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Discussion of Inter-RTO Seams Issues

Discussion of Inter-RTO Seams Issues. Presented by: Midwest ISO and NYISO Independent Market Monitor David B. Patton, Ph.D. Potomac Economics October 7, 2013. Introduction. The eastern interconnect is operated by a relatively small number of RTOs and utilities.

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Discussion of Inter-RTO Seams Issues

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  1. Discussion of Inter-RTO Seams Issues Presented by: Midwest ISO and NYISO Independent Market Monitor David B. Patton, Ph.D. Potomac Economics October 7, 2013

  2. Introduction • The eastern interconnect is operated by a relatively small number of RTOs and utilities. • Because power flows over the network governed primarily by the laws of physics, these markets and systems are heavily interdependent, giving rise to “seams issues”. • Substantial work has been done to address these seams issues: • For example, market-to-market coordination between PJM and both MISO and NYISO plays a critical role in managing network congestion efficiently. • However, energy transactions between areas are still scheduled in relatively a relatively unsophisticated manner, contributing to significant inefficiencies. • In the presentation, I discuss two opportunities for improvement: • Coordinated interchange; and • Remedying a significant error in PJM and MISO’s current interface prices.

  3. The Need for Coordinated Interchange • The benefits of fully utilizing the interfaces between areas is intuitive. • Differences in prices between the markets indicates the potential for savings as inter-regional trades allow lower cost resources in one area to displace higher-cost resources in the other area. • Under the current markets, participants’ ability to capture these benefits by effectively arbitraging the price differences is undermined by: • They must submit transactions 30 minutes or more in advance of when the power will flow. • The lack of coordination among participants, which leads to substantial errors in the aggregate quantities of transactions. • These barriers to efficient trading also cause the RTO’s to commit more resources for reliability because they cannot trust that the interchange will adjust as needed if conditions become tight – raising uplift in all RTO areas. • Current scheduling practices are not efficient – the interregional price differences are typically larger than $10 per MWh. - 3 -

  4. The Need for Coordinated Interchange • Inefficiencies occur in almost all hours, but the economic and reliability impacts of poor interchange can be extremely large during tight conditions. • A good example of this occurred on July 6, 2012 in MISO: • In early afternoon, net imports from PJM fell more than 1,500 MW because prices when the transactions were scheduled (30-45 minutes early) were higher in PJM than in MISO. • This drop in net imports was the single most significant factor that drove MISO into to a deep reserve shortage and caused energy prices to rise to $2400 per MWh. • MISO committed more than 1.5 GW for reliability. • The price spike in MISO led to a sharp 3 GW swing in net imports back into MISO from PJM. • This swing in net imports caused prices in MISO to collapse and resulted in MISO making large uplift payments to resources committed for reliability. • Later in the afternoon, this cycle repeated and MISO experienced another reserve shortage and prices peaking at $1500 per MWh. • These shortages in July raised average prices by almost 20 percent for the month. - 4 -

  5. What is Coordinated Interchange? • Coordinated interchange can be accomplished in a number of ways. • The most popular proposal is to allow intra-hour transactions that would be scheduled for a 5 or 15 minute period when the RTO’s forecast a price difference larger than the participant’s offer price. • This proposal and others that have been discussed would capture similar benefits because they would all: • Eliminate the current scheduling lag of 30 minutes to 1 hour; • Coordinate the quantity of the interchange adjustments to eliminate the over-reactions and under-reactions to the price differences. • PJM has talked about implementing such improvements on both its seam with New York ISO and MISO, but it is not a high priority with the stakeholders. - 5 -

  6. Benefits of Coordinated Interchange • A few years ago, we estimated the efficiency savings of coordinating interchange at these interfaces and others around Lake Erie. • In total, we found $116 million in production cost savings from optimizing the interchange over the NYISO and MISO interfaces with PJM. • These benefits are evenly divided between the two interfaces. • We believe these values to be understated because the study period of November 2008 to October 2009 was a period of low load and fuel prices, which decreases the economic savings of optimizing the interchange. • Importantly, the short-term impacts on prices tend to be much larger than production cost savings. • In the last study, we found that the savings for consumers were 5 times larger than the production cost savings. • Based on these savings and the reduced need to commit resources for reliability (and associated uplift costs), we believe coordinated interchange should be a high priority. - 6 -

  7. Interface Pricing Error • We continue to be very concerned that MISO and PJM’s interface prices contain a substantial error when a market-to-market constraint is binding. • The error arises when a M2M constraint is binding in both the MISO and PJM markets. In this case, when a transaction is scheduled that involves both RTOs, the transaction will be over-paid or over-charged because it settles with both RTOs. • The problem is that the payment by the monitoring RTO fully and efficiently compensates the transaction for the flow relief it provides. • Therefore, every dollar paid by the non-monitoring RTO for the same relief is redundant with the payment made by the monitoring RTO. • There is no justification for the non-monitoring RTO to make an additional payment or impose an additional charge on the transaction. • The non-monitoring RTO has no funding source for these payments, so these costs will ultimately be uplifted to the non-monitoring RTO’s customers as: • Negative excess congestion fund (ECF) in MISO, balancing congestion in PJM, or • FTR underfunding (MISO and PJM). • We estimated that this resulted in inflated payments by PJM exceeding $33 million, which only includes MISO constraints and no other external constraints. • The larger costs of this error are inefficient distortion of the dispatch it causes when transactions are scheduled inefficiently. - 7 -

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