Convergence Bidding Overview Margaret Miller Manager Market Design

Convergence Bidding Overview Margaret Miller Manager, Market Design & Regulatory Policy CPUC Convergence Bidding Workshop August 26, 2010

Agenda § § § § What are virtual bids? Credit requirements Position Limits Settlements Implications CRR Settlement Rule Information release Compliance Slide 2

Convergence bidding provides important benefits. § Minimizes differences between day-ahead and real-time prices § Limits incentives to withhold supply or underchedule load § Lower costs due to more efficient day-ahead commitment § Increases certainty and grid reliability § Mitigates supplier market power § Ability to hedge generator offers and demand bids § Account for anticipated intermittent generation Convergence bidding operates successfully in all the other US Independent System Operator nodal markets

Convergence Bids also known as Virtual Bids are purely financial transactions § Virtual Demand § Bid to buy at Day-Ahead price and sell at Real-Time price § Virtual Supply § Offer to sell at Day-Ahead price and buy at real-time price § § Supported in Day-Ahead Market only May be submitted at pricing nodes within CAISO system Does not require any physical generation or load Single day outcome – low risk Slide 4

How do Convergence Bids Affect the Physical Market? § Virtual bids ARE used in the Integrated Forward Market process and can set the LMP § Virtual bids are NOT included in the Residual Unit Commitment process § Virtual bids will not be included in the LMPM process 5

Why do market participants want to engage in virtual bidding? § Ability to arbitrage difference between Day-Ahead and Real-Time prices § Hedge generator outages and demand response § Optimize financial settlements between Day-Ahead and Real-Time market Slide 6

Example 1 - Arbitrage difference in market prices at a location using virtual supply Day-Ahead § LMP = $20 § Virtual supply bid clears for 100 MW at $20 § Settles at 100 MW * $20 = $2, 000 Real-Time § LMP = $15 § Virtual supply liquidated in opposite position at $15 § Settles at 100 MW * $15 = $- (1500) Net Position = $500 credit Slide 7

Example 2 – Generator hedges against potential outage and high real-time prices Day-Ahead Market § LMP = $15 § Schedule for 200 MW § Clears 100 MW Virtual Real-Time Market § LMP = $ 20 § Produces 100 MW § Virtual demand bid liquidated Demand Bid at $15 in opposite position at $20 § Generator settles 200 MW * $15 = $ 3, 000 § Generator settles at 100 MW * $20 = - (2, 000) RT imbalance § Virtual demand settles 100 MW * $15 = $ -(1500) § Virtual demand settles 100 MW * $20 = $2, 000 Net Position = $1500 credit Slide 8

Example 3 – Optimal Unit Settlement Day-Ahead Market § LMP = $15 § 100 MW Must Run/Must Offer Unit § 100 MW Virtual Demand Bid clears at $15 § Generator settles 100 MW * $15 = $ 1500 § Virtual demand settles 100 MW Real-Time Market § LMP = $ 20 § Virtual demand bid liquidated in opposite position at $20 § Virtual demand settles 100 MW * $20 = $2, 000 § Generator although scheduled in Day-ahead receives RT price * $15 = $ -(1500) Net Position Day-Ahead = $0 Net Position RT = $2000 Slide 9

Design includes sufficient safeguards to address concerns raised regarding nodal convergence bidding Concerns Safeguards Market manipulation • Position limits • CRR settlement rule • Ability to suspend bidding Undermining established mitigation measures • Position limits • Physical LMPM process Payment default • Dynamic credit check Obtains objective of mitigating concerns without compromising functionality Slide 10

Convergence Bidding Overview Participating in the Markets Bidding Rules and Credit Policy Implications

Value of Virtual Bids is compared to Available Credit at the time of submitting bids. § Reference Price – 95 th percentile value of historical price differentials for each season at each node § Absolute value of MW of all virtual bids are included except if both virtual demand supply bids are submitted by the same the SC at the same location for the same hour. The greater MW value will be used then. § 100% Available Credit can be used § Available Credit is updated daily § Rejecting Virtual Bids follows the rule of last in, first out Slide 12

Adjustment of Estimated Aggregate Liability § After the Day-Ahead Market closes (but before the Real. Time Market closes) ISO will recalculate the Estimated Aggregate Liability based on absolute value of the cleared DA MW value * Virtual Bid Reference Price. § After the close of the Real-Time Market, ISO will recalculate the total liability and adjust the Estimated Aggregate Liability accordingly. 13

Convergence Bidding Overview Participating in the Market Understanding Position Limits

Defining Position Limits § Position limits are limits on the MWh quantities of virtual demand virtual supply bids that can be submitted by all the SCIDs that represent a given Convergence Bidding Entity at a single location § Limits each Convergence Bidding Entity to a percentage of a certain MW amount for a PNode or APNode. § Intended to mitigate the potential exercise of market power at a specific node in the absence of a liquid market 15

Position Limits in the ISO Market § Position Limits will be imposed for: § Internal nodes at 10% § Interties at 5% § Trading Hubs and Default Load Aggregation Points – No limit § Schedule for increasing position limits for Internal Nodes: § Initial implementation through 8 months after implementation – 10% limit § Months 9 through 12 – 50% limit § Position limits will no longer apply beginning on the first day of the month as of the first anniversary of the implementation. 16

Position Limits in the ISO Market § Schedule for increasing position limits for Interties: § Initial implementation through 8 months after implementation – 5% limit § Months 9 through 12 – 25% limit § Months 13 through 16 – 50% limits § Position limits will no longer apply beginning on the first day of the seventeenth month from the implementation 17

Determining Position Limits at Nodes and Inter-ties Position limits are based on: § For Generator Nodes – Pmax of the generator resource § For Demand Nodes – forecast of the maximum MW consumption of the physical demand resources. § For nodes associated with both supply and demand – based on the larger of the maximum demand the maximum capacity MW value (Pmax) § For Inter-ties – based on the Operating Transfer Capability of the intertie. § ISO will publish the locational limits for the eligible Pnodes and APNodes 18

Convergence Bidding Overview Settlement Implications

Convergence Bidding GMC § A bid submission fee of $0. 005 per virtual bid segment will be charged to convergence bids § Revenues from this fee will be used to offset fees imposed for cleared convergence bids (gross MWh), in 2011 § GMC for cleared convergence bids proposed at $0. 078 per cleared gross MWh 20

Obligation for Virtual Demand to pay IFM Tier 1 Uplift § Allocate IFM Tier 1 Uplift to virtual demand when system wide virtual demand is positive. § Obligation for virtual demand based on how much additional unit commitment was driven by net virtual demand that resulted in IFM clearing above what was needed to satisfy measured demand § Allocated to SCs with a positive net virtual demand position

Obligation for Virtual Supply to pay RUC Tier 1 Uplift § Extent CAISO forecast ≤ actual load RUC Tier 1 Uplift paid by net virtual supply and underscheduled load § Extent CAISO forecast > actual load RUC Tier 1 paid by measured demand by ratio share § Allocate RUC Tier 1 Uplift to virtual supply when system wide net virtual supply is positive § Virtual Supply obligation to pay RUC Tier 1 Uplift would be based on pro-rata share of the total obligation as determined by their total (net) virtual supply bids

Real-Time Bid Cost Recovery § Costs related to bid cost recovery for short-start units started in Real-Time as a result of a RUC schedule will be allocated to net virtual supply and underscheduled load § These costs will now be allocated through RUC Tier 1 Uplift rather than through Real-Time BCR Uplift § Costs attributed to other factors that result in Real-Time uplift will continue to be allocated to Measured Demand until a two-tier charge is developed

Convergence Bidding Overview Congestion Revenue Rights Settlement Rule

Defining Congestion Revenue Rights (CRRs) § CRRs are financial instruments that give the Holder the right to receive or the obligation to pay a share of the total congestion revenue associated with a given Trading Hour of the Day-Ahead Market. § CRR Settlement Rule applies only to CRR holders that participate in Convergence Bidding. 25

Defining the CRR Settlement Rule § CRR settlement rule is put in place to recapture - where warranted – the increase in CRR revenues to CRR Holders that are attributable to that Company’s Convergence Bidding. 26

Convergence Bidding Overview Compliance

Compliance § Department of Market Monitoring will be monitoring the Convergence Bids and CRR Settlement Rule charges § CRR Settlement Rule is not applied at the affiliate level, but will be monitored by DMM. § Monitoring virtual bidding activity for anomalous market behavior, gaming, or the exercise of market power. § ISO has the authority to suspend or to limit the ability to bid at a single Eligible PNode or at ALL Eligible PNodes 28

Compliance § Ability to suspend or limit virtual bidding pursuant to Tariff Section 39. 11. 2. 2 if virtual bidding: § Detrimentally affects System Reliability or grid operations § Causes or contributes to unwarranted divergence in prices between the Day-Ahead Market and the HASP or Real-Time Market § Causes or contributes to unwarranted divergence in Shadow Prices between the Day-Ahead Market and the HASP or Real. Time Market that contributes to a significant divergence in LMPs at any Eligible PNode and/or Eligible APNode 29

Non-Compliance May Result In… § Suspension from or limitation in participating in the Market. § Once participant is suspended, suspension could remain in place for up to 90 days unless FERC directs otherwise or ISO determines it is no longer needed. § Financial Impact – potential revenues lost for not participating in the market 30

Convergence Bidding Overview Information Release

The ISO will release the following information on convergence bids: § Bid data released on 90 day lag § Same as physical resource bid data § Hourly net cleared virtual quantities at each node § Helps identify nodes with high virtual activity § Day-Ahead Market Summary Report § Includes MWh and dollars for submitted as well as cleared physical and virtual bids system wide Slide 32

Convergence Bidding Overview References

References § Draft Final Proposal of the Design for Convergence Bidding – September 14, 2009 § Addendum to Draft Final Proposal of the Design for Convergence Bidding – October 2, 2009 § Convergence Bidding Draft Tariff Modifications, CAISO Fourth Replacement Tariff – April 23, 2010 and May 13, 2010 § Convergence Bidding Design Policy to FERC § Implementation Plan v. 2. 1 – June 3, 2010 § Business Requirements Specifications v. 1. 2 – April 20, 2010 34

Convergence Bidding Overview Thank you for attending. For questions, please contact: mmiller@caiso. com