Exhibit 99.308
NEGATIVE ZONAL MARKET CLEARING PRICES
WHAT ARE THE ZONAL MARKET CLEARING PRICES
PX's Zonal Market Clearing Prices (MCPs) are intended to capture the geographic
variations in the marginal energy prices in California at those times when
transmission system is congested and energy cannot freely flow between all
zones. At times when congestion exists in the ISO controlled grid, the PX, like
all other Scheduling Coordinators in California, must pay the ISO congestion
charges(1). Hence, the PX needs to settles with its participants based on zonal
MPCs in order to stay revenue neutral.
In a typical day-ahead market, the PX energy auction process clears the energy
market hourly by matching generation/import bids with demand/export bids for
that hour. In this process, the PX determines portfolio energy schedules for its
market participants as well as a single "Unconstrained" Market Clearing Price
for all of California as well as its ties without regard for transmission system
constraints. The PX then submits these schedules to the ISO as the Initial
Preferred Schedule (IPS). The IPS(2) includes energy schedules for individual
scheduled resources along with the optional Schedule Adjustment Bids (SAB)(3)
for these resources.
The ISO studies the impact of all schedules that it receives for potential
transmission congestion. If congestion is detected across any transmission path,
the ISO will alter the schedules at the two ends of the path to relieve the
congestion(4). The ISO relies on the SABs to determine which schedules to
modify, and by how much, in order to relieve congestion at lowest possible cost.
The congestion charges for each congested transmission path are directly
dependent on SABs of the schedules across the congested path. If there are
insufficient SABs for energy schedules across a congested path, the ISO modifies
the schedules on a pro-rata basis and assigns an administrative congestion price
for that path(5).
The PX receives the final energy schedules and congestion charges from the ISO.
In order to pay ISO's congestion charges and stay revenue neutral, the PX
calculates zonal MCPs according to the following three principals:
1. Difference in zonal MCPs between two zones is equal to congestion charges
determined by the ISO for the same two zones; and
2. Zonal MCP for each zone is equal to or
greater than the marginal energy price in that zone(6); and
3. No zonal MCPs could be negative - this principal is not needed for revenue
neutrality.
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(1) Also known as the transmission Usage Charge, these charges are the results
of ISO's congestion management process (auction of transmission capacity).
They reflect the overall cost of relieving transmission congestion by
scheduling more expensive resources to "create reverse flow" on congested
paths.
(2) The PX market participants create IPSs based on their portfolio energy
schedules as determined by the PX.
(3) SAB for a supply resource (generation/import) represents the desire of the
resource to increment its schedule if price increases, or decrement its
schedule if the price decreases. Vice versa for demand/export resources.
Resources that provide SABs indicate that they are willing to participate in
the congestion management process and participate in setting transmission
congestion charges. Resources that do not provide SABs are price takers so
far as congestion charges are concerned - they want their schedules to
remain constant and are willing to pay/accept any congestion related charges
implicit in the price they receive.
(4) In this process the ISO is effectively conducting a transmission capacity
auction. And the PX publishes two set of MCPs due to the sequential auctions
of energy and transmission commodities in California's energy market: a
single Unconstrained MCP after the energy auction and a number of zonal MCPs
after the transmission auction by the ISO.
(5) Currently set at $100/MWh. Economically determined congestion charges are
usually lower than $100.
(6) The marginal energy price (MEP) is a zone is the highest PX incremental or
decremental SAB accepted by the ISO in that zone for managing congestion.
DS/PSC/PX Page 1
EXAMPLE OF ZONAL MARKET CLEARING PRICES
Consider the energy market for hour 22 (9 to 10 PM) of March 11, 1998. The ISO
discovered congestion along California-Oregon Intertie (COI) due to abundance of
low cost imports from the Pacific Northwest. The ISO congestion management
relieved the congestion by curtailing imports from zone known as NW1. The
attached figure is intended to demonstrate the scenario in this example. In this
scenario, the IPS is the result of the PX energy auction. The Final schedule is
developed based on modifications to the IPS by the ISO in order to relieve
congestion on COI. Since there were not sufficient SABs for import schedules
from NW1 (across COI), the ISO has curtailed some imports from NW1 and assigned
the administrative charge of $100 for congestion charge across COI.
According to the present method of calculating zonal MCPs, with a zero price
floor on zonal MCPs, the zonal MCPs become Zero for the NW1 and $100.00 for all
other zones including California(7). In this scenario, the MCP in California
becomes substantially higher than the marginal energy price in California. The
large zonal MCP in California lends itself to high energy payments and a major
windfall for all generators in and imports into (other than those from the NW1)
California. This condition is shown in the attached figure under the existing
zonal MCPs solution.
Finally, it is rather straightforward to create a similar scenario by congesting
any tie into California. Hence, gaming can readily develop in which the PX or
the ISO market participants could create and take advantage of high energy
payments in California.
WHAT IS THE IMPACT OF ALLOWING NEGATIVE MCPS
The principal of maintaining a zero price floor for zonal MCPs is not needed for
the PX revenue neutrality. Should this constraint be removed, the price within
California will become equal to the marginal energy price in California,
$24.67/MWh in this example - see the values under the new zonal MCPs solution in
the attached figure. And since the PX must pay the ISO for congestion charges,
the zonal MCP for NW1 will be set at -$75.33/MWh(8).
HOW TO PROTECT AGAINST NEGATIVE MCPS
Negative MCPs entail net energy payments by the PX market participants in order
to schedule their energy import into California(9). However, any market
participant could readily avoid paying for importing (or generating) energy into
California by providing SABs with its import (generation) schedule(s).
Furthermore, if sufficient SABs are provided by the PX market participants, it
is likely that the ISO can determine congestion charges economically based on
actual marginal energy prices; and hence avoid assigning the administrative
charge of $100 for congestion charges.
Finally, negative market clearing prices are a strong disincentive for gaming
and a very strong incentive for market participants to provide SABs with their
energy schedules.
AT THIS TIME, THE PX IS CONSIDERING DIFFERENT OPTIONS FOR POSTING NEGATIVE ZONAL
MARKET CLEARING PRICES.
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(7) Zero for the NW1 is possible since import schedules from NW1 have indicated
that they are price takers.
(8) Negative price for imports from NW1 is consistent with import schedules
which have identified themselves as price takers.
(9) As was explained earlier this net negative payment is to cover congestion
charges due ISO. Here again the negative payment is acceptable since the
imports to California at NW1 have declared themselves as price takers and
willing to pay any congestion charge to get their import into California.
Finally, these negative payments are not limited to imports and could happen
to any resource (generator, load and export) that declares itself as a price
taker by not submitting a SAB.
DS/PSC/PX Page 2
INITIAL PREFERRED SCHEDULE (IPS)
[Initial Preferred Schedule Chart]
FINAL SCHEDULE
[Final Schedule Chart]
DS/PSC/PX Page 3