The Midwest ISO Market Design Roberto F Paliza

The Midwest ISO Market Design Roberto F. Paliza , Ph. D. Federal Energy Regulatory Commission Electricity Market Design and Structure Conference January 22 -23, 2002

Topics • • The Midwest ISO The Midwest Market Design Process Design Framework Common Design Elements Unique Design Features Implementation Challenges 1

Midwest ISO Statistics • 25 Transmission-Owning Members • 35 Non-Transmission Owning Members • MISO Service Territory – 81, 000 MW Peak Load – 74, 000 miles of transmission – More than 8 million customers – 15 states and 1 Canadian province – 3 states with retail access • Detroit ITC approved under Appendix I and Trans. Link awaiting approval 2

Midwest ISO Operations • Day-1 – – – – Security coordination Outage coordination Tariff administration Congestion management Energy imbalance Billing and settlements Market monitoring • Day-2 – Implementation of a single market in the Midwest – LMP and Financial Transmission Rights 3

Proposed Midwest Market • Includes MISO, SPP, and Alliance • Trans. Cos: Detroit ITC, Trans. Link, …. . • Midwest Market Statistics – Over 200, 000 MW of generation capacity – Includes 23 states and 1 Canadian province – 6 states with retail access – Approximately 200, 000 miles of transmission – Serving over 30 million customers – The largest market in the US 4

Operational Characteristics • Electrically intertwined systems with heavy interdependencies in some regions • Covers MAIN, MAPP, SPP and most of ECAR reliability councils and associated reserve sharing agreements • Over 40 control areas responsible for the dispatch and regulation of their systems • Currently there are four security coordinators and several tariff administrators • Coordination issues will be addressed by the implementation of one RTO in the Midwest and a single market 5

Proposed Midwest Market 6

Market Design Process • Stakeholder driven process • Focused group composed of stakeholders and staff responsible for the design • High level design is completed • Working on the detailed design • Implementation alternatives are being studied in parallel with the design • Staged approach to achieve ultimate goal 7

MISO Design Framework • Bid-based security constrained dispatch • Locational Marginal Pricing for imbalances and congestion • Financial transmission rights based on PTP and FGR (options and obligations) • Real-time and day-ahead markets • Works within a multi-control area structure – Existing reserves groups will transition to a MISO-wide market – Existing control area regulation will transition to a MISO-wide market 8

MISO Market Operations Market Inputs Generator Bids Load Bids Bilateral Schedules Self Schedules RTO Functions Market Support Cover Imbalances Ensure Reliability Bid based Security. Constrained Dispatch Calculate Nodal Prices RTO Market Settlements At Nodal Prices Real-Time Balancing Buy and Sell In Spot Market Congestion Redispatch Buy Through Congestion Transmission Rights Hedge Congestion $$$ Market-Driven Decisions 9

Common Design Elements • The MISO Market Design includes the core elements of the emerging standard market design: 10

Common Design Elements 11

Common Design Elements 12

Transmission Rights Allocation • Initial allocation of transmission rights – Grandfathered rights (non-OATT) have the choice to convert or keep them as they are until expiration – Existing OATT contracts will be converted to PTP • Transition to a full auction of transmission rights after a transition period • Transition period needs to be determined • Develop methodology to ensure that allocated transmission rights are simultaneously feasible 13

Types of Transmission Rights • Financial Transmission rights are defined in terms of Point-to-Point (PTP) and Flowgate (FGR) rights: – PTP and FGR can be options as well as obligations. – Flowgate is a transmission element or a set of elements which represent transmission operational constraints (thermal, voltage, or stability) – Flowgates (FGRs) can be defined as having: – Monitored elements only – Monitored and contingency elements 14

Obligations vs Options • Transmission rights can be options or obligations. Settlement of these financial rights depend on the direction of congestion. For example for A-B right: A B $20 $70 $20 Obligation: Holder receives $50 Holder pays $50 _______________________ Option: Holder receives $50 Holder receives/pays $0 15

Flowgate Right Characteristics • FGRs as proposed for implementation by MISO have the following characteristics: – FGRs can be options or obligations – The flowgate right holder is hedged for congestion only on the specified constraint – The flowgate right holder decides how many flowgate rights will be necessary to hedge its transactions 16

Multi-Control Area Structure • The Midwest region includes over 40 control areas in which a variety of important functions are performed by the control area operator • The design accommodates existing control areas (does not require CA consolidation) • The design includes a phase-in approach to move towards centrally coordinated markets • Dispatch is centrally coordinated first, followed by reserves and regulation 17

18

Operating Reserves • The Midwest includes portions of four existing reserve sharing agreements: ECAR, MAIN, MAPP, and SPP • These agreements are similar but each has its own characteristics and implementation • During a transition period, MISO will coordinate existing reserve groups and reserve activation • After the transition period, a MISO-wide reserves market will be established • To properly maintain reliability in the Midwest region, reserve zones may have to be defined 19

Resource Adequacy • Alternatives for assuring long-term resource adequacy – ICAP markets – Pricing mechanism – Load shedding responsibility • Preliminary assessment of above methods led to primary reliance on the pricing mechanism (supported by load shedding rules) but more investigation is required – High price/bid caps – Demand is price-sensitive 20

Resource Adequacy • Ensure short-term resource adequacy – All generation is “visible” to the MISO – Price will rise until generation meets load • MISO does not propose that control areas share responsibility for load shedding in all circumstances • If load shedding is required as a result of inadequate day-ahead resource commitment, distribution companies that lack resources to meet their loads will bear more of the load shedding 21

Market Power Mitigation • Market power concerns in load pockets have been brought to the attention of the MISO • These market power concerns will be addressed as part of the Market Design by the Independent Market Monitor (IMM), MISO, and stakeholders • Proposed mitigation mechanisms will be filed with FERC and, if approved, incorporated in the implementation of the congestion management system • Any exercise of market power in the Midwest will be monitored and identified on an ongoing basis by the IMM 22

MISO-Trans. Co Coordination • MISO-Trans. Co coordination process is under development: – Avoid the creation of internal seams (single market) – Provide appropriate incentives for transmission expansion • Some of the Trans. Co functions may include: – Transmission ownership and maintenance – Physical operation of transmission system – Work with MISO on transmission planning – Transmission expansion – Collect payments for transmission service provided under MISO tariff 23

Inter-RTO Coordination • The establishment of large RTOs employing real-time redispatch across broad regions will require changes in interregional coordination mechanisms • FERC Standard Market Design will reduce seams issues but will not eliminate them • In addition to the standard market design, there is a need for coordination mechanisms that would address issues such as: – Impact of loop flow and compensation – Impact of real-time redispatch – Transmission rights across RTO boundaries • MISO-PJM Letter of Intent 24

Implementation Challenges • The scale of MISO operations requires a careful evaluation of implementation alternatives • Combination with SPP and Alliance will help greatly in resolving seams issues in the Midwest • The key challenge for MISO is to successfully implement the “Single Market” in the Midwest: • Establishment of real-time and day-ahead markets • Allocation of financial transmission rights • Coordination of these markets by MISO • Implementation risks and cost will be managed by staging the implementation and establishing cooperating agreements with other RTOs 25

Questions/Comments • cmwg@lists. midwestiso. org • Rpaliza@midwestiso. org 26