Convergence Bidding Issues Eric Hildebrandt, Ph.D. CAISO Department of Market Monitoring CPUC Convergence Bidding Workshop July 26, 2010

Average hourly LMPs: PG&E LAP, Q Slide 2 Virtual demand profitable Virtual supply profitable

Potential benefits of LSE participation in convergence bidding.  Virtual demand  Can commit generation unit in DA needed to meet real-time demand  e.g. extra generation during specific peak hours.  Virtual supply  Can displace physical supply if market participant believes that less physical supply will be needed in real time  e.g. due to extra generation from unscheduled generation in off-peak  Can also prevent virtual demand by generators from undermining local market power mitigation procedures.  In these cases, convergence bidding can reduce the total cost of meeting overall demand and should be profitable (on average). Slide 3

Safeguards against potential detrimental use of virtual bidding  Position limits  CRR “clawback” rule  Ability to temporarily suspend virtual bidding  Referral to FERC for market manipulation  Deep and liquid market for virtual bidding, including participation by LSE’s. Slide 4

Illustrative Examples:  Base Case (with no virtual bids)  Potential impact of virtual demand bids.  Potential impact with addition of relatively high priced virtual supply bids (e.g. traders).  Potential impact with addition of competitively priced virtual supply bids (e.g. LSEs). Based on examples originally presented at August 10, 2007 MSC/Stakeholder meeting. Whitepaper available at: Virtual Bidding and Local Market Power Mitigation

Base Case Example: Generation within non-competitive load pocket)

Competitive Constraints run of pre-IFM local market power mitigation procedures

All Constraints run of pre-IFM local market power mitigation procedures

Mitigation of bids based on pre-IFM local market power mitigation procedures.

Base Case (no virtual demand or supply): Final IFM market results

Potential Impact of Virtual Demand Bids by Generators  Generator’s can be expected to submit virtual demand bids to “hedge” risk of outages in real time.  Local market power mitigation procedures may be undermined if virtual demand not offset by competitively priced virtual supply.  Although generator may loose on virtual demand bid, this may be profitable due to increase in revenues from DA sales from generation portfolio  This problem may be mitigated by competitively priced virtual supply bids from LSEs.

Example of potential impact of virtual demand on day-ahead market (without virtual supply)

Example of potential impact with relatively high priced virtual supply bids (e.g. by traders).

Example of potential impact with competitively priced virtual supply bids (e.g. LSE).

Other issues  CPUC reporting and review  Virtual bidding can provide “external” benefits by mitigating supplier market power (which can lower overall costs and risks).  Direct profits/losses from virtual bidding can be tracked/reported on frequent basis (even daily).  Portfolio level limits and/or review triggers could be established to control/review losses.  Unregulated affiliate issues  DMM will monitor for indications of any potential use of virtual bidding by regulated entities to increase CRR revenues by unregulated affiliates.  CRR activity by regulated entities cannot be used to increase profitability of virtual bidding by unregulated affiliates. Slide 15