Market Power and Designated Congestion Areas under Standard Market Design

1
Market Power and Designated Congestion Areas
under Standard Market Design
Robert P. Clarke Director, NEPOOL Relations and
Transmission Business Strategy May 2, 2003
2
Basic Idea

• Goal
• To encourage additional generation, demand
  response, and/or transmission investment in the
  regions where it is most valuable through
  competitive markets.
• Market Mechanisms
• Energy
• Locational Marginal Pricing (LMP)
• Capacity
• Unforced Capacity (UCAP)

3
Basic Problems

• Market Power
• Bidding behavior not market efficiencies creates
  congestion
• Peaking Units
• Insufficient opportunities for seldom-run reserve
  units to recover costs

4
Northeast Massachusetts Zone (NEMA) (21 of New
England Transmission Load - 13 of New England
Generation)
All Other Units
Imports
Imports
514 MW
711 MW
2,263 MW
2003 Summer Max Area Load 5,400 MW Transmission
3,900 MW Generation 3,900 MW ( 600 MW
cannot run simultaneously )
380 MW
Imports
Imports
5
Market Power in NEMA

• Highly concentrated market
• Single entity owns over 70 NEMA generation
  over 90 owned by two entities
• NEMA 2000 HHI 4700 2003 HHI 6100(Christensen
  Associates Study dated 1/14/03)

6
Market Power Solution

• Market Monitoring and Mitigation
• Market rules designed to replicate competitive
  environment in some manner when competition no
  longer exists
• Exacerbates peaking unit concerns
• Proliferation of RMR contracts

7
Peaking Unit Solution

• Designated Congestion Areas (DCAs)
• Designed to reduce need for RMR and eliminate
  disincentives to new investment.
• Exacerbates market power concerns
• All units within DCA not subject to mitigation if
  bids at or below proxy price.

8
FERC Solution

• Peaking Unit Safe Harbor (PUSH)
• Permits high-cost seldom-run units in DCAs to
  recover fixed and variable costs
• Reduces concerns
• Qualifying units not subject to mitigation if
  bids at or below individual PUSH

9
ISO-NE Additional Market Solutions

• Market Power
• No additional measures.
• Peaking Units
• Scarcity Premiums
• Resource Adequacy/Locational ICAP
• Forward Reserves
• Quick-start Capacity
• Co-optimized Reserves markets

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NSTAR Proposal

• Stop piecemeal shotgun approach to market
  development.
• Develop comprehensive solution or set of
  solutions that address problems efficiently.
• Provides reasonable opportunity for seldom-run
  units to recover costs.
• Alleviates market power concerns.
• Eliminates duplicative markets.