1. Frontier Economics, Inc. Cambridge, Massachusetts
Boston London Melbourne
Project Stanley - July 20th Review Meeting Initial market analysis Privileged and Confidential Communication with Counsel
Frontier Economics, Inc.
Cambridge, Massachusetts

2. Outline of presentation
Market power in the Power Pool of Alberta
Sample transaction analysis
Examples from other hours
Transaction profitability
Initial estimates of impacts on prices
Preliminary conclusions
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3. Structure of the Alberta power market
Three main utilities were functionally unbundled during restructuring but have remained contractually integrated
“Legislated hedges” based on regulated rates determine actual prices paid by customers for most power - hedge out variation in Pool prices for most final sales
Historically the Pool price has been a ‘virtual’ transfer price between gencos and distcos - little actual volume sold at this price
Demand
Supply MW
$/MWh
Power Pool of AB
ATCO
EPCOR
IPPs
Imports
TAU
Enmax
Other
Gencos/importers
Discos
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4. Relevant aspects of the Pool design
Ex post design - binding settlement prices and quantities are set in real-time during dispatch
Clearing second-price auction
Prices are set on a 5 minute basis - hourly Pool price is an average
Bids are submitted day ahead - quantities can be re-declared (on a limited basis) although prices cannot
Pool releases estimated prices (and sensitivities day ahead) to all participants MW
MWh
Settlement supply curve
Day ahead supply curve
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5. Exercising market power in a clearing pool
Trader can seek to increase prices by bidding up prices in the Pool or withholding capacity
Profitable if the increase in Pool price over marginal cost is greater than the lost quantity
Price-quantity relationship for each trader described by a “reaction function”
Reaction function is steep when supply is highly inelastic or when there are few other sellers
Profitability increased if a trader has other infra-marginal capacity offered to market
MWh
Reaction function P’ P’ MC Q’ Q MW
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6. Re-declarations as a search strategy
Assume all variation is in demand (supply is constant)
If demand is high, bidding in small block (e.g. 50 MW) may set price high
But if demand is low, then would lose opportunity to sell MW at lower (but still profitable) price
Re-declaration of blocks to price-taking when not accepted by Pool allows bidder to “search” for periods in which withholding would be profitable with low opportunity costs
Final block
Low demand outcome
$/MWh
High demand outcome
Supply curve incl. withholding MW
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7. Alberta supply curve illustrates potential for exercising market power
Large “step function” between coal and gas plant variable costs and gas and combustion turbine variable costs - significant ability to bid up or withhold
Little flexible CT capacity - supply curve turns nearly vertical > 7400 MW
High levels of concentration in generation:
TAU - ~ 4100 MW
ATCO - ~ 1675 MW
EPCOR - ~ 1639 MW
Imports - ~ 950 MW
IPPs and munis- ~ 1300 MW
1999 sample supply curve - availability unadjusted
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8. Illustrative transaction - June 18th HE16
Pool price set at $998/MWh from Enron bid
Very tight supply-demand balance - only 56 MW shift in day ahead supply will increase price from $80/MWh to $500/MWh
Substantial contraction in supply at $0/MWh and at $3-5/MWh (TAU or EPCOR coal most likely) as well
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9. Effect of re-declarations on Pool price
ENR bid
Supplemental offers
??? bid
Base and coal bid withdrawals
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10. Many high price hours not associated with E/PX transactions
Other hours
Hourly pool prices: June 1st - Sept 30th 1999
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11. High price hour with no E/PWX transaction: August 30th HE14
PWX bid
Powerex made 414 MW re-declaration which pegged Pool price at $998/MWh
Other substantial withdrawals as well from ATCO or EPCOR gas units?
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12. An unsuccessful transaction: June 7th HE15
Non ENR bid
PWX offered option on 125 MW at PP with $400/MWh cap
Bid into Power Pool at $740/MWh - not in merit. Pool cleared at $85.1/MWh over hour with demand at 6164 MW (average settlement load)
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13. What would prices have been otherwise?
True counterfactual would require re-dispatch of all bids - not yet estimated
Can approximate simple ‘but for’ price by a shift in supply curve
ENR/PWX transactions eliminated zero-price bids – will restore these bids to estimate ‘but for’ price
Generally, the steeper the bid stack at the actual Pool Price, the greater the impact of these transactions P P P’
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14. Assumptions of price impact analysis
Initial price impacts model assumes:
price will be set by next bid after removal of ENR-PWX transaction bid - may be another ENR bid
all other bids stay the same - in reality, many players have been using withholding and re- declaration strategies
In most hours, ENR strategy likely would not have been possible without other withholding by AB gens and/or PWX
ENR- PWX bid
Price $/MWh
Other ENR bid P’
P’’
MW offered
Withholding by other bidders
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15. Estimated impact of increased prices
Higher prices will be detrimental to any purchasers from the Pool
In reality, most volume is covered by legislated hedges or commercial contracts
Assume 85% total cover in example
Will need to calculate exact UOA
Impact estimated as the increase in price due to transactions over the affected volume traded in the Pool
On average, trades appear to have increased prices by over $300/MWh
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16. Who benefited from the transactions?
Direct benefit to ENR in most hours – received Pool price minus settlement price with PWX
No direct benefit to PWX - lost opportunity
PWX indirect benefit – increase in Pool price on other sales
ENR had an ‘independent business reason’ to enter into profitable transactions
Indirect benefits (higher price on other volumes) larger than direct benefits, but not by much
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17. Conclusions - Transaction structure
Given small magnitudes of MW - transactions had little possibility of success except in hours when supply-demand balance was already very tight
Transactions (and attempts) made in hours when demand was > MW, so small shifts in net supply could have large impacts on prices
Structure of Pool rules (ex post market with limited re-declarations) is well-suited to this type of strategy. Aided by day ahead information published by Power Pool of Alberta
Use of withholding and re-declaration strategies by many players to influence prices appear to have been fairly common across the period
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18. Conclusions - Benefits from transactions
ENR benefited (on average) from transactions with PWX directly, and by leveraging higher Pool price on other volumes
PWX lost money (on an economic basis) on sales to ENR, but benefited on leveraging higher Pool prices across other MW
Sample calculation does not show benefits from BC Fort Nelson plant which sells into Power Pool of Alberta - is it hedged?
Based only on PWX intertie volumes from settlement data
Assumes PWX could have achieved same impact on Pool prices through a unilateral bidding strategy - no political restrictions
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19. Conclusions - Impact on Pool prices
Based on a simplified initial analysis, there was an impact on Pool prices:
raised Pool revs by ~ $45 million in 22 hours on total Pool volume
actual financial impact would likely be under $7million after accounting for legislated hedges
Need to model legislated hedge and price impacts more precisely
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