1. PowerGEM Power Grid Engineering & Markets 1 New York Congestion Costs Experience and Plans JMitsche@power-gem.com FERC Offices April 14, 2005 James Mitsche

2. PowerGEM Power Grid Engineering & Markets 2 Meeting Topics Congestion –It’s Nature –Analysis Tools –NYISO Activities NYISO Congestion Analysis –Congestion Measures –Congestion Analysis Approach –Historic Congestion Results –Sensitivity Studies Congestion Planning PowerGEM Observations

3. PowerGEM Power Grid Engineering & Markets 3 Remember Numbers –Average 4 Simultaneous Constraints Every Hour in NY –NY Congestion Impact: 2003 = $85 Million; 2004 = $72 Million Observations from a Planning Perspective –Congestion Occurs at All Load Levels –Most Congestion Impact is Due To Chronic Events, Not Price Spikes –Bottleneck Relief Is Not as Cost Effective as Generally Believed –Analysis of Large Persistent Transmission Constraints is Reasonable

4. PowerGEM Power Grid Engineering & Markets 4 Congestion The Cost of Committing or Running Generating Units Out of Merit Order Caused By Combination of –Insufficient Transmission, Requiring Local More Expensive Supply to Maintain Load/Generation Balance –Generator Characteristics (e.g. min run time, ramp rate, unit MW minimum) Unit Commitment Process Commits/Decommits Units to Minimize BPC, but Increases Congestion

5. PowerGEM Power Grid Engineering & Markets 5 Nature of Congestion Cost Congestion is: Persistent Usually Not Dramatic At All Load Levels Average $0.59 / MW

6. PowerGEM Power Grid Engineering & Markets 6 How Often are There Simultaneous Transmission Constraints? Answer: Almost Always Average for NY 4.25, Max 13 in 2004

7. PowerGEM Power Grid Engineering & Markets 7 Congestion Is an Everyday Thing Bid Production Cost Impact

8. PowerGEM Power Grid Engineering & Markets 8 Congestion Is an Every Hour Thing Bid Production Cost Impact

9. PowerGEM Power Grid Engineering & Markets 9 What Causes Congestion At Shoulder Load ? Unit Commitment Decisions and Restrictions –Unit Minimums –Ramp Rates –Minimum Run Times Generation Outages Transmission Outages Bidding Patterns

10. PowerGEM Power Grid Engineering & Markets 10 Congestion Terms Bid Production Cost –The Total Cost to Serve Demand at the Bid Price (Not Clearing Price) Shadow Price –The Incremental Change in Bid Production Cost for an Incremental Change in Constrained Facility Rating LMP = Shadow Price x Distribution Factor LMP Congestion Component –Difference Between Local and Reference Point LMP (excepting Losses) Distribution Factor –Change in Constraint Flow for a Change at a Location, Relative to a Reference Point Reference Point –Assumed Uncongested Location

11. PowerGEM Power Grid Engineering & Markets 11 Congestion Calculation Tools Shadow Prices Result From Optimization Simulations –Security Constrained Unit Commitment –Security Constrained Economic Dispatch These Tools Minimize Total Bid Production Cost Subject to Energy Balance, Flow Limits, and Other Constraints Payments are Made at the LMP Clearing Price, Not the Bid Price

12. PowerGEM Power Grid Engineering & Markets 12 NYISO Congestion Analysis NYISO has reported historic congestion costs since 2001 Included in NYISO Market Advisor's annual "State of the Market" report Electric System Planning Working Group ("ESPWG") was formed in 2003 to assist in the development of a Comprehensive Planning Process for the NYISO ESPWG efforts have led to a detailed methodology for the analysis of historic congestion costs This process is now included in the NYISO Tariff (Attachment Y)

13. PowerGEM Power Grid Engineering & Markets 13 ESPWG Objectives To Better Understand Congestion Costs & Causes –Define congestion –Analyze causes of congestion –Provide better information for the market –Consider implications for NYISO Comprehensive Planning Process Characterize Historic Congestion –Measures & Metrics –Magnitude –Location Zones Constraints

14. PowerGEM Power Grid Engineering & Markets 14 Congestion Measures Market Impact Measures –Change in BPC –Incremental BPC Impact (Patton Method) Payment Impact Measures –Congestion Payments –Demand and Supply Payments

15. PowerGEM Power Grid Engineering & Markets 15

16. PowerGEM Power Grid Engineering & Markets 16 David Patton’s 2003 NYISO Markets Report Defines Congestion as: – The difference between total congestion payments from loads and payments to generators and imports; plus –Congestion costs collected from physical bilaterals Utilizes a “marginal cost” definition: –“Shadow price” x Power flowing across congested interface Includes both Day-Ahead and Real-Time congestion components Relative, Not Absolute Measure Total for 2003: $688 Million

17. PowerGEM Power Grid Engineering & Markets 17 BPC Congestion Impact and Patton Number Both Numbers are Extreme Cases –BPC Impact Removes All Transmission Constraints (Big Change) –BPC Represents the Maximum Savings Possible –Patton Number is for a Small Incremental Change Only Better Approach –BPC Change for Discrete Grid Improvements or Other “What If” Tests –It is Believed That Both Methods Should Converge When Looking at Discrete Situations

18. PowerGEM Power Grid Engineering & Markets 18 Comparison of 2004 Totals By Different Metrics, Metric2004 Total $ Millions Positive MeansNegative MeansInterpretation of Actual 2004 Result BPC Change$ 71.3 Market InefficiencyNot PossibleMaximum that Can be Saved (Not Shifted) from Eliminating Congestion Demand Payments After TCC Hedging - $ 181.2 Congestion Increased Energy Bills Congestion Decreased Energy Bills NY State as a Whole Benefited from Congestion (Viewed Differently at Zonal Level) Supply Payments After TCC Hedging - $ 181.2 Suppliers Benefited from Congestion Suppliers Were Paid Less Because of Congestion NY Generators as a Whole Were Hurt by Congestion (Viewed Differently at Zonal Level) Unhedged Congestion Payments $ 316.0 Congestion Increased this Component of Total Energy Payments Congestion Decreased this Component of Total Energy Payments Congestion Was about 3% of Total NY State Energy Payments

19. PowerGEM Power Grid Engineering & Markets 19 Congestion Reporting Posting (www.NYISO.com) Total and Zonal Congestion Metrics Congestion Payments By Constraint

20. PowerGEM Power Grid Engineering & Markets 20 Metrics Calculated Using PROBE Software PROBE (P o R tfolio O wnership B id E valuation ) Software –A “Study Mode” for the NYISO SCUC –Day Ahead Market Only –Driven by Same Data as the SCUC Bids (real and virtual, load and generation), Hourly Network Models, Business Rules, TCC –Market Optimization All Markets (Generation, Price Capped Load, Virtual Load & Generation, Imports, Exports, Wheels, Ancillary Service) Full Security Constrained Unit Commitment and Dispatch Includes Mitigation Produces Same Hourly Results as SCUC (LMP’s, dispatch, flows, etc.) + Insights –2 Modes SCUC Viewer Simulation Used Since January 2002 NYISO Market Monitoring & Performance Unit Uses Routinely Used for Daily PJM Market Advice and Economic Planning

21. PowerGEM Power Grid Engineering & Markets 21 Simulation Tool PROBE Hourly Network Models (24) Generator Bids Virtual Load & Gen Bids Fixed Load & Price Capped Load Bids PAR Settings Imports & Export Bids Unit Characteristics (Status, Min Up & Down Time, Ramp Rates) Monitored Branches, Interfaces Limits, Contingencies Zonal Factors TCC Contracts Daily Security Constrained Unit Commitment Daily Security Constrained Dispatch Energy & Congestion $ for All Bid Types Generators Fixed Load Price Capped Load Virtuals Imports & Exports Shadow Prices & LMP’s Branch Flows Marginal Bids Congestion Impact on Bidders Excel Spreadsheets NYISO Supplied Daily Relatively Static or Derived Data User Controls Ramp Rate Handling Bids to Optimize PAR Handling

22. PowerGEM Power Grid Engineering & Markets 22 Important Assumptions The Congestion Impact Calculation is the Difference of the “As Given” Network and a Totally Unconstrained System. Removing All Constraints is Not Truly Practical, but Quantifies the Maximum Possible Savings Bids are Assumed to Be Mitigated and Unchanged for All Calculations Bilateral Market Hedging is Not Included TCC Hedging Attributed Totally to Load. No Inclusion of TCC Auction Cost Virtual Load, Virtual Generation, and Price Capped Load Assumed to be Fixed MWHr in the Unconstrained Case ($ Payments Change) No Adjustment for “Unusual Events” PAR’s Fixed at SCUC Supplied Setting

23. PowerGEM Power Grid Engineering & Markets 23 SCUC – PROBE Results Comparison Conclusion: Overall Revenue and Bid Production Cost is Being Reproduced by PROBE With Acceptable Precision Note: Sept. 22 Imports were very small (5% of Gen+import Revenue); a small SCUC/PROBE difference results in a larger than normal % difference. All dates in 2003

24. PowerGEM Power Grid Engineering & Markets 24 2003 & 2004 Summary

25. PowerGEM Power Grid Engineering & Markets 25 2003 & 2004 Summary Not all Constraints Shown. 95% of 2003, 90% 0f 2004

26. PowerGEM Power Grid Engineering & Markets 26 2003 Totals + Number Means Congestion Increases Supplier Production Cost + Number Means Congestion Increases Load Cost - Number Means Congestion Decreases Load Payments Negative Number Means Gen Payments Congestion Hurt Gens

27. PowerGEM Power Grid Engineering & Markets 27 2003 Totals Unhedged Congestion Impact by Constraint (Price Increasing Impact only)

28. PowerGEM Power Grid Engineering & Markets 28 2004 Totals + Number Means Congestion Increases Supplier Production Cost + Number Means Congestion Increases Load Cost - Number Means Congestion Decreases Load Payments Negative Number Means Gen Payments Congestion Hurt Gens

29. PowerGEM Power Grid Engineering & Markets 29 2004 Totals Unhedged Congestion Impact by Constraint

30. PowerGEM Power Grid Engineering & Markets 30 Congestion Impact By Day

31. PowerGEM Power Grid Engineering & Markets 31 Observations 2004 Congestion Impact Not Dramatically Different than 2003, but is Lower After a Congested January, Summer 2004 Congestion was Lower then 2003 The Upstate/Imports to Zone J and K Congestion Impact Divide Continues Individual Constraints 2003 vs 2004 –Consistent Dunwoodie – Shore Rd 345 Rainey – Vernon 138 kV –Up Dunwoodie – Rainey 345 Pleasant Valley – Leeds 345 kV Sprainbrook – 49 th Street –Down Central East Interface

32. PowerGEM Power Grid Engineering & Markets 32 “Release Constraints in Sequence” Test Assumes No Network Impedance or Connection Change

33. PowerGEM Power Grid Engineering & Markets 33 Economic Planning Example Using PROBE May 2004 Dunwoodie – Shore Rd. 345 kV was 25% of Congestion Payments 2 Tests –10% Increase in Dunwoodie – Shore Road Rating –600 MW added in Zone K @ $50/MW

34. PowerGEM Power Grid Engineering & Markets 34 Handling “Unusual Days” Approach 1.Use a Statistical Approach to Identify Days with an Unusual Amount of Congestion Impact 2.Define Congestion Impact Using the Primary Congestion Measure (Constrained – Unconstrained) Mitigated Bid Production Cost 3.Analyze and Characterize Why the Days Were Unusual 4.Report Congestion Metrics Separately for “Unusual Days”

35. PowerGEM Power Grid Engineering & Markets 35 Unusual Days Part of the Preliminary 2003 Congestion Metrics

36. PowerGEM Power Grid Engineering & Markets 36 Economic Planning Thoughts Using PROBE Everyone Agrees “What if” Studies are Worthwhile Study Approach Questions Analyze All Hours or a Sample? Take Out “Unusual Events” in the Base Calculation? Solution to Each Problem or Multiple Problems ? What about the “Just Submerged” Constraints ?

37. PowerGEM Power Grid Engineering & Markets 37 Economic Planning Thoughts Using PROBE “Cost Effectiveness” Measured by the Change in Bid Production Cost with the Upgrade (Economic Efficiency Improvement) Whole State Net Benefit Viewpoint 10 Year Planning Horizon “Benefit” is Present Worth of Production Cost Improvement Net of –Cost of the Transmission Upgrade –Cost of the Upgrade Outage

38. PowerGEM Power Grid Engineering & Markets 38 Chronic Congestion May Be Viewed As: –All Monitored Elements that contributed to the top X% of unhedged congestion payments in 2004

39. PowerGEM Power Grid Engineering & Markets 39 PowerGEM Observations More Comprehensive Calculation Significantly Lowers Congestion Impacts –Cost Shifting Rather than Savings –Effect on Energy Markets –Another Constraint is Usually in Hiding Studies to Date Have Not Shown Instances Where Transmission Development Lowers Cost Enough to Justify the Investment on a Purely Economic Basis Reliability Upgrades Affect Congestion Diligence is Justified –Persistent High Impact Constraints –Low Cost Transmission Investments

40. PowerGEM Power Grid Engineering & Markets 40 PowerGEM Observations LMP Based Rewards for Transmission Investment are Weak –LMP’s are Volatile –Congestion is Shifty and Difficult to Predict –Small Changes Can Make a Large Local Difference –Upgrades Remove the Source of Reward –Free Rider Issues LMP’s Are Strong Indicators for Generation Affect on Bid Production Cost is a More Dependable Reward for Transmission Investment

41. PowerGEM Power Grid Engineering & Markets 41 PowerGEM Lessons Learned Congestion is Persistent LMP’s are Volatile Shadow Prices are Even Yet More Volatile Unit Commitment Has a Major Impact on Congestion Location and Price Congestion Cost Measurement Depends on Application Transmission Upgrades Shift Rather than Reduce Cost to Customers Bid Production Cost Change is a More Stable Measure of Upgrade Merits

42. PowerGEM Power Grid Engineering & Markets 42 Remember Numbers –Average 4 Simultaneous Constraints Every Hour in NY –NY Congestion Impact: 2003 = $85 Million; 2004 = $72 Million Observations from a Planning Perspective –Congestion Occurs at All Load Levels –Most Congestion Impact is Due To Chronic Events, Not Price Spikes –Bottleneck Relief Is Not as Cost Effective as Generally Believed –Analysis of Large Persistent Transmission Constraints is Prudent