Exhibit 99.299
Introduction:
This document represents an alternative to the ISO's Congestion Management
Reform Recommendation that has been developed by the PX and other market
participants. It incorporates concerns previously raised with the ISO's proposal
while remaining consistent with the ISO's overall principles.
Revisions to specific portions of the ISO's recommendations are described this
paper. It is not intended to replace the ISO's entire proposal. Instead, it
describes how certain modifications to the ISO's recommendations need to be
implemented. We believe that these changes can be effectively integrated into
the ISO's proposal.
Much of the Comprehensive Market Reform design can and should be retained. The
decisions to build upon the existing California market structure and to uphold
the original fundamental design principles have significant value, as does the
proposed use of a consistent network model throughout the Real-Time and forward
markets. The introduction of a single commercial network model should eliminate
most of the inconsistencies that currently exist between the forward and spot
markets. The introduction of additional LPAs along with the enforcement of
nomograms in the forward markets should facilitate the reduction of forward
intra-zonal congestion, and thereby reduce Real-Time intra-zonal congestion. We
are concerned, however, that much of the information provided by the ISO to date
on the integration of nomograms and distribution factors has been illustrative;
we believe that it is vital that market participants have access to meaningful
market data as soon as possible.
Design consistency should extend beyond the network model. When finalizing the
details of their recommendation the ISO should make certain that policies are
uniform across markets and do not discriminate against any single class of
stakeholder.
Forward congestion will be better managed with the introduction of nomograms in
CONG (the ISO's congestion management software). The creation of new LPAs and
the enforcement of nomograms will allow the market to eliminate much of the
current intra-zonal congestion in the forward markets. The use of consistent
nomograms in the forward and Real-Time markets should further contribute to a
reduction in Real-Time congestion.
Utilizing recallable transmission (RT) will potentially further enhance
congestion management efficiency. We support the concept of a product that
provides the market access to non-firm transmission capacity that is currently
reserved for Existing Transmission Contract (ETC) holders. However, more details
of the proposed RT market and its interaction with other ISO markets and
processes are required to fully judge its impact on the ISO and its usefulness
to the participants.
Supposes that SC1 schedules the use of RT in the day-ahead process. After the
day-ahead, the SC that owns the FTR recalls the RT that SC1 used so that it can
schedule the use of its FTR by scheduling load in the receiving LPA and
generation in the sending
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LPA. SC1 must now adjust its schedule to remove its flow on the recalled
transmission. SC1 could cut its scheduled loads in the receiving LPA and its
scheduled generation in the receiving LPA so that its hour-ahead schedule no
longer uses the recalled transmission. However, SC1 may actually be unable to
curtail its loads thereby serving the loads from the ISO's real-time market.
This would exacerbate ISO's problem of serving unscheduled loads in its
real-time market. Would ISO require that the SC scheduling RT procure
Replacement Reserves in the receiving LPA sufficient to cover any potential
effects of recalled RT? Would ISO require that an SC schedule new generation to
offset any changes in schedules due to recalled RT? The way in which ISO treats
recalled RT could make the RT market uneconomic or exacerbate ISO's real-time
supply problems.
ISO must ensure that changes that it proposes to improve one aspect of its
processes would not have significant adverse effects on changes that it is
proposing to improve other aspects of its processes.
When defining market mechanics it is important that the ISO pursue the simplest
workable solution. Unnecessary levels of complexity are significant barriers to
market participation and thus, market liquidity. The ISO should also seek to
avoid market proliferation. Increasing the number of markets into which the same
energy or capacity can be sold fragments the markets and may adversely affect
liquidity. Those aspects of the ISO's proposal that have been identified as
overly complex or fragmented are simplified in the enclosed recommendations.
Comments on the Long Forward Market:
The Long Forward market design doesn't consistently conform to the ISO's
self-stated goals of enhancing market efficiency through decentralized decision
making. Instead, the market structure includes processes that abandon market
solutions - even in situations when the marketplace is best suited to
efficiently resolve reliability requirements.
One such process is Local Reliability Service (LRS) procurement. The ISO's
proposal relies on the introduction of a new process that includes a
two-day-ahead "auction" to procure generation within each Local Reliability Area
(LRA). This process abandons existing market structures and instead,
unnecessarily increases the ISO's presence in the forward markets. For example,
rather than relying on loads to acquire needed reliability capacity and energy,
the ISO plans to acquire these services on their behalf based in its forecasts,
and require that portions of the purchased capacity be scheduled in the
Day-Ahead. Capacity purchased by the ISO in the 2-Day-Ahead market, but not
identified as "Minimum Reliability Energy" (and thus required to be scheduled in
Day-Ahead) may be dispatched by the ISO as needed through Real-Time.
In reality, two distinct and separate products are being acquired by the ISO in
this process. Purchased capacity that is scheduled as Minimum Reliability Energy
(MRE) in the forward market is not really capacity. It is instead, locational
firm energy and should
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be treated as such. Additional committed capacity that is reserved by the ISO
for potential dispatch through Real-Time should be obtained through existing
processes such as the Day-Ahead and Hour-Ahead Ancillary Services markets.
The decision to schedule MRE is a forward energy allocation decision. Thus, if
the ISO is to remain consistent with it's goals of maintaining the decentralized
decision making process, it should let SCs complete this task. SCs should be
responsible for scheduling load and generation within LRAs according to current
Day-Ahead and Day-Of timelines and plans for introducing a 2-Day-Ahead auction
should be abandoned.
All relevant nomogram constraints and other operating requirements should be
placed in CONG, which should validate whether enough generation within each LRA
has been scheduled to meet daily load requirements. If insufficient generation
has been scheduled, CONG should either increment the necessary generators based
on their adjustment bids, or it should decrement those loads that exceed the
nomogram limitations.
If ISO requires that particular resources be committed based on its forecasts.
It can notify the units that they must commit. Actually scheduling the energy
from the resources should be done in existing day-ahead and hour-ahead markets.
They would also be able to bid in ISO day-ahead and hour-ahead CC markets or
sell CC to the SCs. If necessary, ISO could contract with these resources to
enable ISO to call on them to commit.
CONG will ensure that scheduled generation and load satisfy each nomogram on a
market-wide basis rather than by SC. CONG would determine "usage charges" for
flows across nomogram constraints. SCs would pay usage charges for bringing
power across nomograms. Conversely, SCs whose schedules allow other SCs to
import more across nomograms would be paid the usage charges for their
counter-flow. This is necessary to conform to nomogram requirements efficiently.
Qualified market operators could facilitate the forward procurement of MRE and
CC by running markets to help participants develop schedules that meet nomogram
requirements and avoid the associated usage charges. Buyers and sellers would be
able to trade MRE and CC using many different contract types and would
self-provide the resulting positions in the Day-Ahead market.
Nomograms simply represent another scheduling constraint: one that can and
should be expressly valued by the marketplace. Releasing Nomogram rights in the
same primary auction format as FTRs would allow the market, rather than the ISO,
to value them. This would also allow them to be traded in the secondary markets.
If the ISO did release nomogram rights, loads could purchase the rights to hedge
against the Locational Price Areas (LPAs), avoid the cost of expensive in-area
generation and enhance market efficiency. Nomogram rights, like FTRs would be
both physical and financial.
If this structure were introduced, loads within LRAs would have sufficient
incentives to acquire nomogram rights and to schedule in the forward markets to
hedge against ISO charges. The ISO would remain consistent with its stated goals
and would not need to
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implement a totally new market whose effects on existing markets are potentially
detrimental.
A substantial benefit of adopting this method of enforcing nomograms and pricing
flows across nomograms is that it preserves the financial value of FTRs. This is
not the case with the ISO's proposal. Implementation of the ISO's LRS
procurement process will result in the purchasing of substantial amounts of
generation within each LRA in advance of the Day-Ahead market. This would
significantly reduce or eliminate congestion on paths flowing into LRAs, and as
a result, distort the financial value of FTRs. Adoption of the ISO's proposal
will result in FTR purchasers having to value FTRs based on their expectations
of the ISO's ability to make accurate forecasts rather than on historical
congestion information and the value of transmission into the LPA to the FTR
purchaser. However, because the PX's proposal relies on standard Day-Ahead
congestion management processes to correctly allocate generation to in-LRA load,
the proper financial signals will be sent to FTR holders in the form of usage
charges.
If after running Day-Ahead and / or Day-Of congestion management, the ISO felt
that an insufficient amount of minimum reliability energy had been scheduled it
would acquire "committed capacity" (CC), which would be dispatched, if needed,
through Real-Time. The ISO could also procure CC if it expected additional
in-LRA load would appear in Real-Time). The ISO would obtain committed capacity
by having generators bid to supply it as an additional Ancillary Service.
The Committed Capacity ancillary service will be treated in the same fashion as
existing A/S types with the exception that CC will be purchased on a zonal / LPA
basis rather than a market-wide basis. SCs will be allowed to self-provide the
service according to the same rules that govern self-provision today. SCs who
have available capacity will be able to submit bids to supply CC to the ISO,
which would procure it along with its other Ancillary Services. As with minimum
reliability energy, SCs will have the incentive to self-provide this service to
hedge against ISO charges.
Because some level of market power will exist within LRAs until new generation
or transmission is built, market power issues must be addressed. Market power
issues are the same regardless of whether the ISO adopts the PX's
recommendations or not: a price must be determined that protects loads from
undue market power, provides sufficient revenues to generators and provides
locational price signals in accordance with FERC requirements. The PX feels that
the ISO and its stakeholders are capable of developing a workable solution to
this issue and thus does offer a specific price cap proposal at this time.
While this approach differs from the one proposed by the ISO, it contains enough
benefits to warrant adoption. This model's primary advantage is its greater
consistency with the original California design principles. In it, the ISO's
primary roles are information supplier (to facilitate the efficient scheduling
of load and generation) and supplier of last resort (in situations where
insufficient generation was scheduled or
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additional load was expected to appear in Real-Time). Physical scheduling is
accomplished through decentralized decision making.
The ISO intends to be responsible for both forecasting and obtaining MRE and CC.
While the ability for SCs to self-provide these services has been added to their
proposal, the proposed timelines make it more likely that the majority of
scheduling decisions will be made by the ISO. This is because their proposal
requires SCs to finalize LRA schedules one day in advance of the Day-Ahead
market. In addition, it is not clear that the ISO's proposed cost allocation
mechanism would provide sufficient incentives for self-provision.
The PX's approach relies existing market mechanisms to efficiently allocate LRA
resources within existing timelines. This ensures that procurement of MRE and CC
does not interfere with or distort other Day-Ahead scheduling decisions. When
the amount of energy and capacity that is likely to be allocated through this
process is considered, the importance of adopting an approach that compliments,
rather than supplants existing market structures is made clear. ISO statements
that the procurement of MRE and CC could even extend to competitive LPAs in
certain situations only underscores the importance of adopting the PX's
approach.
Comments on FTRs:
The ISO is to be commended for responding to stakeholder input and limiting the
term of FTRs to one year. This will provide required price certainty, as the
market becomes familiar with the implications of new zonal boundaries.
Additionally, it is easier to link annual FTRs to zone creation and redefinition
policies. As boundaries solidify, the sale of longer-term rights should again be
examined, however.
Some modifications to the ISO's proposed transmission rights policies are
required though. The ISO should release all ATC as FTRs in their annual primary
auction. The specific percentage should depend on the amount of rights that can
be released with a predetermined annual level of certainty. If this is done,
secondary markets will develop to reallocate transmission rights. The ISO can
compliment this process by releasing shorter-term seasonal FTRs, as they become
available.
Shorter-term FTRs may help the market adjust for seasonal variances in
transmission capacity. However, questions must be answered before the nature and
amount of shorter-term FTRs to be released is determined. How significant of a
barrier to the development of liquid secondary markets are shorter-term FTRs?
How often is transmission capacity significantly affected by weather or other
considerations (are monthly auctions required or are longer terms such as
quarterly better)? How much of a change in transmission capacity is needed and
how long must the new levels be sustained before the ISO determines that the
capacity in question can be auctioned as an FTR? These questions will be able to
be answered only if the ISO releases its criteria for determining Available
Transmission Capacity.
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Of additional concern is the ISO's proposed method of allocating costs to FTR
holders. The ISO has stated that in the event of topology or operating transfer
limit changes they intend to "keep market participant's financially whole by
creating a balancing account of net gains and losses." Balancing accounts are to
be cleared by each applicable PTO on a monthly basis. The details of this
proposed arrangement need to be provided, but an initial examination of the
information reveals deep concerns.
If the ISO publishes a "library" of shift factors as is stated in their
proposal, and the factors are published in advance of the primary auction, SCs
should be capable of planning for and reacting to system changes. For instance,
SCs could purchase enough FTRs in the primary auctions to cover a range of
potential shift factor changes. Those who were unwilling or unable to purchase
rights in the primary auction could bid to purchase desired FTRs in the
secondary markets that will be provided by such qualified exchanges as the PX.
If SCs are given information about shift factor changes in time to adjust their
schedules and transmission rights, they are capable of making educated business
decisions and dealing with the resulting financial implications. Having a
central balancing account where some parties are charged to offset others'
losses is not only unnecessary, it is contrary to the most fundamental
free-market concepts.
Instead of pursing this course, the ISO should treat financial rights in the
same manner as they propose to resolve scheduling priorities: SCs who wish to
hedge their congestion costs should be responsible for procuring additional FTRs
when the ISO implements new sets of shift factors. Those who choose not to hedge
by purchasing additional FTRs on the secondary market would expose portions of
their schedules to both financial and physical delivery risks.
Comments on the Forward Market:
We support the efforts of the ISO to preserve the original design concepts of
the deregulation process, which we feel are well represented in the proposed
enhancements to the forward market. However, certain changes are required to
further improve the recommended modifications.
A change that is supported is the recent introduction of Inter-SC adjustment
bids. While the implementation of this functionality is outside the scope of the
congestion reform project, its effects are not. The ISO's market separation
study clearly shows that the existing market structure is an efficient one.
However, Inter-SC trade adjustment bids can only enhance efficiency for those
SCs who choose to use them. When the efficiency of the existing market structure
is combined with the fact that decentralized decision making remains a
cornerstone of California's proposed deregulation model, arguments against
additional relaxation of market separation become overwhelming.
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There is a proposed enhancement that would threaten market efficiency, however.
Implementation of the ISO's proposed congestion activity rule would create as
many, if not more, issues than it would resolve. While it is understood that
this rule was designed to provide the ISO with the opportunity to always select
the lowest cost scheduling iteration, it is not the appropriate way to insure
against potential market behavior. Rather than reducing the potential for
damaging market behavior, the congestion activity rule would simply increase the
likelihood that both iterations would become distorted. The level of uncertainty
that the implementation of the activity would introduce increases this tendency.
Stakeholders will be less willing to enter into new transactions during the
iteration if there is the danger that the ISO will force them to be cancelled
with any degree of frequency. If the ISO is concerned about limiting the
potential gaming affects of having two congestion management iterations, it
should either adopt different activity rules or consider eliminating the second
iteration entirely.
Comments on Real-Time:
Based on our current understanding, the PX supports the ISO's proposed Real-Time
changes. However, more information is required to fully evaluate them. For
instance, the anticipated dispatch model hasn't been adequately defined and
should be released to the marketplace for examination. Additionally, since the
ISO is proposing to move to a transmission constrained economic dispatch
optimization model to dispatch Real-Time energy, references to Real-Time bid
stacks should be removed from the draft proposal to eliminate confusion. The PX
support of a Real-Time optimization model is predicated on the understanding
that only Real-Time bids will be optimized.
If the optimization model is used to re-dispatch previously scheduled energy
that doesn't have explicit bids (other than in system or local emergencies) many
of the fundamental principles of California's deregulation process will be
undermined.
Conclusion:
The PX commends the ISO for their efforts to develop a comprehensive congestion
management solution. However, we urge the ISO to incorporate these modifications
into their proposal. The integration of these concepts with the ISO's existing
proposal will ensure that the maximum benefits of any reform are enjoyed by all
Californians. Failure to do so, however, will significantly blunt the benefits
of any changes.
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