The FERC SMD and the Midwest Electricity Markets IEEE PES – Chicago Chapter Chicago, IL - January 8, 2003 Roberto F. Paliza, Ph.D. Paliza Consulting, LLC. roberto@palizaconsulting.com

Paliza Consulting, LLC. roberto@palizaconsulting.com Agenda FERC SMD Focus is in the RTM, DAM, and FTRs What is missing in the SMD? Inter-ITP coordination Midwest Markets Initiative MISO-SPP MISO-PJM-SPP joint and common market Paliza Consulting, LLC. roberto@palizaconsulting.com

Paliza Consulting, LLC. roberto@palizaconsulting.com FERC SMD Sets the direction for the design and implementation of wholesale markets. Defines the desired end state for these markets. Does not provide solution for transitional issues although establishes principles to be followed. Provides flexibility in regards to timing of the implementation and in accommodating regional differences. Paliza Consulting, LLC. roberto@palizaconsulting.com

Basic Elements of the SMD From an operational perspective: Real-time market Day-ahead market Ancillary services market Congestion revenue rights market Market power monitoring & mitigation Capacity requirement Markets administered by RTOs/ITPs Paliza Consulting, LLC. roberto@palizaconsulting.com

ITP Market Operations ITP Functions Market Inputs Market Support Cover Generator Bids Cover Imbalances Ensure Reliability Bid based Security- Constrained Dispatch Real-Time Balancing Load Bids Buy and Sell In Spot Market Buy Through Congestion Bilateral Schedules Congestion Redispatch Calculate Nodal Prices Hedge Congestion Self Schedules Transmission Rights RTO Market Settlements At Nodal Prices Market-Driven Decisions $$$ Paliza Consulting, LLC. roberto@palizaconsulting.com

The Real-time Market (RTM) RTOs will ensure that all market participants have equal access to the spot market. RTM main component is a bid-based security constrained dispatch (5 min cycle). RTM is a voluntary market. Market participants can submit: Bilateral schedules, Self-schedule, or Bid into the real-time market Paliza Consulting, LLC. roberto@palizaconsulting.com

Paliza Consulting, LLC. roberto@palizaconsulting.com Example1: Economic Dispatch Least expensive generators are dispatched I need MWs. Sale goes to the MW 300 MWs @ $10 lowest bidder with capacity. $10 Going once.... Load Capacity 300 MWs 499 MWs MW 199 MWs @ $15 $15 Capacity 200 MWs RTO $15 MW $20 Not Dispatched LMP for all settlement nodes is $15 Capacity 200 MWs Paliza Consulting, LLC. roberto@palizaconsulting.com

Example2: Economic Dispatch Highest Cost Generator Sets Price MW I need MWs. Sale goes to the $10 300 MWs @ $10 lowest bidder with capacity. Going once.... Capacity Load 300 MWs 599 MWs MW $15 200 MWs @ $15 Capacity 200 MWs RTO $20 MW LMP for all settlement nodes is $20 $20 99 MWs @ $20 Capacity 200 MWs Paliza Consulting, LLC. roberto@palizaconsulting.com

Paliza Consulting, LLC. roberto@palizaconsulting.com If There is Congestion Delivery limitations prevent use of “next least-cost generator” Higher cost generator closer to load must be used to meet demand Cost to operate more expensive generation are translated into transmission congestion costs in LMP calculation Nodal pricing results in cost causation for congestion pricing to market participants Paliza Consulting, LLC. roberto@palizaconsulting.com

Real-time Market Settlements All real-time injections, withdrawals and transmission congestion will be settled at LMP prices determined by the real-time dispatch. The difference in LMP prices across the grid will reflect congestion and incremental cost of losses. Loads have the choice to settle at nodal or zonal prices. Generators may self-schedule but only accepted schedules will settle at LMP prices. Paliza Consulting, LLC. roberto@palizaconsulting.com

LMP Definition Cost of supplying next MW of load at a specific location, considering generation marginal cost of energy, cost of transmission congestion, and losses LMP Marginal Energy Component (EC) Marginal Congestion Component (MCC) Marginal Loss Component (MLC) = + + Paliza Consulting, LLC. roberto@palizaconsulting.com

The Day-ahead Market (DAM) DAM main component is a bid-based security constrained unit commitment. It is a voluntary market and is financially binding. DAM main function is to provide certainty for Market Participants (MPs). In the DAM, participants will be able to: Buy/sell energy and self-schedule generation. Submit bilateral transactions. Submit virtual bids. Paliza Consulting, LLC. roberto@palizaconsulting.com

Day-ahead Market Settlements Process is very similar to RTM settlement for energy, congestion, and losses. RTM settles deviations with respect to DAM schedules. FTRs are settled based on the DAM hourly prices. Paliza Consulting, LLC. roberto@palizaconsulting.com

Paliza Consulting, LLC. roberto@palizaconsulting.com

Day-ahead Reliability Check Check is performed after DAM closes and it focuses on: Evaluating overall resource adequacy. Evaluating reserve adequacy. Evaluating transmission reliability. Reliability Commitment: Units are committed/de-committed to satisfy reliability criteria. Paliza Consulting, LLC. roberto@palizaconsulting.com

Paliza Consulting, LLC. roberto@palizaconsulting.com Financial Transmission Rights FTR is a financial instrument that entitles holder to a stream of revenues (or charges) based on the DA hourly energy price differences across the path or shadow price of a flowgate. Paliza Consulting, LLC. roberto@palizaconsulting.com

Paliza Consulting, LLC. roberto@palizaconsulting.com FTR Characteristics MPs will be able to acquire point-to-point (PTP) and flowgate (FGR) transmission rights to hedge congestion charges. PTPs and FGRs will be financial. PTP is a full hedge between source and sink while FGR is a full hedge for a specific constraint only. PTPs will be available in the form of obligations and options and FGRs will be available as options. Awarded PTPs and FGRs will be simultaneously feasible. Paliza Consulting, LLC. roberto@palizaconsulting.com

Example: Delivery with FTR FTR = 100 MW Source (Sending End) Sink (Receiving End) Bus B Bus A Energy Delivery = 100 MWh LMP $15 LMP $20 Congestion Charge = 100 MWh * ($20-$15) = $500 FTR Credit = 100 MW * ($20-$15) = $500 Paliza Consulting, LLC. roberto@palizaconsulting.com

PTP Rights Characteristics Obligations can have a zero, positive, or negative value. Options can only have a zero or positive value. It is a perfect hedge against congestion costs as long as: Schedule is between specified source and sink. Schedule is equal or less than the FTR amount. Paliza Consulting, LLC. roberto@palizaconsulting.com

Paliza Consulting, LLC. roberto@palizaconsulting.com FGR Rights Characteristics FGR owner gets paid the constraint shadow price of that flowgate. FGRs are proposed as options and only hedge the specified flowgate. Available as PTDF (monitored element) and OTDF (monitored/contingency pair) flowgates. Place responsibility for assessment of shift factors and the number of FGRs required to hedge a transaction on the market participant. Paliza Consulting, LLC. roberto@palizaconsulting.com

Paliza Consulting, LLC. roberto@palizaconsulting.com Priorities and FTRs SMD proposes when transmission is tight, participants with FTRs have scheduling priority. How about curtailment priorities? Current LMP markets do not have this physical characteristic. Many comments have been submitted on this subject. Paliza Consulting, LLC. roberto@palizaconsulting.com

Paliza Consulting, LLC. roberto@palizaconsulting.com Acquiring FTRs Allocation Is based on existing contracts. Is a conversion process from physical to financial. FTR Auction -- administered by the ITP MPs can purchase “left over” capability. It may be used as the primary way to assign FTRs. MPs can reconfigure FTRs. Secondary market -- bilateral trading ITPs will facilitate the secondary market. FTRs that exist are bought or sold. Paliza Consulting, LLC. roberto@palizaconsulting.com

What Is Missing in the SMD? From an operations perspective: SMD embraces the goal of seamless markets but no approach is suggested. FERC has taken a significant step forward in developing the SMD but the next step – coordination of these markets - is also a very important one. Paliza Consulting, LLC. roberto@palizaconsulting.com

Inter-ITP Coordination Types of ITP coordination under SMD: LMP market and non-market coordination LMP market and other LMP markets Reliability backstop process One stop shopping desired features: Common business practices Common user interface Availability of CRRs that expand several ITPs Paliza Consulting, LLC. roberto@palizaconsulting.com

Paliza Consulting, LLC. roberto@palizaconsulting.com Transitional Issues SMD calls for conversion of all transmission service to SMD. However, if grandfather contracts do not convert to the SMD tariff, another level of complexity will be created Will require that ITPs support physical service in all of their markets (RTM, DAM, FTR). Certain special provisions of these grandfather contracts may be difficult to honor/administer by the ITP under LMP. Paliza Consulting, LLC. roberto@palizaconsulting.com

Paliza Consulting, LLC. roberto@palizaconsulting.com Transitional Issues Initial allocation of CRRs May prove to be very contentious specially in places where the system is oversold. Availability of FTR options will add another layer of complexity. Modeling of FTRs in the allocation process needs to be consistent with settlements of these rights. Paliza Consulting, LLC. roberto@palizaconsulting.com

Inter-ITP Coordination Elements Honor external constraints in the same way as internal constraints are respected. Treatment of resources in a multi-market environment Bidding, control, scheduling, settlement… Ancillary services Parallel flow agreement that includes: Definition and calculation of parallel flow Agreement on usage and compensation Convergence of LMP prices at the seams. Paliza Consulting, LLC. roberto@palizaconsulting.com

Reliability Backstop Process NERC TLR is the reliability backstop process in the eastern interconnection Relies on a central database of “tagged” transactions Relies on a single transmission model for impact calculation and curtailments Input data and results are available to all SCs Equivalent capability needs to be provided under SMD May require policy changes by NERC Paliza Consulting, LLC. roberto@palizaconsulting.com

Paliza Consulting, LLC. roberto@palizaconsulting.com One-stop Shopping Market participants do business over large geographical areas Establishment of a single network access service will enable development of large markets Requires compatible market rules Timings, scheduling practices, market protocols and procedures, settlements…… Development of a single user interface is a must. Support for CRRs across several ITP regions. Paliza Consulting, LLC. roberto@palizaconsulting.com

Paliza Consulting, LLC. roberto@palizaconsulting.com The Obvious Fix Creation of a single market run by a single market operator Single RTM, DAM, and FTR markets Is this feasible over a very large area? Eastern Interconnection MISO-PJM-SPP What is the criteria for determining the appropriate size of a single market? Paliza Consulting, LLC. roberto@palizaconsulting.com

Paliza Consulting, LLC. roberto@palizaconsulting.com Managing Seams Type of seams: Manageable. Unmanageable (e.g. unable to control internal constraints). A couple of factors to consider to manage seams: Proper grouping of constraints & resources. Internalize as much loop flow as possible. Paliza Consulting, LLC. roberto@palizaconsulting.com

Paliza Consulting, LLC. roberto@palizaconsulting.com The Midwest Markets Dec 2003 is the target date for MISO-SPP market operation. It is a staged project. Functionality to be provided in the first stage is based on RTM, DAM with no SCUC, FTR market, and Market Power Mitigation. Full SCUC and Ancillary Services market will be added in future stages. Paliza Consulting, LLC. roberto@palizaconsulting.com

Participant Readiness MISO Markets Initial Functionality Day Ahead Market (Based on scheduled hourly quantities and day-ahead hourly prices) SCUC for reliability commitment only Security Constrained Economic Dispatch LMP calculation using generation offers, demand bids, and bilateral transaction schedules. Participant Readiness FTRs (A financial contract that entitles holder to a stream of revenues – or charges - based on the hourly energy price differences across the path) Request processing Simultaneous feasibility testing Approval processing Settlements & Billing P u b l i s h M a r k e t D FUNCTIONAL AREAS SUPPORTING PROCESSES Real-Time Energy Market (Based on actual hourly quantity deviations from day-ahead schedule hourly quantities and real-time prices) LMP calculation using real-time SE values State Estimator Process Communications Plan Define Membership Requirements Manage Customer Registration Manage Customer Relations Manage Training Perform Market Trials Paliza Consulting, LLC. roberto@palizaconsulting.com

Paliza Consulting, LLC. roberto@palizaconsulting.com The Midwest Markets Significant challenges: No experience operating as a pool. Many control areas of all sizes. Allocation of transmission rights in areas where system is overbooked. Coordination with PJM and other neighboring entities. Resolution of WI and MI hold harmless provisions. Aggressive timeline. MISO-SPP merger needs to be completed. Paliza Consulting, LLC. roberto@palizaconsulting.com

Paliza Consulting, LLC. roberto@palizaconsulting.com MISO-PJM-SPP Territory Paliza Consulting, LLC. roberto@palizaconsulting.com

Paliza Consulting, LLC. roberto@palizaconsulting.com A Joint and Common Wholesale Energy Market The goal is to develop a common single wholesale market with a “one-stop shop” that meets the needs of all customers and stakeholders using the electric grid in the 26 states served by them. Paliza Consulting, LLC. roberto@palizaconsulting.com

Paliza Consulting, LLC. roberto@palizaconsulting.com

Paliza Consulting, LLC. roberto@palizaconsulting.com Schedule May 2003 – AEP & DPL in PJM market Oct 2003 – Dominion in PJM market Dec 2003 – ComEd & IP in PJM market Dec 2003 – MISO-SPP market operation October 2004 – MISO-PJM-SPP market is implemented with one-stop shopping Paliza Consulting, LLC. roberto@palizaconsulting.com

Paliza Consulting, LLC. roberto@palizaconsulting.com Current Activities MISO and PJM have chosen to resolve seams without implementing the single market. MISO is also working on its LMP market and the integration of Grid America and TransLink while PJM is focused on the expansion of its markets in AEP & DPL areas. Paliza Consulting, LLC. roberto@palizaconsulting.com

(Transmission Reservation, Energy Market, Settlements & Billing ) Market Model for RTO Coordination Market Participants RTO Specific Internet or VPN Access Common Market Interface RTO Functions (Transmission Reservation, Energy Market, Settlements & Billing ) RTO Portals Planning Scheduling Operations Settlements & Billing RTO Data Repository Data Transport Data Transport Data Transport Regional Entity Regional Entity Regional Entity Control Area ITC Control Area ITC Control Area ITC Paliza Consulting, LLC. roberto@palizaconsulting.com

Implementation of the SMD Markets in the Midwest Proper solution to the coordination between MISO and PJM, and between these RTOs and the Independent Transmission Companies in their footprints, is the key to a successful implementation of the SMD markets in the Midwest. Paliza Consulting, LLC. roberto@palizaconsulting.com