Market-to-Market Agreement for Efficient Dispatch Toolkit

1. Market-to-Market Agreement for Efficient Dispatch Toolkit New Business Agenda WECC Seams Issues Subcommittee Meeting Aug. 9-10, 2010 Jim Price CAISO Market & Infrastructure Development

2. Topics for discussion • Role of market-to-market coordination as design feature of Energy Imbalance Service • Eastern ISOs’ “Broader Regional Markets” initiative: 7/15/2010 FERC decision conditionally approved improved coordination among NYISO, PJM, MISO, IESO (Ontario), & ISO-NE “… to reduce uplift costs and lower total system operating costs …”, addressing: • Parallel Flow Visualization • Buy-Through of Congestion • Congestion Management / Market-to-Market Coordination • Interface Pricing Revisions • Interregional Transaction Coordination • Installation and Operation of Michigan/Ontario phase shifters (PARs) • Existing functionality of new CAISO market for external-to-internal market integration • This presentation is only to initiate discussions, and is not a CAISO proposal on specific details at this time.

3. Clear, functional market-to-market coordination needs to be in Energy Imbalance Service design • Historical experience with inter-market seams issues, e.g.: • In January 2008, some exports from NYISO to PJM began to be scheduled as circuitous flows around Lake Erie, exiting NYISO through IESO and MISO before sinking in PJM. 80% of actual flows directly crossed NYISO/PJM border. Circuitous schedules benefited from price differences, while avoiding congested border. • Result: NYISO, PJM, MISO, IESO “Broader Regional Markets” initiative • Under Joint Operating Agreement, PJM and MISO establish Reciprocal Coordinated Flowgates for which they monitor congestion and jointly dispatch their systems to resolve congestion. Disputes on use of “substitute” or “proxy” flowgates led to complaint to FERC over seams issue. • Market-to-market coordination may establish the necessary data sharing needs to support market operation in both markets

4. Eastern ISOs’ “Broader Regional Markets” Initiative For more detail: http://www.nyiso.com/public/webdocs/documents/regulatory/filings/2010/01/NYISO_Rpt_BRM_01_12_10FNL.pdf,and FERC docket ER08-1281 Statements concerning benefits of this initiative are from the NYISO materials and do not result from CAISO analyses.

5. Parallel Flow Visualization • The development of a “parallel flow visualization” tool is designed to: • Enhance the exchange of transmission system information and to assemble the necessary real-time data to perform generation-to-load calculations, • Facilitate the calculation of impacts on regional power flows, and • Make available common and consistent information regarding the sources of power flows and their impacts to all regions. • Observations: • Tool is NERC initiative for generation-to-load flow calculations • Prerequisite for implementing buy-through congestion proposal and congestion management initiative • WECC west-wide model may support similar functionality

6. Buy-Through of Congestion • Charges for congestion and redispatch based on the physical flow of power, unlike the current settlement based only on contract path, and allows choice to curtail instead of paying for redispatch. • Example: Scheduled from Ontario to MISO to PJM would pay for any resulting congestion due to flows through New York. • Provides more accurate price signals for inter-regional trading, • Allows for congestion management cost recovery, and • Provides an economic-based alternative to the existing transmission loading relief (TLR) procedures. • Observations: • NYISO proposed “all or nothing” approach. FERC has asked for more discussion of an “up to” congestion bid to limit cost exposure. • NYISO proposed that congestion risk can be managed in eastern markets through transparency and visibility of congestion costs, financial congestion hedges, day-ahead market bids, and virtual bidding • TLR process will continue to address loop flows caused by entities outside the 4 ISOs & RTOs

7. Congestion Management / Market-to-Market Coordination • Generation assets in neighboring control areas would be made available to address constraints in another region if those generators are the most efficient available. • Increases level of collaboration between system operators in the region. • Potential transmission constraints would be pre-determined and jointly solved through a real-time cost and system analysis. • Intent is to: • More cost effectively utilize the region’s collective assets to address constraints across multiple systems, • Result in lower congestion costs to consumers, and • Provide a more consistent pricing profile across markets. • Observations: • Method includes agreement on a baseline of allowable usage of each others’ transmission networks • Data sharing communicates real-time constraint management costs • Design will depend on analyzing data from Parallel Flow Visualization tool

8. Interface Pricing Revisions • Efficient and compatible interface proxy bus prices will improve the interconnected markets’ ability to efficiently transfer power within the four ISO/RTO regions. • Proposal addresses existing seams between markets that can impede efficient regional power transfers. • Better aligning prices at the interface between markets will: • Provide correct signals to market participants, and • Better reflect the value of moving energy between regions. • Observations: • ISOs/RTOs would need to predict when the PARs will be able to conform power flows to schedules around Lake Erie, and to incorporate the necessary assumptions into day-ahead and hour-ahead markets. • At times when actual and scheduled power flows are consistent, pricing will treat power as flowing consistent with the contract path. • At times when actual power flows do not conform to schedules (when there is loop flow), interface proxy pricing will need to reflect the actual flow, which will not be entirely consistent with the contract path.

9. Interregional Transaction Coordination • Under this phased proposal, the frequency of interchange schedule changes would be reduced from one hour to as little as five minutes. • Currently inter-area transactions are scheduled on an hourly basis. • In addition, reserves and regulation service would be scheduled between regions. Currently, each control area is responsible for securing reserves and regulation from native resources. • This would result in a significant lowering of total system operating costs as transaction schedules would more quickly adjust to market-to-market pricing patterns. Price consistency and transmission utilization also would be improved. • Observations: • Joint Initiatives is taking steps in this direction

10. Installation and Operation of Michigan/Ontario PARs • A complementary solution to the issue of loop flow involves the completion and activation of a set of phase angle regulators (PARs) on the Michigan-Ontario border. • PARs are electrical devices that can enable the redirection of power from one circuit to another. When fully operational, these would be expected to help align the actual power flows with the corresponding level of scheduled transactions. • Operation of the PARs would reduce inadvertent flows that do not match contract paths, to reduce the amount of TLR required to counteract the congestion caused by inadvertent flows. • Observations: • ITC (owner of PARs) asserts PARs benefit four regions as a whole, so costs should be shared. NYISO responds PARs did not result from regional planning and benefit ITC’s customers, so does not accept cost sharing. • WECC has existing Coordinated Operation of Phase Shifters.

11. Existing Functionality of New CAISO Market for External-to-Internal Market Integration

12. Existing functionality of new CAISO market for external-to-internal market integration • Full Network Model for CAISO market includes external network topology. Adding models of external sources and sinks will improve CAISO’s congestion management, ensure appropriate unit commitment, and can create opportunities for market participation by external resources. • Following recent stakeholder process on dynamic transfers, resource-specific dynamic resources will be modeled and priced at own locations. • CAISO is exploring opportunities for using data available from WECC. • With sufficient data to model external facilities and resources, CAISO has the capability to implement alternative methodologies for modeling external areas: • The FNM can model external transmission systems, generators and loads. • CAISO State Estimator observes operating conditions throughout the WECC, and provides the pertinent data to the market systems for maintaining reliability during market operations.

13. Mechanics of CAISO market functionality for external-to-internal market integration • Net Interchange values for external areas would allow modeling of inter-area transactions. • Values can be schedules at the CAISO boundary, and as net or gross schedules at other boundaries between Balancing Authority Areas. • Entities with control of external generation or demand may participate in CAISO markets on a resource-specific basis. As appropriate, scheduling may reflect an aggregation of resources rather than scheduling all resources individually. • External generation or demand may schedule dynamic transfers with or wheelingschedules through the CAISO Balancing Authority Area. • External load and generation patterns in the CAISO’s day-ahead market can be scaled using distribution factors to meet the demand and net-interchange values among external Balancing Authority Areas. • CAISO market optimization does not adjust its values for external generation and load that are not scheduled in CAISO market.

14. Pricing in CAISO markets with modeling of external-to-internal market integration • The CAISO may monitor external transmission constraints, but does not enforce such constraints in the CAISO market. • CAISO enforces operating limits of internal transmission facilities in the day-ahead and real-time markets, scheduling limits on interties with adjacent Balancing Authorities, and operating limits of interties when available data on external sources and sinks allow modeled flows to match actual flows. • Losses within external transmission systems are excluded from CAISO loss sensitivity calculations and LMPs. • If the CAISO were to calculate MW losses in external systems, they would be distinguished from CAISO system losses to enable the CAISO to dispatch CAISO resources based solely upon conditions within the CAISO system. • In cases where impact on CAISO meets criteria to create an Integrated Balancing Authority Area (IBAA) but data exchange does not enable CAISO to verify operation of the resources to implement interchange transactions, CAISO tariff establishes default pricing rule to reflect the value of interchange transactions with the IBAA.

15. When less detailed data are available, CAISO can implement a simplified modeling approach • Can use a reduced network model derived from WECC models • If external resources do not participate on a resource-specific basis, establish areas that model generation and loads as aggregations at central points in the high voltage transmission network. • Assume day-ahead schedules have source or sink at these aggregations. • If state estimator solution of specific resources is available in the real-time market, view the actual locations of external supply and demand, and model only incremental dispatch at assumed aggregations. • If lack of real-time operational data precludes basing the CAISO’s real-time market solution on a state estimator solution, estimate pseudo-injections to produce flows at the CAISO boundary that match the flows that are observed by the CAISO. • Calculated pseudo-injections only approximate conditions in external network, and are likely to be less accurate for future Dispatch Intervals than if a State Estimator solution were available.

16. Going forward • Does eastern ISOs’ “Broader Regional Markets” initiative offer models for market-to-market coordination in WECC during design of Energy Imbalance Service? • Does new CAISO market’s existing functionality for external-to-internal market integration offer opportunities for market-to-market coordination in WECC during design of Energy Imbalance Service? • Any other alternatives?