The ISO’s Zonal Forward Model Proposal:
Overview of  Model and Details/Changes Proposed by Carl Imparato

[Draft #2 - April 20, 2000]

I.  Near-Term Fixes

1.  Zonal model: no change to zonal structure, but need to describe the model in the context of a flowgate model.   

2. 	Commercial model:  ISO uses a simplified commercial model for inter-zonal access.   The model will be released to the market participants.

3.  Portfolio bidding of energy and ancillary services permitted.  This also provides a mechanism for contingent inter-SC trades.  Note:  if ISO moves down the path of decentralized continuous markets as part of long-term fixes (see Section II), this item can wait (because it would be moot in the context of a fully-decentralized market model)

4.	Zone creation criterion:  Apply the “five percent” criterion, including those RMR costs that are not associated with local voltage support or black start service, to define the flowgates (a.k.a. inter-zonal interfaces).   Group nodes together as zones using similar flow distribution factors.

5.  Pricing when locational market power is not present
•	Inter-zonal congestion management: market clearing price for the inter-zonal interface
•	Intra-zonal congestion management: pay/charge as-bid, based on inc/dec bids

6.  Pricing when locational market power exists

•	No price caps or price floors for new generators or demand-side resources, except under “abnormal” system conditions (conditions beyond those for which the system is designed to operate securely).  

•	Under such conditions (and only under such conditions), new resources are subject to the same price caps and price floors as existing resources.

•	Price caps: SC for an incremented resource receives, at its option (which can be exercised on an hourly basis), either:

•	ISO’s Real-Time Zonal Energy Price plus the Local Capacity Adder, or
•	Demonstrable Costs plus the Local Capacity Adder; where

•	Real-Time Zonal Energy Price is (for intra-zonal congestion) the ISO’s real-time price for the zone in which the intra-zonal congestion occurs, or (for inter-zonal congestion associated with a non-competitive zone), the ISO’s real-time price for the adjacent competitive zone

•	Demonstrable Costs are defined to be the costs, including variable production costs and the costs of foregone opportunities, incurred by an SC in providing a service to the ISO; provided that: (i) the SC must provide reasonable justification to support its claim of costs, which may include direct cost data or indirect data such as published market prices or indices; (ii) such costs may be subject to caps or floors imposed by contracts or by FERC or other regulatory authorities; and (iii) the final determination of whether a cost has been sufficiently demonstrated will be subject to arbitration under the terms of the ISO’s tariff. 

•	Locational Capacity Adder is: “k” multiplied by the annual carrying charge of a transmission upgrade that could be constructed to eliminate the congestion problem (amortized over 5 years) allocated to the annual projected number of hours of congestion; and “k” = 1 for years 1-3, 2 for year 4, 4 for year 5, 8 for year 6, etc.

•	Price floor: SC for a decremented resource pays, at its option (which can be exercised on an hourly basis), either the ISO’s Real-Time Zonal Energy Price or the resource’s Demonstrable Costs.

7.	Recourse tariff: Resources that are subject to bid caps must offer a standing bid for unscheduled capacity in the forward market to any SC at the same terms and conditions the resource would be required to bid energy to the ISO.

8.	FTRs:  100% release of FTRs (not using the 99.5% criterion!) annually, plus supplemental releases monthly

9.  RMR and OOM:  no need for RMR or OOM. 

10. Long-Term Grid Planning: model meshes with congestion model through the Locational Capacity Adder (and possibly through LARS process?)

11.  Generation Interconnection: no changes needed to the ACCM model.

II.  Longer-Term Fixes  

1.  Continuous trading through markets:  ISO facilitates the creation of, and uses, decentralized Ancillary Services and Transmission markets, allowing for elimination of CONG

2.  Integration of Ancillary Services and inter-zonal transmission access is handled by SCs (who acquire both using the decentralized markets. The ISO (in its PLR role) also acquires both through the ancillary services, transmission and power exchanges – eliminating the need for centralized black-box CONG and ASM programs.

3.  Inter-SC trade Adjustment Bids: handled though trades in the marketplace

4.	Possible market power mitigation/solution: SCs deemed to have market power (in transmission rights, ancillary services or energy) must offer to buy/sell in exchanges

[ZCMPROPOSAL-CFI-042000]