Summary of IMM Function Summary of IMM Function and and

Monthly Report for September 2008Monthly Report for September 2008

Presented to:Presented to:

Organization of Midwest ISO StatesOrganization of Midwest ISO StatesAnnual MeetingAnnual Meeting

David B. Patton, Ph.D.David B. Patton, Ph.D.Independent Market MonitorIndependent Market Monitor

October 14, 2008October 14, 2008

The Role of Market MonitoringThe Role of Market Monitoring

• Deregulation is premised on the benefits of replacing price regulation with Deregulation is premised on the benefits of replacing price regulation with competitive forces to guide generation and transmission usage in the short-competitive forces to guide generation and transmission usage in the short-term and investment decisions in the long-term.term and investment decisions in the long-term.

• To help ensure that these benefits are realized, To help ensure that these benefits are realized, market monitoring is market monitoring is designed to identify:designed to identify: Flaws in market rules that create inefficient incentives or gaming Flaws in market rules that create inefficient incentives or gaming

opportunities;opportunities; Potential efficiency improvements in the operation of the market;Potential efficiency improvements in the operation of the market; Market power;Market power;

• The monitoring function includes:The monitoring function includes: Real-time screening and analysis to identify circumstances that require Real-time screening and analysis to identify circumstances that require

further investigation.further investigation. Investigations of market operations or conduct identified through the daily Investigations of market operations or conduct identified through the daily

screening or complaint processes.screening or complaint processes. Periodic analysis and reporting;Periodic analysis and reporting;

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Real-Time Market MonitoringReal-Time Market Monitoring

• Effective real-time monitoring requires a highly automated software Effective real-time monitoring requires a highly automated software system to continuously receive data and screen the market results for:system to continuously receive data and screen the market results for: Attempts to exercise market power by withholding resources;Attempts to exercise market power by withholding resources; Running a generator uneconomically and causing a transmission line to Running a generator uneconomically and causing a transmission line to

become overloaded;become overloaded; Other inefficient conduct that may indicate potential market design Other inefficient conduct that may indicate potential market design

flaws;flaws; Operator actions or actions of control area operators that may undermine Operator actions or actions of control area operators that may undermine

the efficiency of the market;the efficiency of the market;

• The market monitoring system generates automated alerts sent to the The market monitoring system generates automated alerts sent to the beepers and emails of IMM staff to ensure real-time monitoring is beepers and emails of IMM staff to ensure real-time monitoring is effective on a 24-7 basis. effective on a 24-7 basis.

• The real-time market monitoring also includes the implementation of The real-time market monitoring also includes the implementation of prospective mitigation of economic withholding. prospective mitigation of economic withholding.

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Investigations and ComplaintsInvestigations and Complaints

• Investigations are most often triggered by the real-time monitoring, Investigations are most often triggered by the real-time monitoring, but can be initiated but can be initiated in response to requests from the States, FERC, in response to requests from the States, FERC, market participants, or the MISO staff or Board of Directors.market participants, or the MISO staff or Board of Directors.

• Investigations are often necessary to evaluate certain conduct that Investigations are often necessary to evaluate certain conduct that may or may not be anticompetitive. may or may not be anticompetitive. For example, we conduct physical audits of certain generator or For example, we conduct physical audits of certain generator or

transmission outages to identify physical withholding;transmission outages to identify physical withholding;

Although we consult with participants to gather information, we do not Although we consult with participants to gather information, we do not attempt to compel participants to change their conduct. attempt to compel participants to change their conduct.

• Investigations that indicate anticompetitive conduct or gaming will Investigations that indicate anticompetitive conduct or gaming will result in referrals to FERC under a) the sanction provisions of the result in referrals to FERC under a) the sanction provisions of the MISO tariff or b) enforcement provisions of the Energy Policy Act.MISO tariff or b) enforcement provisions of the Energy Policy Act.

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Periodic Reporting on Market PerformancePeriodic Reporting on Market Performance

• The primary product of the periodic reporting is an annual State of The primary product of the periodic reporting is an annual State of the Market report that contains:the Market report that contains: An assessment of the overall performance of the RTO markets;An assessment of the overall performance of the RTO markets; Recommendations for changes in the market rules or other provisions to Recommendations for changes in the market rules or other provisions to

improve the efficiency of the market; andimprove the efficiency of the market; and An evaluation of the conduct of market participants and An evaluation of the conduct of market participants and

recommendations regarding changes to the mitigation measures.recommendations regarding changes to the mitigation measures.

• We also report on the performance of the market to:We also report on the performance of the market to: To FERC staff in regular weekly and monthly meetings;To FERC staff in regular weekly and monthly meetings; The States on a quarterly basis and on specific topics as needed; The States on a quarterly basis and on specific topics as needed; The MISO Board on a monthly basis; andThe MISO Board on a monthly basis; and Market participant committees as requested;Market participant committees as requested;

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Real-Time Mitigation SoftwareReal-Time Mitigation Software

• We have developed mitigation software that runs as part of the MISO’s We have developed mitigation software that runs as part of the MISO’s real-time production system.real-time production system.

The mitigation software automatically performs the conduct and impact The mitigation software automatically performs the conduct and impact tests that determine when mitigation will be imposed.tests that determine when mitigation will be imposed.

This system ensures that mitigation to limit economic withholding is This system ensures that mitigation to limit economic withholding is imposed within 10 minutes of the conduct and impact tests being satisfied.imposed within 10 minutes of the conduct and impact tests being satisfied.

• On a daily basis, we compute the competitive reference levels against On a daily basis, we compute the competitive reference levels against which suppliers’ offers are compared.which suppliers’ offers are compared.

• The impact test utilizes the real-time energy market software, run in The impact test utilizes the real-time energy market software, run in parallel to determine the price effects of conduct that fails the economic parallel to determine the price effects of conduct that fails the economic withholding tests.withholding tests.

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Independence of Market MonitoringIndependence of Market Monitoring

• In the Midwest, States and participants designed the market monitoring function to be In the Midwest, States and participants designed the market monitoring function to be independent of the ISO – performed by an independent entity (i.e., the independent independent of the ISO – performed by an independent entity (i.e., the independent market monitor or IMM).market monitor or IMM).

• Independence of the Market Monitor from the RTO is important due to its role in Independence of the Market Monitor from the RTO is important due to its role in monitoring the RTO’s rules, procedures, and operations.monitoring the RTO’s rules, procedures, and operations.

The actions of a market operator generally have a larger impact on the market The actions of a market operator generally have a larger impact on the market outcomes than any single participant.outcomes than any single participant.

Manual actions taken to maintain reliability can distort the market outcomes -- the Manual actions taken to maintain reliability can distort the market outcomes -- the rules and operating procedures can often be modified to improve the consistency of the rules and operating procedures can often be modified to improve the consistency of the market and reliability requirements.market and reliability requirements.

• The IMM is also required to be independent of any Market Participant by adhering to The IMM is also required to be independent of any Market Participant by adhering to conflict of interest restrictions that prevent the IMM from having any relationships conflict of interest restrictions that prevent the IMM from having any relationships with an MP.with an MP.

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Market Monitoring ResourcesMarket Monitoring Resources

• The market monitoring function requires an interdisciplinary team of The market monitoring function requires an interdisciplinary team of experts, including:experts, including: Economists, Economists, Power system engineers;Power system engineers; Generation engineers;Generation engineers; Software developers; and Software developers; and Other professionals with math and statistics .Other professionals with math and statistics .

• Potomac Economics currently has 20 staff to perform market Potomac Economics currently has 20 staff to perform market monitoring.monitoring.

• The market monitoring function also requires an extensive market The market monitoring function also requires an extensive market monitoring software system and data interfaces with the ISO.monitoring software system and data interfaces with the ISO.

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Monthly Report for Monthly Report for September 2008September 2008

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Midwest ISO Energy PricesMidwest ISO Energy Prices

• Peak loads continued to be very low in September due to mild weather.Peak loads continued to be very low in September due to mild weather. Average load in September was 10 percent lower than in August 2008 and 4.7 Average load in September was 10 percent lower than in August 2008 and 4.7

percent lower than September 2007.percent lower than September 2007. Load exceeded 90 GWs in only 5 hours on one day and 80 GWs in 25 hours.Load exceeded 90 GWs in only 5 hours on one day and 80 GWs in 25 hours.

• In addition to the mild load, continued reductions in fuel prices contributed to a In addition to the mild load, continued reductions in fuel prices contributed to a significant reduction in energy prices.significant reduction in energy prices. Average energy prices in September at Cinergy, Minnesota and WUMS decreased Average energy prices in September at Cinergy, Minnesota and WUMS decreased

roughly 20 percent from August.roughly 20 percent from August.

• Tropical Depression Ike had significant operational impacts on MISO.Tropical Depression Ike had significant operational impacts on MISO. Over a million customers were without power at its peak, as well as a significant Over a million customers were without power at its peak, as well as a significant

number of transmission and unit outages and deratings.number of transmission and unit outages and deratings.

• There were two minimum generation events in the early mornings of September 1There were two minimum generation events in the early mornings of September 1stst and 21and 21stst..

• There were 5 ARC events caused by a combination of generation deviations, There were 5 ARC events caused by a combination of generation deviations, outages, load volatility and NSI changes.outages, load volatility and NSI changes.

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Real-Time Midwest ISO Energy Prices Real-Time Midwest ISO Energy Prices September 2008September 2008

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Day-Ahead Midwest ISO Energy Prices Day-Ahead Midwest ISO Energy Prices September 2008 September 2008

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Day-Ahead to Real-Time Price DifferencesDay-Ahead to Real-Time Price Differences

• The next figure shows the day-ahead to real-time price convergence at the Cinergy The next figure shows the day-ahead to real-time price convergence at the Cinergy Hub (the table shows other locations).Hub (the table shows other locations).

• September continued to generally show the usual day-ahead price premium at most September continued to generally show the usual day-ahead price premium at most of the hubs.of the hubs.

In general, the market has tended to exhibit day-ahead price premiums due to the In general, the market has tended to exhibit day-ahead price premiums due to the lower price volatility in the day-ahead market and the higher RSG allocations to real-lower price volatility in the day-ahead market and the higher RSG allocations to real-time purchases.time purchases.

The average day-ahead premiums were slightly lower in September than in August, The average day-ahead premiums were slightly lower in September than in August, although price volatility was somewhat higher in September.although price volatility was somewhat higher in September.

– The increase in price volatility relative to August and July were generally due to The increase in price volatility relative to August and July were generally due to unusually low load (contributing minimum generation issues) and the storm unusually low load (contributing minimum generation issues) and the storm conditions affected MISO for several days.conditions affected MISO for several days.

– Volatility remained much lower than experienced in June. Volatility remained much lower than experienced in June.

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Day-Ahead and Real-Time Price ConvergenceDay-Ahead and Real-Time Price ConvergenceA

vera

geA

bsol

ute

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Midwest ISO Fuel PricesMidwest ISO Fuel Prices

• The next figure shows coal, natural gas, and oil prices from January 2007 through The next figure shows coal, natural gas, and oil prices from January 2007 through September 2008. September 2008.

• Natural gas prices in continued the decline that began in July, which ended an 18 month Natural gas prices in continued the decline that began in July, which ended an 18 month period of steady increases.period of steady increases.

Gas prices averaged $6.81 per MMBTU in September compared to $8.20 in August.Gas prices averaged $6.81 per MMBTU in September compared to $8.20 in August.

Prices have generally continued a downward trend into October, trading around Prices have generally continued a downward trend into October, trading around $6.50.$6.50.

• Illinois basin coal prices, which had risen substantially in 2008, decreased roughly 10 Illinois basin coal prices, which had risen substantially in 2008, decreased roughly 10 percent in September.percent in September.

• Oil prices decreased modestly during the month.Oil prices decreased modestly during the month.

• Despite the decline in gas prices in September, fuel prices overall remain substantially Despite the decline in gas prices in September, fuel prices overall remain substantially higher then the same period last summer.higher then the same period last summer.

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Midwest ISO Fuel PricesMidwest ISO Fuel Prices

$0.00

$8.00

$16.00

$24.00

$32.00

Jan

Feb

Mar

Apr

May Jun

Jul

Aug Sep Oct

Nov

Dec Jan

Feb

Mar

Apr

May Jun

Jul

Aug Sep

2007 2008

$/m

mB

tu

0.0

1.0

2.0

3.0

4.0

Ind

ex

(Jan

uar

y 20

07=

1)

Oil Natural Gas

Illinois Basin Coal Powder River Basin Coal

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Net Load Scheduled in the Day-Ahead MarketNet Load Scheduled in the Day-Ahead Market

• The following figures show variation of the net load scheduling metric during the The following figures show variation of the net load scheduling metric during the daily peak hour.daily peak hour.

The net load scheduled day ahead is a key driver of RSG because low levels can The net load scheduled day ahead is a key driver of RSG because low levels can compel MISO to commit peaking resources to satisfy the increased load in real-time.compel MISO to commit peaking resources to satisfy the increased load in real-time.

• The figure shows that over the past 12 months, the net day-ahead load scheduling The figure shows that over the past 12 months, the net day-ahead load scheduling levels in peak hours have remained steady between 95 and 98 percent. levels in peak hours have remained steady between 95 and 98 percent.

• Net load scheduling in September in the peak hours continued to be reasonably high Net load scheduling in September in the peak hours continued to be reasonably high at 96.3 percent.at 96.3 percent.

This significantly reduces the need to commit peaking resources in the real time to This significantly reduces the need to commit peaking resources in the real time to satisfy the peak load.satisfy the peak load.

This high level of net load scheduling during peak hours contributed to continued This high level of net load scheduling during peak hours contributed to continued very low RSG levels in September.very low RSG levels in September.

Average load scheduling in all hours was 97.4 percent.Average load scheduling in all hours was 97.4 percent.

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Net Load Scheduled in the Day-Ahead MarketNet Load Scheduled in the Day-Ahead Market

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Net Load Scheduled in the Day-Ahead MarketNet Load Scheduled in the Day-Ahead MarketPeak Daily Hour, September 2008Peak Daily Hour, September 2008

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Real-Time Dispatch of Peaking ResourcesReal-Time Dispatch of Peaking Resources

• The following figure shows the real-time dispatch of peaking resources, separately The following figure shows the real-time dispatch of peaking resources, separately indicating the share of these peaking resources that were out-of-merit (offer price indicating the share of these peaking resources that were out-of-merit (offer price higher than the LMP).higher than the LMP).

• Dispatch of peaking resources in September was lower than August 2008 and Dispatch of peaking resources in September was lower than August 2008 and substantially lower than in September 2007.substantially lower than in September 2007.

The decrease in utilization of peaking resources was largely due to the decrease in The decrease in utilization of peaking resources was largely due to the decrease in peak load levels and modest congestion.peak load levels and modest congestion.

High load-scheduling in the peak hours also contributed to the moderate dispatch High load-scheduling in the peak hours also contributed to the moderate dispatch levels for the peaking resources.levels for the peaking resources.

48 percent of peaking resources dispatched were in-merit, which is relatively 48 percent of peaking resources dispatched were in-merit, which is relatively typical for moderate load conditions. typical for moderate load conditions.

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Peaking Unit Real-Time Merit StatusPeaking Unit Real-Time Merit Status

MW 85 74 106

52 117

179

665

457

119

317

218

177

219

458

133

220

182

316

344

625

254

302

184

176

166

156

110

95 69 148

245

143

143

% 68 64 64 57 41 53 41 48 73 67 66 58 69 61 56 61 55 55 45 44 48 51 61 56 56 63 52 66 67 52 42 42 52

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S

2006 2007 2008

Ave

rage

Hou

rly

Pea

ker

Dis

patc

h (M

W)

Out-of-Merit Peaking Resources

In-Merit Peaking Resources

Out-of-Merit

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Real-Time RSG PaymentsReal-Time RSG Payments

• The next two figures show RSG payments made to peaking units and other units on The next two figures show RSG payments made to peaking units and other units on a nominal basis, and adjusted for changes in fuel prices. a nominal basis, and adjusted for changes in fuel prices.

• The first figure shows RSG payments in the real-time market. The first figure shows RSG payments in the real-time market. RSG payments in September were among the lowest for any month since market RSG payments in September were among the lowest for any month since market

start and slightly lower than August on a fuel-adjusted basis.start and slightly lower than August on a fuel-adjusted basis.

In September, the share of real-time RSG paid to peaking resources was very high, In September, the share of real-time RSG paid to peaking resources was very high, which is consistent with historical patterns. which is consistent with historical patterns.

• The second figure shows day-ahead RSG levels for September, which continued to The second figure shows day-ahead RSG levels for September, which continued to be much lower than in the real-time market. be much lower than in the real-time market.

• The third figure shows daily real-time RSG costs incurred by region.The third figure shows daily real-time RSG costs incurred by region. Compared to prior months, RSG payments in WUMS and the West regions were Compared to prior months, RSG payments in WUMS and the West regions were

modest. This reflects continued modest congestion into those areas in September.modest. This reflects continued modest congestion into those areas in September.

There were no significant periods with reliability issues resulting in large RSG There were no significant periods with reliability issues resulting in large RSG payments in any region during September.payments in any region during September.

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Monthly Real-Time RSG PaymentsMonthly Real-Time RSG Payments

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Monthly Day-Ahead RSG PaymentsMonthly Day-Ahead RSG Payments

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Regional Daily Real-Time RSG PaymentsRegional Daily Real-Time RSG PaymentsSeptember 2008September 2008

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Potential Economic Withholding: Output GapPotential Economic Withholding: Output Gap

• The next two figures show the output gap levels used to screen for economic The next two figures show the output gap levels used to screen for economic withholding. withholding.

• The first figure shows the output gap under two thresholds (mitigation threshold, one-The first figure shows the output gap under two thresholds (mitigation threshold, one-half of mitigation threshold). half of mitigation threshold). The output gap levels in September increased slightly at the lower threshold, and were The output gap levels in September increased slightly at the lower threshold, and were

nearly unchanged at the higher threshold compared to August.nearly unchanged at the higher threshold compared to August.

The increase in output gap levels compared to 2006 is primarily due to the introduction The increase in output gap levels compared to 2006 is primarily due to the introduction of the Minnesota NCA in early 2007 and the reduction in NCA thresholds in February of the Minnesota NCA in early 2007 and the reduction in NCA thresholds in February 20082008

– Lower mitigation thresholds cause more resources to fail the output gap screen.Lower mitigation thresholds cause more resources to fail the output gap screen.

No significant changes in participant offer conduct has occurred in recent months.No significant changes in participant offer conduct has occurred in recent months.

• The second figure shows output gap by day. While there is a steady baseline level, The second figure shows output gap by day. While there is a steady baseline level, some days show elevated levels that we routinely investigate.some days show elevated levels that we routinely investigate.

• Our monitoring of the output gap levels on an hourly basis has not raised significant Our monitoring of the output gap levels on an hourly basis has not raised significant competitive concerns.competitive concerns.

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Monthly Output GapMonthly Output Gap

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Peak Hour Output GapPeak Hour Output GapSeptember 2008September 2008

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Submittals to External Entities and Other IssuesSubmittals to External Entities and Other Issues

Submittals to External EntitiesSubmittals to External Entities

• Responded to FERC data request related to our referral regarding transaction Responded to FERC data request related to our referral regarding transaction scheduling around Lake Erie and participated in additional teleconferences scheduling around Lake Erie and participated in additional teleconferences with FERC staff regarding these issues.with FERC staff regarding these issues.

• Met with both the OMS staff and the state Commissioners regarding market Met with both the OMS staff and the state Commissioners regarding market monitoring issues in early to mid-October.monitoring issues in early to mid-October.

Other IssuesOther Issues

• We have continued to work with MISO in reviewing results of the operations We have continued to work with MISO in reviewing results of the operations testing of the ASM software and evaluating the ramp rate modeling testing of the ASM software and evaluating the ramp rate modeling assumptions.assumptions.