Organized Regional Wholesale Markets Paul M. Flynn Shareholder Wright & Talisman, P.C.
Overview Organized Market Regions Goals of Regional Markets Energy Markets Congestion and Hedges Market Power and Mitigation Reserve Markets Capacity Markets 2
Organized Market Regions FERC defines organized market regions as areas where RTO or ISO operates day-ahead or realtime energy markets. As currently approved, those areas: serve in aggregate over 170 million people; include over 500,000 megawatts of installed generation. 3
Organized Market Regions (cont d) Six FERC-approved RTOs/ISOs currently operate regional markets: California ISO Southwest Power Pool Midwest ISO PJM Interconnection New York ISO ISO-New England 4
Organized Market Regions (cont d) 5
Goals of Organized Markets (cont d) EPAct 2005 confirmed national policy to foster competition in wholesale electric power markets. FERC identifies goals of wholesale competition generally as: providing more supply options; encouraging new entry and innovation; spurring deployment of new technologies; and promoting demand response and energy efficiency. 6
Goals of Organized Markets (cont d) Promote more efficient resource utilization; increase transparency and accuracy of pricing; enable economic management of transmission congestion; support bilateral contracting; develop more economic means of satisfying adequacy and reliability requirements; e e provide platform for new products and services, including demand response. 7
Energy Markets Five of the six regions have offer-based locational marginal price (LMP) energy markets, with separate day-ahead (DA) and real-time (RT) resource commitment and clearing. SPP has an energy imbalance market but is moving toward a more fully-featured f energy market. 8
Energy Markets (cont d) LMPs: cost of serving next increment of demand at each point on network, considering: bid prices of resources transmission constraints. detailed model of regional grid. Same price paid to all cleared resources at node CaISO: price to suppliers is nodal but price to loads is aggregated over the 3 IOU service areas. 9
Energy Markets (cont d) DA market = financial binding, one-day forward contracts for energy and ancillary services. Most resources committed and paid through DA market. RT market = physical supply and demand in real time. Typically addresses variations in supply and demand from DA expectations. In efficient market, RT and DA prices converge; financial traders seeking profit from differences in those prices can help them converge. 10
Congestion Pricing and Hedging Congestion: physical TX limits prevent load from being served with least cost energy Congestion cost varies by location and is embedded in LMP LMP at any ygiven point can reflect congestion from multiple constraints 11
Congestion Pricing and Hedging (cont d) Congestion costs can be hedged with financial rights (e.g., FTRs or CRRs) available through ISO/RTO. LSE can use revenue streams from CRRs/FTRs to offset some of the congestion it incurs to serve its loads. Typically specify source, sink, MW, peak or nonpeak, term, and direction. Typically allocated and auctioned in annual and monthly processes. 12
Market Power and Mitigation Market Power = ability to raise prices above competitive levels. ISOs/RTOs seek to mitigate market power in several ways: Design markets that promote competition Where market structure not competitive, e.g., TX constraint creates potential for local market power, ISO/RTO applies direct mitigation measures, e.g., sell offer caps 13
Market Power and Mitigation (cont d) Mitigation measures typically involve: structural test to determine if local market is competitive, e.g., three pivotal supplier test; t behavioral test to determine if generator offers exceed competitive levels, e.g., above marginal cost of producing energy; impact test to determine if offers would affect market price. 14
Market Power and Mitigation (cont d) In single-clearing-price market, offer-capped unit still paid market-clearing price, even if higher than its offer cap Individual sellers still must obtain market-based rate authority from FERC Participant i t in RTO/ISO market might not have market power because of smaller role relative to large market May be able to rely on RTO/ISO market power study for reg/reserve markets Virtual traders do not need MBR approval 15
Market Power and Mitigation (cont d) FERC requires RTOs/ISOs to employ market monitor. FERC Order 719 requires MM s functions to include: identifying ineffective market rules and recommending rule changes; reviewing and reporting on the performance of the wholesale markets; and notifying FERC staff of instances in which a market participant s behavior may require investigation FERC distinguishes between tariff administration (e.g., applying offer caps) and market monitoring 16
Market Power and Mitigation (cont d) RTOs/ISOs must provide MMs with: direct reporting to the RTO/ISO board of directors, access to market data, and sufficient resources to carry out their duties. RTO/ISOs must include ethics standards for MMU employees in tariff 17
Market Manipulation EPAct 2005: empowered FERC to prohibit manipulation by any entity in connection with jurisdictional transactions. increased civil penalties to up to $1,000,000 per violation, per day. 18
Market Manipulation (cont d) FERC regs implementing EPAct 2005 make it unlawful for any entity in connection with FERCjurisdictional purchase, sale or transmission of electric energy to: Use any device, scheme or artifice to defraud; Make an untrue statement of material fact or omit a material fact needed to avoid misleading an entity; or Engage in any act, practice or course of conduct that operates as a fraud or deceit upon any entity. 19
Market Manipulation (cont d) Tracks SEC Rule 10(b)(5); ) scienter required (includes recklessness); Not expressly limited to manipulation, intended to permit FERC to police all forms of fraud and manipulation that affect electric energy transactions. Affirmative defenses: action explicitly contemplated in FERC-approved rules presumed not to violate anti-manip. rule. can assert as defense that action undertaken at direction of an ISO/RTO, even if not of type explicitly approved by FERC 20
Market Manipulation (cont d) Examples of manipulative or deceptive devices or contrivances: wash trades transactions predicated on submitting false information transactions creating and relieving artificial congestion collusion for the purpose of market manipulation. 21
Market Manipulation (cont d) FERC behavioral rules for MBR sellers relevant to RTO/ISO markets: MBR Seller in RTO must operate and bid in compliance with FERC approved rules of RTO/ISO market MBR Seller must provide accurate, not false, misleading, or materially incomplete, info to FERC, MMs, RTO/ISOs, and transmission providers 22
Market Manipulation (cont d) The LLC and the E-Trade Baby: A Cautionary Tale Morale: If you think you must deceive in order to get ahead, at least don t lie in a filing to FERC or communication to an RTO 23
Reserve Markets RTO/ISOs that have organized energy markets also have various markets for regulation and reserves: Regulating Reserve: resources capable of changing output quickly, used on a continuous basis to match generation to load and keep frequency within acceptable levels Operating Reserve: (spin and non-spin, used to maintain system frequency during emergency or major unexpected change (typically based on largest single contingency) DR eligible to provide some of these services, if meet ramp requirements 24
Reserve Markets (cont d) Similar to energy, these markets are locational and bid- based ISO-NE has a seasonal forward reserve auction; advance reserve commitments t are satisfied in real time with quick start gen or on-line gen with unused capability; intended to attract investment in capacity that is able to provide reserves at relatively low cost, particularly fast-start generation. CaISO recognizes cascading of higher quality reserves for lower quality reserves, such that thee highest quality reserve, regulation up, will always have the highest market clearing price 25
Reserve Markets (cont d) Some markets co-optimize reserves with energy recognizes economic trade-offs (i.e., lost opportunity costs) between scheduling a resource for energy rather than reserves. Allows market to reflect redispatch costs incurred to maintain reserves in clearing prices for both energy and reserves. 26
Reserve Markets (cont d) Co-optimization optimization example: 100 MW unit bids 90 MW of energy at $20/MW and 20 MW of spin at $5/MW. If clears 90 MW of energy and 10 MW of spin: no opportunity cost. if clears 80 MW of energy with energy LMP of $50 and 20 MW of spin: $30 opportunity cost (difference between energy LMP and energy bid price If unit was marginal for spin, spin market clearing price would be $35 = $5(marginal spin bid price)+$30(opportunity cost) 27
Reserve Markets (cont d) Energy/reserves trade-offs particularly important during tight operating conditions because efficient scheduling reduces likelihood of reserve shortage. Operating Reserve Scarcity Pricing: i NY and NE have relatively high reserve constraint factor charges when system short of RT operating reserves. PJM proposing similar charge. CalSO implemented scarcity pricing in 2010, but no direct link in RT between energy and reserves 28
Capacity Markets Load-serving entities adopt installed capacity requirements to minimize the likelihood of a loss of load. Some ISOs/RTOs and their predecessor power pools adopted requirements for LSEs to maintain installed capacity resources equal to their peak loads plus an installed reserve margin, or pay a penalty typically based on the cost to bild a new peaking plant. 29
Capacity Markets (cont d) Midwest ISO has this approach now, including a capacity credit market in which parties with excess installed capacity can sell it to other LSEs so that they can meet the requirement and avoid paying penalties. ISO-NE, NYISO, and PJM have adopted capacity markets to meet this need, with locational pricing 30
Capacity Markets (cont d) PJM and ISO-NE: auctions to solicit capacity commitments three years forward (time for construction of new CT). PJM and NYISO: demand curves (based on Net CONE to clear auction (can result in procurement over IRM); ISO-NE uses descending-clock auction, also based on Net CONE. 31
Capacity Markets (cont d) Sell offers in central capacity markets subject to cap based on avoidable cost and minimum offer based on cost of new entry Existing and new gens and demand resources (even energy efficiency) all can offer to provide capacity Committed capacity resources must offer into DA mkt 32
Organized Wholesale Markets Questions? For more information, contact Paul Flynn at flynn@wrightlaw.com or 202-393-1200. 33