that fail their Price Impact Test and a Binding Transmission Constraint pr Binding Reserve Zone Constraint is active. Default Offers that are substituted are used for the remainder of the OH. Midway through the current OH and after the subsequent OH bids close at “OH+30m”, the initial process is repeated for new Generation Offers for the subsequent OH (“OH+1h”).

Substituting Default Offers in Real-Time Near the end of the current OH, Generation Resources that failed Conduct and Impact tests during the current OH are retested. If either Conduct or Impact Tests (based upon Generation Offers for the next hour and projected LMPs and MCPs for the next hour) no longer fail for a multi-hour Generation Offer, the mitigation measures will be removed at the end of the OH and Default Offers will not be used for that Generation Resource in the next OH (“OH+1h”). If both Conduct and Price Impact Tests still fail, the Mitigation Measures are continued into the next OH.

Mitigation

Future Market Implementation Requirements - way forward