Market Evolution Program

1. Market Evolution Program Hok Ng Market Operations Standing Committee of the IMO

2. Proposed Scope for Analysis of Historical Nodal Prices Market Operations Standing Committee of the IMO

3. Objective • To provide an analysis of historical nodal pricing data to allow stakeholders to assess the potential impact of nodal pricing • The scope of the analysis will include • an examination of how nodal pricing data has varied over time • a consistent comparison between nodal pricing and uniform pricing • an examination how nodal pricing data has varied across the province Market Operations Standing Committee of the IMO

4. Temporal Effects • Objective - To illustrate how indicative prices have changed over the study period • Monthly, on-peak and off-peak average values will be calculated for: • Hourly Ontario Energy Price (HOEP) • Ontario generator-weighted average nodal price • Ontario demand-weighted average nodal price • best approximation of the load-weighted average • the difference between the two weighted-average nodal prices approximates the loss residual and congestion rents • Richview nodal price (reference bus) Market Operations Standing Committee of the IMO

5. Temporal Effects • Objective - To indicate the volatility of indicative prices, the standard deviations will be calculated for: • HOEP • Ontario generator-weighted average nodal price • Ontario demand-weighted average nodal price • A representative node in each of the transmission zones Market Operations Standing Committee of the IMO

6. Comparing Nodal & Uniform Pricing • Objective - To provide a consistent comparison between nodal pricing and uniform pricing over a set of known data from actual market operations • This objective is supported by: • Accounting for the differences in the manner in which costs for congestion and losses are distributed under today’s uniform pricing system vs. a nodal pricing construct • Accounting for the application of current rebate mechanism to today’s uniform prices vs. nodal prices Market Operations Standing Committee of the IMO

7. Comparing Nodal & Uniform Pricing • Monthly average prices under the uniform pricing methodology will be calculated by • HOEP + CMSC + losses - rebates • Monthly average prices under the nodal pricing methodology will be calculated by • (demand-weighted average nodal price) - (loss residual + congestion rent) - rebates • equivalent to (generator-weighted average) - rebates • assuming that transmissions rights are allocated to load • Nodal prices already include congestion and losses • All other uplifts are common to uniform pricing and nodal pricing methodologies Market Operations Standing Committee of the IMO

8. Spatial Effects • Objective - To examine how indicative prices have varied amongst Ontario transmission zones • The monthly average nodal prices for representative nodes in each of the 10 transmission zones will be calculated Market Operations Standing Committee of the IMO

9. Study Period/Exclusion of Certain Data Nodal pricing data will be assessed for the period of Oct 4, 2002 - Oct 31, 2003 • Most recent 12+ months of data is used (data during the blackout restoration, Aug 14-22, 2003 is excluded) • Published historical nodal prices for the period of May 1, 2002 - October 3, 2002 were incorrect • The software bug causing the incorrect nodal pricing calculations was detected shortly after market opening but was not corrected until October 2002 Market Operations Standing Committee of the IMO

10. Study Period/Exclusion of Certain Data • The published erroneous prices exclude the loss component of the nodal price • the software error affected the constrained algorithm only - however, system was dispatched correctly during this period - market was settled correctly as the uniform prices used for settlement are calculated in the unconstrained algorithm • The IMO is not planning to recalculate data • The IMO is not aware of any other errors of this nature Market Operations Standing Committee of the IMO

11. Penalty Factors • Penalty Factors • Bids and Offers • Richview Nodal Prices • Forecast Load • Congestion Impact X • System Limits • Transmission Model • Load Profile X • Richview Nodal Prices • All Other Nodal Prices • Congestion Impact • Dispatch Instructions Error Impact on Published Nodal Prices • Incorrect penalty factors were used only in the second calculation, i.e., the calculation of prices for all nodes other than Richview DSO Calculation 1 DSO Calculation 2 Market Operations Standing Committee of the IMO

12. Summary of Limitations • The analysis will provide a high-level gauge how nodal prices have varied over the past 12+ months and over each of the 10 transmission zones in Ontario • The analysis will not: • explain the differences between HOEP and nodal prices • predict future prices • explain all changes to prices over time • capture bidding behaviour in determining prices Market Operations Standing Committee of the IMO

13. Summary of Limitations • The time period of the analysis is limited to 12+ months • conclusions cannot be drawn regarding the impact of the weather effect on nodal prices vs. uniform prices • Various aspects of market schedule/price formulation are not equivalent • the CMSC approximates a value of congestion in a manner entirely different from the nodal pricing construct • the calculation used to determine uniform prices differs from that of nodal prices (unconstrained v.s. constrained) Market Operations Standing Committee of the IMO

14. Nodal Pricing - Events • Dec 3 - MOSC • Scope of Nodal Pricing Analysis • Dec 9/10 - Workshop • Nodal Pricing Basics (full) • Jan 8 ‘04 - Workshop • Nodal Pricing Basics (registration required) • Jan 14 ‘04 - MOSC • Nodal Pricing Analysis Market Operations Standing Committee of the IMO