Addressing Constrained-Off Payments for Intertie Transactions Darren Matsugu, Supervisor - Markets, IESO Presentation to Technical Panel: June 2, 2015

In response to a recommendation by the Market Surveillance Panel (MSP), the IESO is seeking to eliminate constrained-off payments for all Ontario interconnections – IESO has acknowledged the two-schedule uniform market price system has the potential for unwarranted CMSC payments – Differences between the two schedules can create potential pay-as-bid incentives. IESO has taken previous steps to limit CMSC to imports in Constrained-Off Watch Zones i.e. COWZ (MR-00395) – Participants have been observed engaging in “nodal price chasing” in other areas, and through export bids 2 Background

Stakeholder engagement initiative launched to present an overview of the issue, provide analysis and invite discussion from stakeholders to identify impacts that might arise as a result of eliminating these payments Meeting held on May 20 with attendance from 30 stakeholders representing generators, electricity wholesalers (traders), service providers (consultants), both inside and outside Ontario Three main presentations: 1. IESO presented background on theoretical “pay-as-bid” incentives that exists for intertie transactions, and potential efficiency impacts should constrained-off payments be eliminated. 2. MSP presented evidence from recent Panel Report of “nodal price chasing” behaviour has been observe, supporting their recommendation to the IESO 3. IESO experience post-COWZ indicates there has not been a material deterioration of efficiency and no impact upon reliability Presentation materials can be found at Constrained-Off-Payments-for-Ontario-Interties.aspx Constrained-Off-Payments-for-Ontario-Interties.aspx 3 Stakeholder Engagement Initiative

“Fictitious” or “nodal price chasing” transactions are imports or exports offered into the market with no intention to actually flow. These transactions ignore the price spread between markets, instead trying to generate unwarranted c-off payments A MP that expects to be constrained-off can lower their offer price (or raise their bid) to increase the difference between HOEP, in order to maximize their c-off payment Creates a wealth transfer from consumers to traders. Behaviour can result also in inefficiency if the participant “guesses wrong” and is actually scheduled to flow. 4 Pay As Bid Incentives

Eliminating c-off payments to intertie transactions would remove the unwarranted payments and potential inefficiencies from “pay as bid” behaviour However, genuine intertie transactions seeking to arbitrage price between markets would now be at risk of being constrained off without compensation – In response, traders may change their bid/offers to ensure being selected in the constrained schedule. This could result in inefficient dispatch Traders may also choose not to adjust their bid/offers if price uncertainty that may expose them to a loss if the transaction were to flow. 5 Consequence of Eliminating C-Off Payments

Analysis in MSP Report 24 indicates that “intertie traders at times bid in a manner that ensures their export is not scheduled in order to target constrained-off CMSC payments” Constrained-off CMSC paid to exports (Jan 2013-Apr 2014) was $31.6M of which $21.8M “was paid in excess of any reasonable measure of lost profit opportunities” 6 MSP Analysis Market Surveillance Panel: Briefing for SE-ACOP, May 20, 2015 Recommendation 3-1: “The Panel recommends that the IESO eliminate constrained-off Congestion Management Settlement Credit (CMSC) payments for all intertie transactions…” Full MSP analysis and recommendation can be found: ments/MSP/MSP_Report_Nov2013- Apr2014_ pdf ments/MSP/MSP_Report_Nov2013- Apr2014_ pdf

IESO analyzed market outcomes and participant behaviour for the two years following the implementation of MR (Oct. 1, 2012) – Limiting constrained-off payments to imports in COWZ addressed “pay- as-bid” incentives for transactions with no intent to flow – However, IESO considered if there has been an increase of inefficient imports, as the result of participants changing their offer behaviour? Analysis found that in the NW following the rule amendment; – 83% reduction constrained-off payments to imports ($8.8M to $1.5M) – Several MPs ceased submitting import offers on MB, MN interties – Volumes of inefficient imports have decreased – Remaining MPs have not significantly lowered their import offer prices – Small change in inefficiency from negative price import offers ($0.1M) 7 Post COWZ Analysis

Stakeholders invited to provide input in writing to help the IESO complete its understanding of the impacts associated with eliminating constrained-off payments on the interties Written comments due June 1, 2015 IESO will consider stakeholder views and provide a response (mid- June) All communications will be posted on stakeholder engagement webpage 8 Stakeholder Engagement Next Steps