Rational Buyer. Ancillary Service Rational Buyer Adjustment. Description. Purpose. Charge Calculation and Calculation Components

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1 Settlements Guide Revised 05/31/04 Rational Buyer Charge # 1011 Ancillary Service Rational Buyer Adjustment Description As part of the Ancillary Services (A/S) Redesign project a Rational Buyer algorithm has been put into place to decrease the total cost of A/S procurement. The Rational Buyer process alters the A/S requirements among the various A/S auctions, procuring higher quality A/S to replace lower quality A/S, if such substitution is economically beneficial. The Rational buyer algorithm will calculate an alternative set of A/S capacity requirements which, when run through the Ancillary Services Market (ASM) module, will give the lowest total A/S capacity cost while meeting the ISO s reliability requirements. In substituting purchases of one service for another, both the ISO s apparent service requirements and the market -clearing prices (MCPs) for different services will generally differ from those that result from inputting the original service requirements into the ASM. This Rational Buyer functionality will alter the A/S capacity settlements with Scheduling Coordinators (SCs). Purpose The purpose of the A/S Rational Buyer settlement is to procure A/S at the most cost effective price. This will, in turn, send consistent economic signals to both buyers and sellers of A/S. The A/S Rational Buyer Adjustment Charge Type #1011 is to set up a single balancing account for the difference between the payment to A/S sellers and the charges to A/S buyers. Charge Calculation and Calculation Components Charge Type #1011 consist of a balancing account that is cleared hourly by allocating the accumulated cost/benefits pro rata to all SCs requiring A/S. The basis for the allocation will be the total A/S bill for each A/S. Rational Buyer quantities and MCPs are used in settlements with the suppliers of A/S. In addition, the original ASM requirement quantities and Rational Buyer MCPs are used in settlements with the SC s needing to purchase A/S. Supplier Payment Quantity = Rational Buyer Procurement Price = MCP Total User Charge

2 Quantity = pre-rational Buyer procurement (requirement) Price = Same price as paid to supplier (MCP) The Rational Buyer adjustment percentage is determined by taking the Total Imbalance Amount (total overcollected or undercollected ) divided by both the Hour Ahead and Day Ahead market total A/S charge (Total Allocation Base). Rational Buyer Adjustment % = Total Imbalance Amount / Total Allocation Base Where: Total Imbalance Amount = (Total DA and HA Payment to Sellers) - (Total DA and HA Charge to Buyers) Total Allocation Base = Total DA and HA Charge to Buyers The total imbalance charge or credit will be allocated to SCs pro rata, based on SC s total Settlement charge for all services in both DA and HA markets. Individual SC Imbalance Charge or Credit = Total A/S Settlement Charge for Individual SC X Rational Buyer Adjustment % Day Ahead Reqt RB Price Payment Charge Regulation $20 $50,000 $30,000 Spin $20 $20,000 $20,000 Non-Spin $20 $10,000 $20,000 Replacement $30 $15,000 $30,000 Total $95,000 $100,000 Imbalance-DA -$5,000 Hour Ahead Reqt RB Price Payment Charge Regulation $20 $0 $2,000 Spin $20 $6,000 $2,000 Non-Spin $20 $1,000 $2,000 Replacement $30 $1,500 $3,000 Total $8,500 $9,000 Imbalance-HA -$500 Total Charge/Refund Amount: Total Imbalance $103,500 $109,000 -$5,500 Where: Price = Rational Buyer Market Clearing Price Payment = Ration Buyer Procurement X RB MCP Charge = Pre-RB Procurement X RB MCP 2

3 Total Payment to Sellers Total Charged to Buyers Regulation $50,000 $32,000 Spin $26,000 $22,000 Non-Spin $11,000 $22,000 Replacement $16,500 $33,000 Total $103,500 $109,000 Total Imbalance -$5,500 Adjustment % -5.04% Adjustment % = Total Imbalance / Total Allocation Base Adjustment % = -$5,500 / $109,000 = -5.04% SC1 Total Settlement Charge for Reg, Spin, Nspin and RR = $1,500 Imbalance Credit to SC1 = $1500 x -5.04% = -$7,560 On page 5 of this document there is an equation map for the Rational Buyer Charge type. In the Adjustment Percent shown above it appears as a negative which results in a credit to the SC s. However, if the the Total Charged amount was $90,000 instead of $109,000 the Total Imbalance amount would result in a positive Total Imbalance of $13,500 (instead of the negative $5,500), which results in a positive Adjustment Percentage. This will result in a charge to the SC s. Even though there is a charge, there is still a savings to the SC s of $60,000 (as shown below), where the existing practice shows a total procurement cost of $155,000 and the Rational Buyer practice shows a total procurement cost of $95,000. The following table illustrates the cost savings. A/S Type Requirement (MW) Existing Practice MCP ($/MWh) Cost ($/h) Rational Buyer due SC (Payment) MCP ($/MWh ) Requirement (MW) MCP ($/MWh) Rational Buyer due ISO (Charge) MCP ($/MWh) Requirement (MW) Cost ($/h) Reg. 1, ,000 2, ,000 1, ,000 Spin 1, ,000 1, ,000 1, ,000 Non-Spin 1, , ,000 1, ,000 Replacement 1, , ,000 1, ,000 3

4 Total Procurement Cost ($/h) $155,000 $95,000 $100,000 4

5 Settlements Guide Revised 05/31/04 RATIONAL BUYER EQUATION MAP Quantity x Price = Imbalance Credit/Charge -$52.35 Total Settlement Charge for individual SC for each service (CT#111 + CT#112 + CT#114 + CT#115 + CT 116) $1,500 (Total Payment to Sellers - Charge to Buyers) $103,500 $109,000 Adjustment Percentage -3.49% Total Imbalance / Total Allocation Base * -$5,500 $109,000 ( Day Ahead Charge to Buyers + Hour Ahead Charge to Buyers) ( Day Ahead Payment + Hour Ahead Payment $95,000 $8,500 (Day Ahead RB proc. x MCP) (Hour Ahead RB proc. x (Day Ahead Pre-Rat. Buyer Proc. x Day Ahead Rational Buyer MCP) Reg. 1,500 x $20 = $30,000 Spin 1,000 x $20 = $20,000 NS 1,000 x $20 = $20,000 RR 1,000 x $20 = $30,000 $100,000 Reg. 2,500 x $20 = $50,000 Spin 1,000 x $20 = $20,000 NS 500 x $20 = $10,000 RR 500 x $30 = $15,000 $95,000 Reg. 0 x $20 = $0 Spin 300 x $20 = $6,000 NS 50 x $20 = $1,000 RR 50 x $30 = $1,500 $8,500 NOTE: ( ) = total for DA and HA for each service for each trading interval by zone (Hour Ahead Pre-Rat. Buyer Proc. X Hour Ahead RB Proc.) Reg. 100 x $20 = $2,000 Spin 100 x $20 = $2,000 NS 100 x $20 = $2,000 RR 100 x $30 = $3,000 $9,000

6 Settlements Guide DRAFT Revised 05/31/04 Verifying the Charge The Rational Buyer algorithm will produce individual A/S schedules and final MCP, which will be used in Settlements. The final A/S procurement quantities (pre and post-rational Buyer) and Rational Buyer MCP prices will be posted on the ISO Public Market Information page located at Market Ops, OASIS, then under Market Information. The final schedules showing the Rational Buyer quantities can be downloaded from the Wenet for the requested Trading Interval for the DA and HA Market. In template ISO will publish Preliminary (pre-rb) ASM zonal non-self requirements, self-requirements and total requirements. For each Trading Interval by zone, multiply the pre-rational Buyer procurement by Rational Buyer MCP for each service and sum together. Do this for both the DA and HA market and add the DA and HA charges together to get the total charge to buyers which is the Total Allocation Base charge. Next, multiply the Rational Buyer procurement by the Rational Buyer MCP for each service and sum together. Do this for both the HA and DA market and add the DA and HA amounts together to get the Total Payment made to the SC s providing the A/S services. Subtract the Total Allocation Base charge from the Total Payment to get the Total Imbalance amount. This shows up as the Total Charge/Refund on the Settlement Statement. Take the Total Imbalance amount and divide it by the Total Allocation Base. This will give the Rational Buyer Adjustment Percentage, which is shown as the Price in the Settlement Statement. Add up the charges for all services (for Charge Type 111, 112, and 114) in both the DA and HA Market. This will give the Total Settlement Charge which is shown as the Quantity on the Settlement Statement. Take the Price and multiply by the Quantity and this will calculate the Imbalance Charge/Credit which is shown as the Settlement Amount. Included in Table 1 is a summary of where to find the information and how to validate the charge. TABLE 1 EXAMPLE OF BASE PARAMETER VALIDATION GUIDE FOR SPIN CHARGE DUE ISO Charge Component Where to find / How to verify pre-rational Buyer requirement This can be estimated by looking at the requirements for each service for each hour and zone on OASIS under item #7 (Day Ahead Final Ancillary Requirement Information) and #19 (Hour Ahead Ancillary Requirement). Rational Buyer MCP This is located on OASIS under item #8. Rational Buyer procurement Total Allocation Base (Total Charge to Buyers) This can be found by looking at the procurement for each service for each hour and zone on OASIS under item #8 (Day Ahead Final Ancillary Procurement Information) and #20 (Hour Ahead Ancillary Procurement). For each Trading Interval by zone, multiply the pre-rational Buyer procurement by Rational Buyer MCP for each service and sum together. Do this for both the DA and HA market and add the DA and HA charges together to get the total charge to buyers.

7 Total Payment Total Imbalance (Total Charge/Refund) Rational Buyer Adjustment Percentage (Price) Multiply the Rational Buyer procurement by the Rational Buyer MCP for each service and sum together. Do this for both the HA and DA market and add the DA and HA amounts together Subtract the Total Allocation Base charge from the Total Payment. Take the Total Imbalance amount and divide it by the Total Allocation Base. Total Settlement Charge (Quantity) Add up the charges for all services (for Charge Type 111, 112, 114, 115 & 116) in both the DA and HA Market. Imbalance Charge/Credit (Settlement Amount) Take the Price and multiply by the Quantity. Frequently Asked Questions 1. How will the overall performance of Rational Buyer be monitored, including DA and HA SC s may need the ability to verify. The ISO will monitor the original results of ASM and compare those results to the Rational Buyer results for both the DA and HA markets. ISO will prepare and publish status report of the above results. 2. Publishing of the Balancing Acct. information is needed the next day, with sufficient information to allocate SC bills, at least on an estimated basis. The ISO will attempt to provide the quantity and MCP for both the original run of ASM and the rational buyer results. From this information the total amount in the neutrality account could be calculated. The specific impact on an SC s bill will not be able to be determined in the PMI timeframe. 3. Clear listing of Next Day PMI data needed on all charges. This has been provided. 4. Policy question Self-providers can t optimize between services, as can those participating through the rational buyer auction according to tariff. A/S suppliers that bid into the A/S auctions can chose to bid their capacity in any particular A/S market, or a combination of A/S, as long as they satisfy the requirements for each service. The Rational Buyer function may accept their bid in a higher quality service to satisfy requirements transferred from lower quality services, even if that bid would not normally be accepted if its location on the supply curve is to the right of the original requirement for that service. Self-providers have many more options available. First, an SC can still fully self-provide all its A/S requirements, as defined in the ASRP, and be immune to A/S charges. Furthermore, strategic self-provision of some services and bidding in others can maximize profits. Finally, an SC may self-provide the higher quality services and buy 7

8 the lower quality services from the ISO, expecting that higher quality services will clear at higher prices due to the Rational Buyer implementation. 5. What specifically triggers HA buyback? i.e. trigger events and what happens system-wise? The ISO has identified the following scenarios, which can initiate a Scheduling Coordinator (SC) buy-back of Ancillary Services (A/S) in the Hour Ahead (H/A) Market: When the limit for A/S procured outside of the control area in the Day Ahead (D/A) market is reached and the total A/S requirements decrease in the H/A market the associated import limit will decrease. As a result, a curtailment to the A/S from outside the control area occurs. Generally this is not an issue because the ISO does not buy any A/S capacity to replace the service and the price is usually zero. A buy-back may also occur if A/S capacity is procured on a control area basis in the D/A market and then procured regionally in the H/A market. Because each region has its own requirement the limit is based on the regional requirements rather than the total control area requirements and a buy-back can occur. When a transmission / generation de-rate or curtailment happens between the closing of the D/A market but before the H/A market has closed. If a SC is awarded an A/S capacity bid in the D/A market, for a generating unit and then increases the unit s energy schedule or other self-provided A/S schedule in the HA market above the unit s capacity rating then the unit would not be able to provide the entire A/S capacity awarded in the D/A market. To illustrate this scenario, assume that a generating unit has a Pmax of 100 MW, a D/A energy schedule of 50 MW and a spin schedule of 50 MW. Then, in the HA market the SC increases their energy schedule to 60 MW. As a result, their spin schedule will be reduced from 50 to 40 MW thus buying back 10 MW of spin. A buy-back condition will also be created when a SC is awarded a bid in the DA market and then self-provides the service in the HA market. 8

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