Robert G. Ethier, Ph.D.

Director, Market Monitoring

December 17, 2003

Proposed Regulation Market Changes

ISO New EnglandMarket Monitoring

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OUTLINE

• Overview

• Background

• The Problem With The Current Regulation Market

• Data

• The Proposed Solution Under The Current Market Structure

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OVERVIEW

• Current Regulation market creates a Day-Ahead floor price paid to all providers

• No link between those who set the Regulation Clearing Price (RCP) and those who provide Regulation

• Large RT Regulation providers have no incentive to be included in RCP determination

• Result: Inefficiently high RCPs• Proposed Solution: Limit self-schedules after RCP determination

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BACKGROUND

• RCP’s are calculated once, prior to the dispatch day• RCP’s are calculated by Regulation Optimizer (REGO)• A RCP is calculated for each hour of the dispatch day• REGO selects the least expensive committed resources required to meet the

Regulation requirements• Hourly RCP is the sum of the submitted Regulation offer plus applicable

Opportunity Costs of the most expensive unit required• RCP based on offers and self-schedules submitted during Day-Ahead and

Re-Offer period

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• RCP is paid to all RT providers of Regulation

• Regulation offers capped at $100/Reg-hr

• Additional self-schedules for Regulation are allowed until one-half hour prior to

the dispatch hour

• In event of excess supply of Regulation, largest providers are selected first,

potentially bumping other in-merit resources

• All units, including self-schedules, are paid the hourly RCP determined prior to the

dispatch day

BACKGROUND (Continued)

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• Note that if a unit with a Regulation offer plus Opportunity Cost exceeding the RCP is selected to provide Regulation in RT, it is paid As-Bid

• There is no link between RT Regulation providers and the units included in RCP setting a day in advance– i.e., all Regulation could be provided by RT self-schedules

that did not clear during the RCP setting process

BACKGROUND (Continued)

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THE PROBLEM WITH REGULATION

• Combination of:

– Regulation floor price (RCP) paid to all providers

– Self-scheduling after the RCP is determined

– Selection of largest Regulation providers in RT

• Results in little incentive for large, inexpensive providers of

Regulation to clear during RCP determination process

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• Why would a large, inexpensive provider want to clear during RCP determination?– This would result in lower RCPs.– This would not improve their chances of being selected for

Regulation in RT• Problem: Regulation market does not incent competitive

offers/self-scheduling by large, low-cost Regulation providers prior to RCP setting.

THE PROBLEM WITH REGULATION (Continued)

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• This results in:

– Higher RCPs

– Large amounts of Regulation self-scheduling in RT

– Frequent displacement of units cleared during REGO Optimization

• These units are willing to provide Regulation at the RCP but are not

selected because of the size of their Regulation range

THE PROBLEM WITH REGULATION (Continued)

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DATA SUGGESTING THE PROBLEM IS REAL

• Five of the six most frequent RT Regulation providers showed substantially more RT Regulation provision than selection during RCP process– From mid-June through early December, these five units were

committed an average of 764 hours in the RCP determination process– During the same time period, they provided Regulation in RT an

average of 2,407 hours– All other significant RT Regulation providers were committed more

often during RCP determination than in RT

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Average Regulation Market Results by MonthMarch 1, 2003 - December 10, 2003

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MW Scheduled in Pool MW Self-Scheduled Average PriceDecember data through 12/10.

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Regulation - Top 5 Real-Time Average Self Scheduled MW vs Average Offer3/1/2003 - 12/14/2003

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3/1/2003 4/20/2003 6/9/2003 7/29/2003 9/17/2003 11/6/2003

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Average Offer Average SS

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SOLUTION

• Appendix A mitigation authority not the right solution:

– Calculating costs of Regulation provision is subjective

– Some units fail to clear because of Opportunity Costs,

yet self-schedule in RT

– Underlying Regulation market incentives are the

fundamental problem

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SOLUTION (Continued)• Proposed solution is to eliminate self-scheduling of Regulation after RCP

determination

– This will incent low-cost providers to clear in the RCP determination process

– Reduce the number of units that clear for RCP determination but are not

selected in RT

• PJM independently proposed same solution to same recognized problem in

Regulation market

• Other Regulation modifications expected to be part of co-optimized reserves