Intertie Conduct
in the post Quick Hits world
STRAWDOG DRAFT
7 May, 2008
TABLE OF CONTENTS
PAGE
1
INTRODUCTION................................................................................................... 1
2
INTERTIE CONDUCT SINCE 2004 ................................................................... 2
3
KEY PRINCIPLES OF GOOD INTERTIE CONDUCT ................................... 5
3.1 Is a market participant required to adjust a term flow to hourly
expectations of pool price? ......................................................................................... 6
3.2 Market participants trading on the expectation of physical flow................ 7
3.3 Use of imports and exports to manage RAPP................................................ 7
3.4 Meeting Section 6 obligations through posting or pricing............................ 7
3.5 Additional clarity on acceptable operational reasons................................... 8
3.6 Application of principles to non-intertie conduct.......................................... 9
3.7 Participants suspecting flows may be contrary to a fair, efficient and
openly competitive market. ........................................................................................ 9
4
NEXT STEPS ........................................................................................................ 10
APPENDIX A: INTERTIE FLOW DEC / JAN FROM 2005/6 TO 2007/8 .............. 11
(i)
1
INTRODUCTION
In July 2005 the MSA released to the market a notice providing guidance around
‘Intertie Conduct’. This noticed provided participants with guidance that included
the following principles:
•
A portfolio strategy which relies upon manipulation of pool price
to be successful is not legitimate, and undermines the fairness and
efficiency of the market.
•
Import and export activity should normally be economic versus the
next best market alternative (by opportunity cost), accordant with
market efficiency. Given that current ISO rules require that imports
and exports are price takers, some degree of economic uncertainty
and inadvertence can be expected, and allowed for.
•
As a matter of economic efficiency, absent transmission
constraints, import and export activity should normally close
arbitrage opportunities.
This guidance was the result of extensive work by the MSA seeking to understand
uneconomic activity on the interties. The guidance provided the MSA views
around how participants might avoid breaching the requirements of Section 6 of
the EUA, i.e. engage in conduct that supports a fair, efficient and openly
competitive market.
The AESO’s Market Policy Implementation Phase I (also known as ‘Quick Hits’)
was implemented in December 2007 and contained a number of significant
changes to market rules. One of these changes resulted in import and export
offers being fixed at t-2 hours. Changes after this time are allowable only for
acceptable operational reasons (ISO rule 3.5.4.2 and 6.3.3). Some participants
have contacted the MSA to verify whether its guidance remains unchanged and /
or whether it is possible to provide additional clarity under the new rules. The
MSA believes this is a reasonable request. Imports and exports remain
constrained within the market design to not offer/bid at a price. This structural
difference from intra-Alberta generators/loads results in an increased risk of
undesirable outcomes and consequently the MSA believes it is an area in which
guidance continues to be required.
In accordance with the MSA’s Stakeholder Consultation process the MSA has
produced this ‘Strawdog’.
The ‘Strawdog’ provides an opportunity for
stakeholder comment prior to the formulation of a draft guideline (or other notice
to the market). For a full description of the MSA’s stakeholder engagement
process see http://www.albertamsa.ca/140.html.
Until the Stakeholder
Consultation process has concluded, the MSA’s view on ‘Intertie Conduct’
remains that expressed in the July 2005 notice.
Market Surveillance Administrator
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7 May, 2008
2
INTERTIE CONDUCT SINCE 2004
In January of 2005 the MSA released a ‘Review of imports and exports, and
economic use of the BC Interconnection’. 1 This review was instigated on the
basis of concern from some participants that imports were being used to drive
down pool prices when it suited their portfolio to do so. The review also
considered the use of exports to drive up pool prices. Where import or export
flows were persistent and the transactions were uneconomic the concern was that
pool price fidelity would be damaged. One reason that uneconomic flows may
persist is that although the intertie activity may be loss making on a standalone
basis it could prove beneficial from the perspective of the participants’ overall
portfolio. In the January review the MSA expressed the position that:
The practice erodes market confidence and the integrity of the price signal upon
which our market is based. Until such time as the market is able to self
discipline this behaviour, the MSA will pay very close attention to activity on
the tie lines. Participants should be cognizant of the line between managing their
portfolio and managing the market (manipulating Pool price). Both the MSA
and the market expect reasonable efforts by participants to use the tie line in a
profitable (or least cost) way that demonstrates an effort to avoid manipulating
Pool price. This means adjusting import/export volumes in response to market
outcomes and/or transacting in the OTC market when volumes are available and
prices make sense.
Stakeholder feedback on the MSA’s review contained a variety of responses
ranging from the contention that:
•
‘…market mechanisms and opportunities do exist to provide a market
response and discipline to any attempt by any party to seek to use
‘uneconomic imports’ over a sustained period to affect market prices’;
to the view that
•
‘The Pool Price impact of uneconomic imports is substantial and we
suggest it constitutes an act of market power abuse when it is
sustainable and repeatable’.2
There was also general support for the MSA’s recommendations which included
allowing imports and exports to offer at a price and in restoring the interties to full
capacity.
The MSA continued to monitor intertie behaviour in 2005 and spoke directly to
some participants. This culminated in the July notice referred to in the
introduction. A follow-up report published in September 2005 noted that while
periods of undesirable conduct had continued in 2005 intertie conduct had
improved. 3
The MSA has continued to monitor flows and continues, on occasion, to seek
further information from individual participants where on an ex post basis flows
appear to represent an uneconomic transaction. Based on this monitoring we
1
http://www.albertamsa.ca/files/ImportExportStudy121005.pdf
http://www.albertamsa.ca/244.html
3
http://www.albertamsa.ca/files/UpdateBCTieLineEconomics092305.pdf
Market Surveillance Administrator
2
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believe the magnitude of undesirable outcomes has reduced since our guidance
was first issued but has continued at a low level during 2006 and 2007. 4 The
MSA notes two contributing factors to the reduction in undesirable outcomes:
•
Anecdotal evidence suggests increased liquidity in bilateral hourly
financials which provides participants with a price certain
alternative to importing; and
•
Reduction in loss factors associated with exports has provided
participants with a more cost effective option for counter-flowing
uneconomic imports. Consequently other participants have been
more able to close arbitrage opportunities or at least discipline
deliberately uneconomic flows. 5
New market rules introduced in December 2007 (the ‘Quick Hits’ package) did
not include a mechanism for imports to price into the market as originally
contemplated. The MSA understands the AESO is still pursuing options to make
importers and exporters price responsive (able to respond to dispatch) but this
enhancement may yet be some time away. Further the requirement for importers
and exporters to offer at t-2 hours (as opposed to up to 20 minutes before the top
of the hour) has changed the dynamics of the market. Participants may also face
additional uncertainty as to pool price at the time in which they offer into the
market (and possibly the purchase price in neighbouring markets). Since the
introduction of Quick Hits we have noticed an increase in term flows (multiple
hours) arranged well in advance of t-2 hours.
Some participants had suggested that following Quick Hits import flows in
particular would be much reduced due the additional pool price uncertainty at t-2
hours, particularly for small speculative players. Based on a comparison of data
before and after the introduction of Quick Hits such concerns do not appear to
have materialized. Import and export flows are in aggregate at similar or higher
levels in Dec 2007 / Jan 2008 as in Dec 2005/ Jan 2006 and Dec 2006/ Jan 2007
(see Appendix 1). Further, Quick Hits does not appear to have reduced the
number of smaller importers who still appear able to find profitable opportunities
for flow.
Post Quick Hits ‘efficiency’ (as measured by the lack of an arbitrage opportunity)
of the use of the interties appears to be similar to the range of experience of the
past two years. Further analysis of intertie efficiency can be found in our 2007
Year in Review. 6
Given the changes brought about by Quick Hits, and notwithstanding that
aggregate flows and efficiency appear to be similar, the MSA considers it
worthwhile to engage stakeholders in providing more formal guidance on intertie
conduct. Equally the MSA is interested in participants’ views as to whether some
4
http://www.albertamsa.ca/files/MSA_2007_Year_in_Review_rev.pdf
Prior to 2006 export loss factors on the BC intertie had been as high as 19.50% during on peak periods
and 25% during off peak periods. Following the change in loss factor methodology, export loss factors on
the BC intertie were 5.58% in 2006 and 3.19% in 2007.
6
http://www.albertamsa.ca/files/MSA_2007_Year_in_Review_rev.pdf
Market Surveillance Administrator
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5
aspects of the existing guidance provided in July 2005 can be refined, or even
removed, if they have a potential adverse impact on legitimate business activity.
Market Surveillance Administrator
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3
KEY PRINCIPLES OF GOOD INTERTIE CONDUCT
Section 6 of the act requires that market participant conduct supports the fair,
efficient and openly competitive operation of the market. With respect to conduct
on the intertie the MSA believes the key principles of good intertie conduct
remain unchanged from our 2005 guidance. Namely, that:
•
A portfolio strategy which relies upon manipulation of pool price to be
successful is not legitimate, and undermines the fairness and efficiency of
the market.
Example of undesirable conduct: A market participant arranges their portfolio
to be systematically short/long and then boosts the value of that portfolio by
using uneconomic imports/exports to manipulate pool price down/up - the
volumes of import/export settle at a loss while the value of the participant’s
overall portfolio is enhanced. Manipulation of pool price is not considered a
legitimate strategy for addressing a portfolio issue, howsoever created.
•
Import and export activity should normally be economic versus the next
best market alternative (by opportunity cost), accordant with market
efficiency. Given that current ISO rules require that imports and exports
are price takers, some degree of economic uncertainty and inadvertence
can be expected, and allowed for.
Example of undesirable conduct: Energy is imported into Alberta with a landed
(or opportunity) cost of $CDN75/MWh. The Pool price is settling at $CDN50
and the OTC market has been offered by credit worthy counterparties at
$CDN52/MWh. The import continues for several hours with no bona fide
attempt to moderate import volumes or purchase less expensive energy OTC.
•
As a matter of economic efficiency, absent transmission constraints,
import and export activity should normally close arbitrage opportunities.
Example of undesirable conduct: An import or export widens (rather than
narrows) the price spread between interconnected markets (eg. Alberta vs. MidC) beyond the range or duration that might be explained by uncertainty or
inadvertence.
In the rest of this Strawdog the MSA considers areas in which it believes it is
able to offer additional guidance to the market. In each area we provide some
general discussion and the MSA views. We have also adopted the convention
that where specific feedback from stakeholders in requested we have enclosed
those sections in a text box. The areas considered are:
•
Is a market participant required to adjust a term (or strip) flow to hourly
expectations of pool price?
•
Market participants trading on the expectation of physical flow
•
Use of imports to manage exposure to rolling average pool price
•
Meeting Section 6 obligations through posting or pricing
•
Additional clarity on acceptable operational reasons
Market Surveillance Administrator
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•
Application of principles to non-intertie conduct
•
Participants suspecting flows may be contrary to a fair, efficient and
openly competitive market.
3.1
Is a market participant required to adjust a term flow to hourly
expectations of pool price?
Some market participants, particularly those with generation in neighbouring
control areas and those with access to firm transmission, use the intertie to deliver
physical power sold forward in the Alberta market. A transaction that is
profitable as a whole may for individual hours or even extended sequences of
hours be ‘uneconomic’ (i.e. serving to widen rather than narrow the price
differential between neighbouring markets). The MSA views activity that serves
to widen rather than narrow the price differential between neighboring markets to
be undesirable. However, while the outcome may be undesirable the participant
engaging in the flow may be meeting their responsibilities to support a fair,
efficient and openly competitive market.
A range of views are possible and the MSA seeks stakeholder feedback on the
following interpretations:
•
A participant engaging in a term flow must adjust their volumes during
hours in which flows are expected to be uneconomic (i.e. buying or
selling in the pool instead of importing or exporting) even if the term
flow as a whole is economic.
•
A participant engaging in a term flow does not have to adjust their
flow on a hourly basis provided that as a whole the term flow is
economic. The market is sufficiently transparent and robust that
counterflow of uneconomic hours should be left to other market
participants.
•
A participant engaging in a term flow, that as a whole is economic
should either: a) adjust their volumes on a hourly basis where flows
are expected to be uneconomic or b) provide to the market an
indication that a term flow is occurring in order to facilitate a response
by participants who have expectations that counterflow will be
economic.
In relation to b) in the third bullet the MSA is envisaging a voluntary system
whereby participants could declare their intentions for term flow ahead of
time and the market would be provided with information on the aggregate net
flow for each hour of the next day. Participants making use of such a system
would need to make good the declarations to flow but would not be subject to
scrutiny for potentially hourly uneconomic flow.
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We are interested in stakeholders’ views on whether a participant should be
held to a higher standard of conduct with regard to term flows if they would
gain from any distortion of pool price caused by an uneconomic flow.
3.2
Market participants trading on the expectation of physical flow
Consider the case where a market participant exposed to the Alberta pool price
enters into a trade with an importer (or exporter) either on the expectation or
condition that the importer (or exporter) provides physical flow and thereby
suppresses (or boosts) pool price. Should the physical flow prove to be
‘uneconomic’ both the market participant and the importer (or exporter) are likely
to be the subject of further scrutiny.
It is the MSA’s current view that the focus of scrutiny would shift to the
participant on the buy (or sell) side of the transaction. The MSA invites
comments on its view.
3.3
Use of imports and exports to manage RAPP
The MSA has been asked to provide its views as to whether import and exports
can be used to manage a participants’ exposure to rolling average pool price
(RAPP) due to obligations / entitlements under the Power Purchase Arrangements
(PPA’s).
It is the MSA’s current view that import and export activity should be
economic versus the next best alternative. In contemplating importing /
exporting relative to a PPA RAPP exposure, a participant should not engage in
an import or export transaction that is expected to be loss making on a
standalone basis. The MSA invites comments on its view.
3.4
Meeting Section 6 obligations through posting or pricing
Our July 2005 guidance noted that ‘intertie activity should be economic versus the
next best market alternative’. For example, in the situation where a participant in
Alberta is considering whether to flow an import / export, the participant may
check with potential bilateral counterparties to see whether more economic
alternatives exist to intertie flow.
The MSA is supportive of participants having a wide range of alternatives
available when considering whether flows are ‘economic versus the next best
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market alternative’. A wider range of options is more consistent with an efficient
market.
The MSA has long advocated that the market design should allow interties to be
fully dispatchable and allow flows to offer at a price. The MSA understands the
AESO is considering the possibility of 15 minute dispatchability as a more readily
achievable goal. While dispatchable interties have the potential to improve
market efficiency and render moot the question of intertie conduct, not all
participants are likely to choose to offer a price since the requirement for their
counterparties to be dispatchable may come with a premium. Consequently, we
see value in considering other alternatives both before and after dispatchable
interties are a reality.
One possibility would be the posting a bid or offer on an hourly exchange in
advance of t-2. For example, a participant considering an import at a t-2 with a
landed cost of $75 could post prior to t-2 on an exchange offering to purchase
from the pool at t-2 at a price similar to landed cost. If, after a reasonable time,
no sellers were interested the participant could reasonably conclude the import
flow was expected to be economic.
Potentially such postings may be preferable to bilateral interactions for some
participants (e.g. they may be less time consuming than multiple interactions and
allow the participant considering intertie flow to remain anonymous). They may
also be easier for the MSA to validate ex post without recourse to requesting
information directly from market participants. Although hourly products are not
currently offered on an exchange the MSA understands this would be possible if
there was sufficient interest from market participants.
The MSA is interested in stakeholders’ views around postings on an hourly
exchange, the merits of intertie dispatchability or who have additional
suggestions to broaden the range of alternative mechanisms available to
participants.
3.5
Additional clarity on acceptable operational reasons
In accordance with ISO rule 3.5.3.2, importers who offer energy must submit an
energy restatement in accordance with the relevant rule prior to the settlement
interval in which the offer is to take effect, if the sum of the e-tag quantities
(MW) for such settlement interval is less than the available capability. ISO rule
3.5.4.2 applies the equivalent standard to exporters bidding into the market.
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Given the intent of the must offer / must comply rules, the MSA does not
consider it an acceptable operation reason to issue a restatement where the
intent is to avoid an apparently loss making flow that was expected to be
profitable at t-2. The MSA invites comments on its current view.
3.6
Application of principles to non-intertie conduct
The focus of this Strawdog is on intertie conduct. The MSA wishes to make
participants aware of guidance given in 2005 indicating manipulative activity
whether through the use of the intertie or in province assets is equally
unacceptable. This includes but is not necessarily limited to:
1) transactions for which the primary benefit is derived from altering market
price; and
2) the (systematic/regular) use of uneconomic supply resources (including either
through an intertie or in-province generation) that results in a material impact on
pool price and/or the fair, efficient and openly competitive operation of the
market. 7
The MSA invites comments on its current view and whether participants
consider they would benefit from more specific guidance in other areas.
3.7
Participants suspecting flows may be contrary to a fair, efficient and
openly competitive market.
Participants suspecting intertie conduct has occurred that is contrary to MSA
guidance or, more broadly, not supportive of a fair, efficient and openly
competitive market should bring that conduct to the attention of the MSA. The
procedure for making a formal complaint or referral is described in the MSA’s
Investigation Procedures.
7
http://www.albertamsa.ca/files/UndesirableConductandMarketPower072605.pdf, p.8.
Market Surveillance Administrator
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4
NEXT STEPS
The stakeholder consultation process may lead to, but is not limited to, one of the
following outcomes:
•
that the existing guidance is sufficient and make no changes;
•
that additional clarity can be provided to stakeholders in the form of an
MSA guideline amending the existing guidance; or
•
that potential competitive forces and the structure of the market are on
their own sufficient to support fair, efficient and openly competitive
outcomes and the MSA, as a result is able to remove its existing guidance.
Consequently the MSA is soliciting stakeholder feedback on the issues examined
in this Strawdog and other comments related to the necessity and scope for
guidance in this area. Please refer to the ‘Stakeholder Consultation Process’ for
more details on how to provide feedback.
The expected timeline for this stakeholder consultation is set out in the table
below and will be updated throughout the process. We are currently in the
‘INITIATE’ phase. Stakeholder comments on the Strawdog are due by 23 MAY
2008
Table 1: Project Schedule
Stage
Results
End Date
INITIATE
Publish Strawdog around Intertie May 7, 2008
Conduct
DEVELOP Receive Stakeholder comments on May 23, 2008
Strawdog
DRAFT
Revised (as applicable) Draft of June 9, 2008
potential guidance on Intertie
Conduct
DEBATE
Receive stakeholder comments on June 27, 2008
Draft
DECIDE
Finalise: Options include: Intertie July 14, 2008
conduct guideline / remove existing
guidance / or retain existing guidance
The MSA also wishes to take this opportunity to inform stakeholders that during
2008 we intend to revisit some of the broader recommendations from our January
2005 paper in light of both Quick Hits and broader market changes. In particular
we intend to examine the continued impact of the interties being constrained
below their rated capacity and the whether new interties would enhance a fair,
efficient and openly competitive market.
Market Surveillance Administrator
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APPENDIX A: INTERTIE FLOW DEC / JAN FROM 2005/6 TO 2007/8 8
Figure A.1: Average Hourly Imports December/ January 2005/6 to 2007/8
8
Source: http://ets.aeso.ca/ - Historical – Import Export graph. For some months series are labeled
numerically other months with asset ID’s.
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Figure A.2: Average Hourly Exports December/ January 2005, 2006, 2007
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