IPPSO FACTO/February 2002 issue
February 1, 2002

Toronto: On January 22, the IMO sponsored an open forum for discussion between its staff and market participants, on priorities for "market evolution." Nearly 100 delegates were able to hear each others’ views and register their preferences about where the IMO should focus its attention in the next two to five years. Issues such as the development of the forward market, integration with grid systems in the U.S., locational marginal pricing, and ancillary services were reviewed. "This is a commendable and crucial exercise, to know if the IMO is focusing on the same things as the participants want it to," said IPPSO Executive Director Jake Brooks.

At the outset, the CEO of the IMO David Goulding identified a range of factors, affecting the long-term development of the market, with many of them in the international context. He confirmed that the market will open on May 1. Then various IMO staff overviewed a range of areas in which the Ontario market may be subject to change: Energy Forward Market; transmission expansion, Demand Side Management, Physical Bilateral Contracts, U.S. developments. The guiding principles for market design endorsed by the IMO Board include the following: efficiency, fairness, reliability, and transparency.

Although true physical bilateral contracts are not possible under Ontario’s market rules, a service similar to physical bilateral contracts for energy is. This service, called physical bilateral contracting, reduces prudentials. Should this billing option be extended to other charges as IMO fees and transmission charges? If such a system were to be implemented, there would be implications for how other charges are allocated, including the DRC, IMO fees and transmission charges.

The IMO’s Darren Finkbeiner explained how the U.S. FERC is trying to come up with one consistent transmission scheduling design that can apply across the country. Manitoba will be effectively a member of the Midwest ISO. Michigan is also indirectly affiliated with it, through the Alliance ISO, which is supposed to merge with the Midwest ISO. The Open Scheduling System (OSS) is trying to make it possible for a single bid or offer to be automatically entered into the tolls of the various markets, to facilitate long-distance transmission. He noted that "We can no longer separate reliability standards from commercial standards," and said that "the Standards will be more cognizant of the commercial activity of the market."

Under Ontario’s market design, Operating Reserve is currently procured by the IMO on behalf of the market participants, and billed for through uplift charges. There were discussions about whether this should be changed. Other services including frequency control, AGC, voltage control, reactive power, and black start capability are procured through a competitive contractual process, but could be procured through a competitive market. There were discussions about whether the four-hour advance requirements for scheduling power with the IMO should be shortened. In Ontario because we don’t have a day ahead market, it’s not clear if shortening the four hour advance requirements will increase or reduce certainty.

With respect to transmission costs, one price for Ontario is now the rule, but the IMO will publish the nodal prices. Congestion costs and transmission losses are currently paid for by the entire market. Nodal pricing is a price calculated at each and every injection and offtake point. The Financial Transmission rights market deals only with congestion on the inter-ties. If you want to hedge your congestion costs between two nodes, there will need to be more mechanisms in the LMP.

Peter Segejweich explained that the capacity reserve market can be activated at any time by the IMO, but that it is currently deferred for at least 12 months. ICAP is an alternative.

Comments from the audience were wide-ranging and thoughtful. Tim Bush, from Sithe Power Marketing, stressed the need for an installed capacity market in Ontario to encourage investment in generation. Otherwise you need an uncapped price to transmit capacity signals and the resulting price volatility is politically difficult, he said. ICAP does not result in higher prices. "It is much easier to capitalize for reserve than to capitalize for volatility," he said. Make sure that price signals occur well enough ahead of time to allow for the investment, he suggested, and noted that an ICAP market in Ontario would be consistent with other markets in the northeast. "ICAP needs to be the top priority as we move forward."

Tom Adams of Energy Probe endorsed an energy-only market, without ICAP. Energy-only markets promote dispatchability, he argued, and enhanced elasticity of demand on the part of consumers can address many of the same things that ICAP does. We do need an energy forwards market, but the IMO is not the best party to pursue it. He also observed that there is a much higher appreciation amongst market participants about the advantages of open electricity borders than amongst the public in general. Many are of the view that we can preserve made-in-Ontario prices. Open borders need more advocates.

Peter Fuller of Mirant Americas Energy Marketing agreed with the need for consultation and evolution of the market, including the harmonization of market designs. He said that we need to be able to import and export the ancillaries too. There is a need for more firm border rights, to allow parties to move with certainty, so that we can hedge against it. He also advocated something commonly raised by generators – the need for a binding day-ahead commitment power supply market with its own settlements – saying it would avoid a great deal of inefficiency that occurs between the day ahead and the real time market. New England has problems because of the single settlement market, which had led to needs for regulatory discipline that would have been better accomplished through market discipline. He also agreed with other speakers that in a market where there are energy price caps, there is a need for another product like an installed capacity market. The benefits will accrue as supply becomes tight. It would give structural certainty to invest in things that support reliability.

Keith Rawson of TransCanada Energy Ltd. also endorsed a "two-settlement market" to match what’s going on in the northeast, but leave the forward market to the private sector. He also noted that some problems with liquidity are caused by OPG’s market power, so we need more power inflow from outside Ontario. TransCanada supports the IMO working on other seams issues.

Mike Kurichuk of Bowater said that participants need to develop additional sensitivity to regional issues. In northwestern Ontario the grid is weak, and participants like Bowater could help with reactive power, if there were appropriate incentive in place. Stakeholders should be consulted in the development of regional LMP zones.

Mike McDonald of PG&E Energy Group said that his company supports LMP and the development of the day-ahead market, as part of the energy forward market. He noted, however, that the private sector can develop other aspects of the forward market. With reference to the ICAP market, he observed that there is a lot of theory behind an energy-only market, and "I have yet to see any place where the politics do not interfere with an energy-only market."

David Goldsmith of IVACO, a major energy consumer, put his emphasis on the development of an energy forward market, because assuming there is reasonable liquidity, it allows for price transparency. Encouragement of dispatchable load is important to counteract generation market power, he noted.

Jim Richardson of Tay Hydro suggested that the market has been supply-focsued. "Until we have both supply and demand engaged, we don’t have a real market." The demand side can be responsive to prices. Instead of a capacity reserve market, we should have interval meters on the load side, he suggested.

Darius Vaiciunas of Collus Power Corp. in Collingwood, echoed some of the comments of Jim Richardson and argued that LMP is no use unless the people in those areas are able to respond to price changes. "Without an interval meter, how are you going to respond?" he asked.

Mike McGee of the Building Owners and Managers Association said there are risks for consumers like his members in making purchase contracts. He said, "We need an element of price discovery," and noted that so far, "We have a lousy retail market." He endorsed efforts to speed development of a forwards market, ICAP, and a day ahead commitment market.

Randy Heaton of OPG suggested that we need to give priority to regional parity in the evolution of our market. In the interest of creating a liquid market and stable price, we need to look towards a two-settlement or some way of reflecting what goes on in the northeast. It’s critical for ongoing reliability.

Jim MacDougall of Toronto Hydro Energy Services agreed that a forwards market is an important tool for price discovery. The IMO may catalyze its development, but should not own it. A day-ahead financial commitment market would give the customer a real price signal that would allow them to adjust behaviour and benefit from load curtailment programs. He agreed with other commentators who didn’t see sufficient immediate benefits associated with moving toward a real-time bidding market, "especially given the dominance of some players in Ontario." ICAP would be an effective mechanism to stabilize Ontario prices, he thought.

James Lee of Nova Chemicals said price and power quality in reliability are the main things. "Transparency, liquidity and efficiency are what we are looking for." We know that of all commodities, electricity has the highest volatility. However we need to mitigate it. Without an ancillary market, what incentive is there to provide that efficiently to the market, he asked, and how are we assured of getting a fair and competitive price for ancillaries as well.

Rob Cary representing Sithe endorsed some earlier speakers’ comments that the IMO should have clear policy objectives in setting its priorities: maintenance of reliability and adequacy; creation of the environment for necessary generation investment; alignment/integration with neighbouring market RTO structures. We also need to bear in mind that some elements that have been identified as necessary for the whole market, such as interval meters, are a retail issue led by the OEB. And the biggest driver in the development of forward markets is the SSS system.

1. The first wholesale market priority needs to be definition of an ICAP market. It needs to be set up well before you would otherwise experience unacceptable shortages, to allow for construction lead times. Firm commitment is needed now to move this forward. 2. At the second level of priority, we need to move now towards a two-settlement market with day-ahead generation commitment. This replaces the day ahead forward market now described in the market rules. 3. The IMO should seek to enable, but not to manage financial forward markets beyond that. Real-time bidding shouldn’t be implemented for its own sake and only after there’s a day-ahead commitment market. 4. Encouragement of load price elasticity has a number of facets: retail price elasticity depends on real-time metering; most of the demand side response is possible with interval metering, and would not need full five minute dispatchability; an ICAP market can also provide economic incentive to recognize interruptibility.

Jan Carr of Barker, Dunn and Rossi suggested three principles to consider in setting priorities: what produces the biggest bang for the buck in terms of waivers, emission trading, etc. "Let’s make sure the horse can run, before we fit it for a new harness," he said.

The IMO asked participants for their suggestions as to how future stakeholder consultations should be organized. General comments included the following: • everyone felt the IMO should continue with these consultations • most felt that all participants and stakeholders should be included/able to participate voluntarily • most expressed support for a well-defined and predictable process • most supported meetings supported by tele-conferencing and the opportunity for written input if unable to participate in person • most felt that a mixture of fully involved meetings (i.e. for design and policy issues) and open representative meetings (i.e. for more technical/procedural issues would be best.

For more information, visit the IMO Web site (the discussion paper on market evolution is available there) or contact the IMO at imo.consultation@theimo.com.