CMSC Rules Changes under Consideration

Market Operations Standing Committee

December 3, 2003

PUBLIC

Proposed Rule Amendments and Issues

• Background • Facility induced CMSC• Reference price for hydroelectric facilities• Negative price offers for imports• Constrained off imports / exports & scheduling

protocols• CMSC for constrained off exports

Background

• Longstanding MSP concern about constrained-off payments– Consultation began with discussion paper, in February

2003

– MSP report presented to IMO Board on July 3

– One conclusion and six recommendations

• Urgent rule for uncontested exports interties– questions about the beneifts to the market from

constrained off export CMSC

Summary of MSP Recommendations

• Conclusion: • not to pursue removal of constrained off payments at this time

• Recommendations requiring rule changes:• No constrained-off CMSC for generators or loads where it is

self-induced• Redefine Hydroelectric historical reference price• No constrained-off CMSC for negative offers• Imports that cannot be scheduled should be removed from

stack so they do not receive CMSC payments.

• Recommendations for working groups:• to look at the Niagara 25 Hz sub-system• to look at transmission planning issues in Ontario

Endorsements from Board

• The IMO Board endorsed the recommendations• authorized IMO to take actions necessary to implement them.

• At the same time Board approved an Urgent Rule amendment

• related to negative offer prices for generators

• Other rules have come to the Technical Panel• proposed changes being sent to December Board

• Working groups under way

“Self-Induced” (Facility Induced)

• Would apply in 4 generic situations, where CMSC is induced by:– dispatch deviations*

– inaccurate telemetry

– quoted ramp rates for dispatchable load below dispatch threshold*

– facility operational constraints lead to limit on dispatch

* Initially proposing only rules for dispatchable load– Because of complexity associated with generators

– will need further stakeholdering

1 2 3 4 5 6 7 8 9 10 11

Scheduled or Actual

Production (MW)

20 MW

29 MW

50 MWMarket Schedule

Dispatch

Actual

CMSC Payment

Dispatch Deviations Can Lead to CMSC

Interval

1 2 3 4 5 6 7 8 9 10 11

Scheduled or Actual

Production (MW)

72 MW

70 MW

100 MW

Market Schedule

Dispatch

Actual

CMSC Payment

Low Ramp Rate Can Lead to CMSC

Interval

Filter off for 1

interval

CMSC Mitigation for hydro

• Existing price screens do not reflect market conditions and opportunity cost as closely as they might. – Hydro price screens should be 30-days (rather than 90

days). Historical price should be replaced by weighted MCP.

• Effect will be to broaden safe harbour for constrained on and narrow it for constrained off payments.

• No hydroelectric screen is perfect. This is better– actual conditions will be discussed with participant

Hydroelectric Reference Price

Price

MarketSchedule

0

MCP

OfferPrice

Contributes tocurrent HRP

Contributes toproposed HRP

Negative Price Offers for Imports

• Issue:– Potentially large CMSC without efficiency rationale

• If 50 MW constrained off at -$2000 offer & zonal price $100

CMSC = [50 * (100 -(-$2000))] = $105,000 per hour.• Compared with energy payment if scheduled

Energy Payment = 50 * $100 = $5000 per hour

• Rationale for Recommendation:– If payment of zonal price is sufficient for producing

energy, it should be sufficient for not producing.• Large negative prices are not indicative of costs incurred

Negative Price Offers - Proposal

• Proposed rule to limit CMSC payments to imports – when offer prices are below zero.

• CMSC calculated assuming a lower price limit– limit is zero $/MWh

• unless zonal price is less than zero, then limit is zonal price

– for fairness / symmetry, applies to positive and negative CMSC, constrained on and constrained off situations

• Interim application: after-the-fact adjustment– for subset: positive CMSC, > 1 MW constrained off

• Can monitor if future conditions change• if reduced CMSC does not cover constrained off costs

Negative Price Offers - Examples

Price$/MWh

0

ZonalPrice

OfferPrice

Proposed CMSC

Applied Limit

Case 1:Zonal Price > 0

Generic Case: Import Constrained off from 50 MW (MS) to 0 MW

Proposed CMSC not

paid

Negative Price Offers - Examples

ZonalPrice

Zonal Price = Applied limitProposed CMSC = $0

Generic Case: Import Constrained off from 50 MW (MS) to 0 MW

Price$/MWh

Case 2

0

Case 2:Zonal Price < 0

Applied Limit

CMSC not paid

Negative Price Offers - Examples

Generic Case: Import Constrained off from 50 MW (MS) to 0 MW

OfferPriceCMSC < 0

No Change

Potential Limit, below offer;

no changeIOG will be positiveIOG + CMSC ~ zero

Price$/MWh

0

Case 3:Zonal Price < Offer Price< 0

Constrained Off Imports / Exports - Current Procedure

• After 2 hour ahead IMO pre-dispatch– IMO notifies NYISO of successful constrained

schedule imports and exports

• NYISO applies these as upper limits – in their hour ahead market.

• Going into 1 hour ahead IMO pre-dispatch – IMO applies limit for the constrained run only

– allows the unconstrained market schedule to float

• Could be further adjustments – for failures during checkout or new TLRs

Proposed Limits on Schedules

• Proposed rules to recognize such limits– generic: possible changes with New York or others

• Planned implementation for New York– CS1 CS2 [ CS = constrained predispatch schedule]

• Same as current procedure

• 2 hr ahead constrained pre-dispatch is limit on 1 hour ahead

– MS1 max (MS2, CS2) [ MS = predispatch market schedule]

• 1 hour ahead unconstrained market schedule is limited

– physical limit: 2 hour ahead constrained value

– economic limit: 2 hour ahead market schedule

• ensures CMSC for congestion management of physically feasible schedules

Limits on Schedules with NYISO - Examples

2 Hour Ahead 1 Hour Ahead *

CS2 MS2 CS1 Limit Old MS1Limit New MS1LimitCase 1: Offer Limit = 100

0 0 0 100 0100 100 100 100 100100 100 0 100 100100 0 100 100 100

0 100 0 100 100

Case 2: Offer Limit = 2000 0 0 200 0

100 100 100 200 100Etc.

* Old / New MS1 Limit relevant when 1 hr Ahead predispatch energy price increases, potentially increasing market schedule

Implications of Scheduling Limits

• Constrained schedules not affected • since these are already limited

• May be no impact on market schedule and CMSC– if either CS2 or MS2 = offer limit

– if 1 hr ahead energy price 2 hr ahead price

• Or no negative payment impact for import / export– if offer price > 0 real time zonal price

• negative CMSC case

• schedule and CMSC change, but IOG and CMSC offset

– similar implication for exports • except no IOG, so may be net reduction in negative CMSC

25-Hz Subsystem

• Inefficiency of 25 Hz subsystem a longstanding issue. Time to resolve it

• CMSC payments reduce incentive to look for solutions; create theoretical potential for gaming

– The IMO should lead a working group including Stelco, Hydro One and OPG to resolve this issue in the best possible fashion. If at the end of six months there is no resolution ... the IMO Board ... should then consider alternatives, including the possible elimination of both constrained off and constrained on CMSC payments to generation on the Niagara 25 Hz system.

Transmission Planning

• IMO, Hydro One, other transmitters and OEB should work together to develop MOU that – sets out appropriate roles /accountabilities in facilitating

transmission planning and approval of projects aimed at enhancing efficiency in a competitive market

– identifies any changes to market rules, statutory authorities and resources necessary to allow appropriate planning processes to take place

• Report to respective Boards by end of December– Followed by market participant comment

• Can consider outage planning & coordination in this working group, if appropriate

Constrained off Export Payments - Background

• When MR-00243 developed to address uncontested export interties, questions raised:

• The purpose of constrained off payments to exports; and

• The benefits of these payments to the IMO administered market

• in light of the Ontario spot market risk of high CMSC payments

• where bid prices may be high

– whether based on high replacement costs or “strategic bid”

Initial View

• Ontario benefits from exports– pay a component of transmission costs (Tariff)

– generators receive additional energy payments

• But there are issues related to– whether there is similar treatment in other markets

– may introduce inefficiencies across markets

– local market power mitigation process may not control risks

Updated View

• Traders say the CMSC is only mechanism for hedging export risk– where (financially) committed for replacement costs

and there is a risk of scarcity pricing in the other market

• Could likely lead to reduced exporter activity and liquidity in IMO market both import / export

• Residual issue– there are circumstances where strategic bid prices lead

to CMSC compensation which exceeds the risk in the destination market

Options for Residual Issue

• Status Quo – Accept the implied “over-payment”

• Cap the payments– either a price limit or limit on number of hours of

payment

• Allow a case by case review– allow exporter to receive / keep CMSC equivalent to

risk or cost