1. Competitive Constraints/ Protocols 3.19 Presented to CMWG 10/14/2011 Steve Reedy, Manager, CRR

2. Current Structure of section 3.19 2CMWGOctober 14, 2011 AnnualMonthlyDaily Annual Study any constraints proposed by TAC/WMS ~36 Million possible TAC must approve 1 month before Annual Auction September TAC Meeting Board approves changes

3. Current Structure of section 3.19 3CMWGOctober 14, 2011 AnnualMonthlyDaily Monthly Study any constraints that passed annual TAC must approve updates before Monthly Auction i.e. for an October CC change, TAC approves in September

4. Current Structure of section 3.19 4CMWGOctober 14, 2011 AnnualMonthlyDaily Study any constraints that passed annual and that month No TAC approval needed

5. TAC Approval Deadline Causes Problems If approval is not to be “rubber stamp”, we need to build in time for discussion/debate 1 CMWG meeting, 2 WMS meetings, 2 TAC meetings? TAC September 1st TAC August 4th WMS July 13th WMS June 15th CMWG June 14th Analysis complete by June 14 th, Analysis starts May 15 th Difficult to guess as to what constraints will cause congestion next year on May 15 th Very little NOMCR/outage information available on May 15 th 5CMWGOctober 14, 2011

6. Why are CCT results needed before the annual auction? “The competitive constraints will determine which constraints are in SCED step 1 and thus significantly affect the clearing price in real time, thus I need to know that information to place in my pricing model for the next two years of CRRs” –TRUE & FALSE TRUE -“The competitive constraints will determine which constraints are in SCED step 1” FALSE – “The constraints in SCED step 1 significantly affect the clearing price in real time” 6CMWGOctober 14, 2011

7. SCED/CCT decision tree 7CMWGOctober 14, 2011 Does constraint pass CCT? Use mitigated curve -verifiable costs ~marginal costs Is constraint actually competitive? (i.e. no market power exists) DME can exercise market power and use non-marginal cost offer curve DME cannot exercise market power and uses marginal cost offer curve N Y N Y Six of one Half a dozen of another

8. When does CCT status affect prices? The only time a CCT competitive designation affects prices is when a constraint has been designated competitive, but a DME CAN exert local market power. –This is an “N-2” occurrence CCT has failed IMM has failed A good assumption in calculating values for annual auction is that all units offer in at marginal costs. 8CMWGOctober 14, 2011

9. Proposal: Designate Competitive Constraints throughout the year ERCOT proposes competitive status of new constraints to each meeting of WMS; –WMS recommends to TAC –TAC approves –In effect next week –Daily test still done (can toggle status to non-competitive) Annual revisiting of constraints previously determined to be non-competitive 9CMWGOctober 14, 2011

10. Implementation proposal ERCOT submits NPRR to change as previously described/NPRR approved ERCOT will study all constraints that have been active (binding with non-zero shadow price) in SCED. Step 1 : all constraints in history that have been binding in SCED –Recommend competitive status on all to WMS by May meeting –TAC approve as early as June 2012 meeting Step 2 : ERCOT to study all new active constraints that have come up since last WMS meeting and recommend competitive status at each WMS meeting. Step 3 : June of each year ERCOT to restudy all constraints currently designated as non-competitive 10CMWGOctober 14, 2011

11. Problems with Current CCT 1.Current CCT finds Odessa Auto constraint “competitive” This appears to be due to the choice of the “From Bus” of the constraint as the reference bus for the analysis. Using this reference bus causes the algorithm to include many units (including units in Houston and San Antonio) as units that could provide counterflow. –In reality, SCED would not move a unit in Houston to solve an Odessa constraint. I propose that we change CCT such that it uses the same reference bus that SCED uses; a distributed reference bus. Would require a protocol change 11CMWGOctober 14, 2011

12. Problems with CCT 2.CCT included wind units in market share calculation for Odessa constraint Practical experience suggests that wind units would be extremely unlikely to attempt to economically withhold and drive up local prices. As such, perhaps wind units should not be included in market concentration calculations. This would also require an NPRR 12CMWGOctober 14, 2011