Exhibit 99.272
APPENDIX: SOFT CAP ISSUES
FERC has proposed that the PX modify its Day-Ahead and Day-of Spot energy
markets to impose a "soft" price cap. On page 34 of its proposed order, FERC
states:
We propose to implement a temporary modification to the single price
auctions of the PX and the ISO. A significant factor causing high prices in
California was the fact that every MW in the market is priced at the market
clearing price. We propose that, effective 60 days from the date of this
order, for all short-term markets operated by the PX and the ISO (including
the Replacement Reserve Market), the single price auctions be used for all
sale offers at or below $150. This auction modification imposes no limits
on a seller's bid and only limits which bids can set the clearing price.
The single market clearing price will be used for the amount of load which
clears at or below this amount in the auctions. To the extent an auction
does not clear at or below the $150 bid level, suppliers who choose to bid
above $150 will be paid their as-bid price. These prices will be averaged
and billed to all the load which was supplied in the auction.
The PX has concerns as to how such a soft cap will be implemented when there is
transmission congestion in the Day-Ahead or Day-Of market. When there is
congestion, the ISO runs a transmission market with the PX and other Scheduling
Coordinators bidding to schedule on congested transmission paths. The ISO
allocates congested transmission to the SCs that place the highest value on the
available transmission capacity and sets the usage charge on each congested path
at the value bid by the marginal user of that path. The PX's and other SCs'
energy markets interact with the ISO's transmission market whenever there is
transmission congestion.
As a consequence of the interaction of the energy and transmission markets, the
PX market will not have a single market-clearing price when there is congestion.
Rather, the PX will have a single market-clearing price per location (zone) with
the difference in the PX's market-clearing prices at two locations being equal
to the ISO's transmission usage charges for sending energy from one location to
the other.
For the PX to impose the soft price cap, it would cap the market-clearing price
in each zone at $150/MWh. Should the ISO also modify the pricing mechanism in
its transmission auction as a result of the soft price cap in the energy
markets? For example:
o Should ISO set its usage charges so that the differences in PX zonal energy
prices (after cap) are equal to the usage charges for moving energy between
zones?
o Should ISO set its usage charges equal to the marginal value of transmission
capacity considering all bids (above and below the soft cap)?
To clarify, consider a simple example with two zones and with the PX as the only
SC. The PX submits the following Initial Preferred Schedules and adjustment bids
to ISO
[PX Initial Preferred Schedules and Adjustment Bids Chart]
Figure 1: PX Initial Preferred Schedules and Adjustment Bids
Absent the transmission constraint, the PX would schedule G(1) = 100 MWh,
G(2) = 180 MWh, G(3) = 90 MWh, and G(4) = 0. The PX energy market would clear at
the soft price cap of $150/MWh. However, the PX would send 170 MWh from A to B
which violates the transmission constraint.
[PX Final Schedules Chart]
Figure 2: PX Final Schedules
In its transmission market, ISO would allocate to the PX all 100 MW of
transmission from A to B. The PX would schedule G(1) = 100 MWh, G(2) = 110 MWh,
G(3) = 100 MWh, and G(4) = 60 MWh. ISO would set the usage charge on path A->B
to $200/MWh which is the marginal value to the PX of transmission capacity from
A to B. Today, the PX would set its zonal market-clearing prices as follows:
MCP(A) = $150/MWh and MCP(B) = $350/MWh. The zonal market-clearing price in
Zone B would be above the soft cap of $150/MWh. Imposing the soft price cap in
the PX energy markets would result in the
following changes to the zonal market-clearing prices: MCPA = $150/MWh and MCPB
= $150/MWh.
Either the ISO must modify the way it calculates the usage charges whenever the
energy markets exceed the soft cap or the PX must modify the way that it
collects usage charges whenever the soft cap is exceeded. Either approach will
have consequences that must be evaluated.
Changing ISO's Calculation of Usage Charge to Take PX Soft Caps into Account
Suppose that ISO were to calculate the usage charge taking into account the soft
price caps in the PX energy markets. ISO could adjust the usage charges so that
the transmission charge for sending energy from one zone to another is equal to
the difference in PX zonal energy prices. In the above example, ISO would adjust
its usage charge on path A->B to $0/MWh.
This can have some unintended consequences. In the above example, ISO would set
the usage charge for transmission from A to B to $0/MW. This would indicate that
an additional MW of transmission capacity from A to B has zero value. In
actuality, adding 1 MW of transmission capacity would reduce PX costs by
$200/MW, so the ISO would send incorrect signals regarding the value of
transmission which could adversely impact capacity expansion.
This method of setting usage charges could also lead to gaming behavior in ISO's
transmission market. For example, a marketer might forecast that the PX would
hit the soft cap in two zones causing ISO to set the usage charges between the
zones to $0/MW. If that marketer wanted to send energy between the two zones, it
could schedule its flow as a price taker in ISO's transmission market. If it
forecast correctly that the PX hit its soft caps, ISO would set the transmission
charge for its transfer to $0. This could seriously affect the efficiency of the
transmission market.
Keeping ISO's Current Calculation of Usage Charge and Using Uplifts
ISO could keep its present method of calculating usage charges as the marginal
value of transmission capacity on a path given all adjustment bids. The PX would
calculate tentative zonal market-clearing prices using the usage charges as it
does today. However, if any zonal MCP exceeds $150/MWh, the PX would cap that
zonal MCP at $150/MWh. Any PX payments to generators that are not covered by the
zonal MCPs would be recovered via an uplift spread over all loads. Similarly,
any transmission usage charges that the PX must pay ISO which are not covered by
the difference in zonal MCPs would be collected by the PX via an uplift spread
over all loads.
In the above example, ISO would set the usage charge from A to B to $200/MWh
while the PX would set its zonal MCPs to $150/MWh. Uplifts would be used to
recover the payment that the PX must make to G4: for its energy priced above the
soft cap and the
payment that the PX makes to ISO for transmission that is not recovered by the
difference in zonal MCPs:
o Additional payment to G(4) = 60 MWh * ($350/MWh - $150/MWh) = $12,000.
o Additional payment to ISO = 100 MW * ($200/MW - $0/MW) = $20,000.
This could also have some unintended consequences. For example, we could find
that transmission is prices well above energy as in the example. This would send
perverse price signals. It may also open unknown opportunities for gaming.
Conclusion
Scheduling and pricing in the PX Day-Ahead and Day-Of energy markets is
coordinated with the ISO's Day-Ahead and Day-Of transmission congestion markets.
The changes that are necessary to add soft price caps in the PX energy markets
should be coordinated with modifications in the ISO transmission congestion
markets. At present, we have several open questions regarding the way that
pricing in the two markets should be coordinated.
Since the PX energy markets and the ISO transmission markets are coordinated,
changing pricing in one market may open gaming opportunities in the other
market. The PX and ISO should monitor for anomalous behavior that may indicate
attempts to game the soft cap.