Exhibit 99.404
FORWARD MARKETS AND SELF-PROVISION OF ANCILLARY SERVICES WITHIN THE PX
INTRODUCTION
The PX can extend its Block Forward Markets to allow the trading of Ancillary
Services. The parties to the forward market trades can schedule them as
self-provided Ancillary Service schedules through the PX. To start, the PX would
allow trading of Regulation Up, Regulation Down, Spinning Reserves, and
Nonspinning Reserves. Due to complications with the method that ISO charges for
Replacement Reserves, these will be excluded from the initial service offering.
OVERVIEW OF BLOCK FORWARD A/S MARKET
The PX will run Block Forward Markets for the four Ancillary Services listed
above in two zones: NP15 and SP15. The A/S trades arranged in the block forward
markets will be physically scheduled as self-provision by the parties to the
trade. The PX will make provision for its participants to physically schedule
their A/S trades as self-provision through the PX. To simplify the process of
settling self-provision schedules, the PX will only allow self-provision
schedules to be entered in the day-ahead time frame.
OVERVIEW OF SELF-PROVISION
The PX will provide its participants with the ability to self-provide their A/S
requirements. On the surface, the problem seems simple; however, there are
several complications. These include the following:
i. ISO treats self-provision within the PX as providing for the whole of the
PX's A/S requirements. ISO does not match self-provision by owners of
specific supplies to the requirements by demands of those owners.
ii. PX participants could conceivably self-provide more A/S capacity than the
ISO determines that they need. In such a case, ISO may pay the PX for the
over self-provision provided that ISO can use the excess capacity to meet
the A/S needs that arise from other SCs. The PX should allocate these
revenues to the PX participants who over self-supplied the A/S capacity.
iii. Similarly, if one PX participant over self-provides, the ISO may use its
excess to reduce the A/S capacity that ISO procures to meet the
requirements of other PX participants who do not self-provide. To treat
over self-provision that ISO uses to meet PX requirements equivalently to
over self-provision that ISO uses to meet the A/S requirements of other
SCs, the PX participants who over self-provide to the benefit of other PX
participants should be compensated.
iv. ISO's forecast of loads may exceed metered loads. As a result, ISO may
procure too much A/S capacity. ISO will allocate the cost of its
over-procurement based on metered loads. Self-provision does not shield an
SC from paying for its share of the over-procurement. Consequently,
self-provision within the PX should not shield a PX participant from
paying for its share of the cost of ISO's over-procurement of A/S
capacity.
v. One PX participant may wish to may provide A/S to meet the requirements of
another PX participant as "self-provision." Tracking and validating such
trades
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within the PX would be difficult and increase the software cost and
development time.
Because of these issues, we will use a financial mechanism to enable
self-provision of A/S within the PX. We will only require that a provider of A/S
specify that the A/S schedule it is submitting is part of a self-provision deal.
The PX participant that is being served will not be identified.
The party self-providing the A/S will be paid at the weighted average of ISO's
day-ahead and hour-ahead prices for the A/S capacity that it self-provides and
which the ISO can use to reduce its procurement of A/S capacity. The party who
is being served by the A/S self-provision will be charged at that same weighted
average price.
If the party scheduling self-provision of A/S in the day-ahead is part of a
trade arranged in the BFM, the PX will settle the BFM trade for the two parties
to as a CFD around the ISO weighted average price for the corresponding A/S.
TREATING INTER-SC TRADES
Suppose that a BFM trade was arranged in the NP15 (SP15) market. If the party
supplying the A/S capacity wants to deliver the physical product via
self-provision in the PX, the party must the self-provision in NP15 (SP15). If a
party wants to use resources outside NP15 (SP15) to provide the required A/S,
the supply that is scheduled as self-provision to the PX must be scheduled as an
inter-SC trade into the PX. As a result, ISO will move a corresponding part of
the PX requirement from the PX in NP15 (SP15) to the supplying SC. As such, the
PX can view the self-provision as deemed delivered. If the SC is unable to
deliver the capacity due to transmission limitations, ISO will procure
replacement A/S capacity and bill the SC who was to provide the A/S to the PX
via inter-SC trade.
The PX can settle the self-provision schedules as above.
In this document, we will not consider the crediting of firm imports by a PX
participant against metered load of that same participant.
EXAMPLE 1: FINANCIAL SELF-PROVISION IN DAY-AHEAD TIME FRAME ONLY
To start, we will consider a simple example in which only one self-provision
deal is made. It is for Spinning Reserves and made in the day-ahead time frame.
PX Participant A agrees to sell 600 MW of Spinning Reserves in hour 1 in NP15 to
Participant B for which B @ $5/MW in the PX NP15 BFM.
When it comes time to schedule resources to meet the BFM trade, A informs the PX
that it is scheduling several of its resources to provide the 600 MW of Spinning
Reserves, say each of generators G(1)[A], G(2)[A] and G(3)[A] to provide 200 MW
of self-provided Spinning Reserves capacity in hour 1. The PX flags the
spinning-reserve "bids" from these generators as self-provision when it sends
the A/S schedules and bids to ISO in the day-
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ahead time frame. We will assume that these are the only PX schedules for
self-provided Spinning Reserves in hour 1.
ISO will inform the PX of its effective level of self-provision of A/S in hour
1. In this case, we will assume that ISO determines that it can use the entire
600 MW of self-provision.
In settlements, ISO will inform the PX of the quantity of Spinning Reserve
capacity that it procured to serve the PX and the cost. Let's assume that in
hour 1, ISO allocates 800 MW of the Spinning Reserve capacity that it bought in
its day-ahead and hour-ahead markets to the PX at a total cost of $4,800. The
ISO's weighted average price for Spinning Reserve capacity in hour 1 is $6/MW.
Assume that there are two PX participants scheduling loads:
- - Participant B has a metered load of 10,000 MWh in hour 1
- - Participant C also has a metered load of 10,000 MWh in hour 1.
The PX will pay A $6/MW for its 600 MW of self-provided Spinning Reserve
capacity or $3,600. The PX will allocate the total cost of Spinning Reserve
capacity to the loads based on their metered values:
- - B is charged ($4,800 + $3,600) x (10,000MWh/(10,000MWh + 10,000MWh)) =
$4,200.
- - C is charged ($4,800 + $3,600) x (10,000MWh/(10,000MWh + 10,000MWh)) =
$4,200.
The PX then settles the BFM trade between A and B as a CFD. A pays B 600 MW
x ($6/MW - $5/MW) = $600.
The net result is:
- - B pays $3,600 for Spinning Reserves in hour 1
- - C pays $4,200 for Spinning Reserves in hour 1
- - A receives $3,000 for Spinning Reserves in hour 1
The net result is the same as if the PX had tracked the trades and accounted for
them physically. In the example, the ISO procured 800 MW of Spinning Reserves
for the PX and the PX self-provided an effective 600 MW. This means that ISO had
determined the PX was responsible for 1,400 MW of Spinning Reserve capacity in
hour 1. The PX could allocate the MW to the loads:
- - B responsible for 1,400 MW x (10,000MWh/(10,000MWh + 10,000MWh)) = 700 MW.
- - C responsible for 1,400 MW x (10,000MWh/(10,000MWh + 10,000MWh)) = 700 MW.
B had A self-provide 500 MW of Spinning Reserves to meet its BFM commitment.
This means that the ISO procured capacity is allocated as follows:
- - B responsible for 700 MW - 600 MW = 100 MW.
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- - C responsible for 700 MW.
The PX participants pay the weighted average price for this capacity:
- - B pays 100 MW x $6/MW = $600.
- - B pays 700 MW x $6/MW = $4,200.
B pays A their agreed price of $5/MW for the 600 MW of BFM trade or $3,000.
The net result is
- - B pays $3,600 for Spinning Reserves in hour 1
- - C pays $4,200 for Spinning Reserves in hour 1
- - A receives $3,000 for Spinning Reserves in hour 1
This is exactly the same as the financial settlement.
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