1. February 2012 CMWG Constraints Competitiveness Tests (CCT)

2. 2 Why do we need it? –To mitigate market power When do we need it? –Annual/ Monthly/ Daily? What do we need to identify? –Questions that CCT is trying to answer for each constraint How do we do it? –Is the current design working? ERCOT PublicFebruary 2012

3. 3 CCT Philosophy Competitive Constraint Test tries to identify for each constraint 1.Can a market participant exercise Market Power by a)offering high to increase the price to resolve the constraint? b)offering low to drive another market participant out of the market when the constraint is binding/ violated?  Calculate Element Competitiveness Index (ECI) 2.Can the constraint be resolved without help from non-Base Load generation of a single Decision Making Entity?  Identify existence of Pivotal player ERCOT PublicFebruary 2012

4. 4 ECI - Herfindahl-Hirschman Index (HHI) Definition: HHI = s 1 ^2 + s 2 ^2 + s 3 ^2 +... + s n ^2, where s i is the market share percentage of the i-th firm) Example 1: non-competitive market –Only 1 firm in the market –HHI = 100^2 = 10,000 –HHI value indicates the market is non-competitive Example 2: competitive market –10 firms with equal shares in the market –HHI = 10*10^2 = 1,000 –HHI value indicates the market is competitive Example 3: “very-good” competitive market –100 firms with equal shares in the market –HHI = 100*1^2 = 100 –HHI value indicates the market is “very-good” and competitive With existing experience at ERCOT, HHI of 2,000-3,000 is usually considered as boundary between competitive and non-competitive –HHI/ECI < 2000, a competitive market/constraint –HHI/ECI > 3000, a non-competitive market/constraint ERCOT PublicFebruary 2012

5. 5 Example Explaining Issue with ECI of Current CCT Example –Import Terminal SF = -0.72, Export Terminal SF = 0.05 –100MW capacity w/ SF=-0.1, 500MW w/ SF=-0.05, 50000MW w/ SF=0 –50000MW equally belong to 50 DMEs Calculation based on current CCT design –100MW capacity w/ SF=-0.15, 500MW w/ SF=-0.1, 50000MW w/ SF=-0.05 (w.r.t. Export Terminal) –ECI SF Threshold is -0.15 / 3 = -0.05 –Total resolving Impact = 100 * 0.15 + 500 * 0.1 + 50000 * 0.05 = 15 + 50 + 2500 = 2565 MW –ECI = (15/2565*100)^2 + (50/2565*100)^2 + 50*(50/2565*100)^2 = 194 (competitive) Calculation based on actual impact seen in power flow –Total resolving Impact = 100 * 0.1 + 500 * 0.05 + 50000 * 0 = 35 MW –HHI of actual impact = (10/35*100)^2 + (25/35*100)^2 = 5918 (non- competitive) ERCOT PublicFebruary 2012

6. 6 Constraint – Distributed Load Ref Bus ERCOT PublicFebruary 2012 Export Terminal (From Bus) Import Terminal (To Bus) Direction to be Evaluated Has negative shift factor w.r.t distributed load ref bus Can move up to help resolve the constraint Can increase cost to resolve the constraint if market share is high Export-Side Network Import-Side Network Has positive shift factor w.r.t distributed load ref bus Can move down to help resolve the constraint Can offer low to prevent from being moved down and get others moved down to resolve constraint

7. 7 Distributed Loads Reference Bus ERCOT PublicFebruary 2012 Shows how the contribution of each generation MW capacity to line flow is proportional to its shift factor w.r.t distributed loads reference bus SFi and SFj are SFs w.r.t single reference bus. The final equation shows that line flows can be show as the generator MW times an effective SF. This SF is the SF w.r.t distributed loads reference. The effective impact of the loads calculated w.r.t distributed loads reference bus becomes zero

8. 8 ECI Calculation Analysis ECI is equal to the sum of the square of the percentages of effective Managed Capacity by each Entity and its Affiliates where the effective Managed Capacity is determined by summing, over all the resources that are selected (have shift factors greater than one-third of the highest resource shift factor), the products (A) the Available Capacity for that Resource and (B) the shift factor of that Resource Should separate ECI be calculated to identify market power to increase cost and market power to drive others out of market market power to increase cost => ECI based on resources with Negative SF market power to drive others out of market => ECI based on resources with Positive SF OR should their be a single ECI to identify market power to resolve the constraint –ECI based on absolute SF ERCOT PublicFebruary 2012

9. 9 Variables Wind capacity –Should full capacity of WGR be considered or use a percentage of full capacity (ex: 8.65% from SARA) –Should the lower % be used just for resources helping to resolve the constraint (Neg SF) and full capacity be used for resources causing the congestion (Pos SF) SF of resources being considered as having significant impact –Should it be greater than1/3 of highest SF or –Should it be same as SCED (greater than 2%) Constraint loading at system load –Should the constraint be considered as competitive if it will not be overloaded at the system level –Should the ECI be determined irrespective of the system load level. ERCOT PublicFebruary 2012

10. 10 Pivotal Player Index (PPI) DME with biggest market share is identified based on non-base-load resource capacities Base-load resource capacities include –Full capacity of nuclear units –Min-gen capacity of coal and lignite units PPI is the sum of impacts from –All base-load –Non-base-load capacity, other than from the biggest DME, needed in addition to base-load to meet the system loads Pivotal player exists if –PPI > Limit ERCOT PublicFebruary 2012

11. 11 PPI Calculation Analysis Should best case scenario be considered –Consider all resources, except those from largest entity, with negative SF are used to meet the system load Or should typical scenario be considered –Consider all resources, except those from largest entity, with significant SF, both positive and negative, are used to meet the system load Should all resources be considered when determining largest entity –Or should only non-base-load be considered Should all resources be used in determining largest entity –Or should resources with SF greater than1/3 SF be used 1/3 of highest non-base-load SF or 1/3 of highest SF ERCOT PublicFebruary 2012