Alan,

I have a few questions regarding the emminent implementation of the new target pricing mechanism.
1. Does uninstructed energy still get paid (if not, we cannot hedge financials)
2. The CISO Table 1. lists an unintended consequence as " Target price may be manipulated due to no obligation to deliver"
	Why is there no obligation to deliver?
3. Is there still a load deviation penalty? Or would that be considered seperately?

Thanks for the help.

Bill

-----Original Message-----
From: Comnes, Alan 
Sent: Wednesday, October 24, 2001 5:23 PM
To: Belden, Tim; Mallory, Chris; Williams III, Bill
Cc: Mara, Susan
Subject: FW: CAISO Notice - Implementation of Revised Target Price
Methodology


All:

Note that the plan to clear overlapping incs and decs is NOT the immediate change.  In the short run, CAISO will imput supplemental bids at cost based on heat rates, gas prices, etc. (Read the bottom half of this first).

I am attaching an other CAISO document on this topic.

If you want a briefing on these changes, please let me know.

Other than the imposition of penalties, I think we are generally supportive of the L-T fix, which will be made via a tariff change (i.e., we will have an opportunity to comment).

GAC

-----Original Message-----
From: CRCommunications [mailto:CRCommunications@caiso.com]
Sent: Wednesday, October 24, 2001 4:57 PM
To: ISO Market Participants; SC Settlements Contacts
Subject: CAISO Notice - Implementation of Revised Target Price
Methodology


MARKET NOTICE
October 24, 2001
Implementation of Revised Target Price Methodology
ISO Market Participants:
SC Settlements Contacts:
Effective Monday, October 29, 2001 the California Independent System
Operator Corporation ("ISO")  will revise its methodology for calculating
the Target Price ("TP"). Provided below is a background on TP, a brief
description of the ISO's current thinking about a long-range solution and
potential implementation schedule, and the ISO's current short-range TP
methodology to be implemented on October 29, 2001.   
Background
The ISO operates a Real-Time Market for Imbalance Energy ("IE")  based on
bids submitted by Market Participants seeking to sell incremental and/or
decremental Imbalance Energy.  In many cases, bids have a "price overlap,"
which occurs when some Scheduling Coordinators ("SCs") are willing to buy
real-time energy (i.e., they have submitted decremental IE bids to reduce
their generator output) at prices higher than the prices at which other SCs
are willing to sell real-time energy (i.e., they have submitted incremental
IE bids to increase their generator output).  
In March 1998, the ISO instituted the TP to eliminate the price overlap
described above. The TP is a calculated price between the highest
decremental bid and the lowest incremental bid.  All incremental bids above
the TP are adjusted down to the TP and all decremental bids below the TP are
adjusted up to it.
Though designed to resolve the price overlap, there are certain difficulties
with the TP as it was implemented.  The major problem was that the ISO
cannot "clear the overlap," i.e., accept all overlapping bids and require
the bidders to actually buy and sell at these prices.  SCs can, and do, use
the inability of the ISO to clear the price overlap to manipulate the TP by
submitting unrealistically high offers to buy and unrealistically low offers
to sell, knowing that the ISO can not require the bidders to fulfill their
bids. 
In April 2000, the ISO sought to eliminate this gaming opportunity by
changing the formula f74or calculating the TP.  As a result, there were many
hours when the TP -- and the published price for Real Time Energy
transactions - was zero.  Thus, while the revised methodology reduced gaming
opportunities, it also produced unrealistic real-time prices that distorted
incentives for SCs to bid into the ISO's Real-Time Market.
Long-Range Solution
After extensive internal review and discussion with Stakeholders, the ISO
has concluded that the best solution is to accept overlapping bids, thus
entirely eliminating the need for the TP.  At its September 20, 2001
meeting, the ISO Governing Board approved this concept.  This long-range
solution will require an ISO Tariff and certain computer software changes
and will not be implemented until approximately Summer, 2002.   Detailed
below is the ISO's interim, short-term TP methodology that will become
effective three business days after this Market Notice, on October 29, 2001.
Short-Range Solution
Also described in the ISO staff memorandum presented at the September 20,
2001 ISO Governing Board meeting and as discussed at the October 3, 2001 and
11, 2001 Market Issues Forum meetings, the ISO will implement an interim
solution to address some of the difficulties with the current methodology
until the ISO can implement the longer-range solution.  Thus, by this Market
Notice, Market Participants are noticed that the ISO will implement the TP
methodology described herein effective Monday, October 29.  
The revised methodology is similar to the original TP methodology, but
features several important enhancements to limit gaming opportunities by
incorporation of Federal Energy Regulatory Commission ("FERC") orders for
price mitigation, limiting the ability of Participating Generators and
Participating Loads to set the TP, and permitting only feasible bids to be
eligible to set the TP.  
Under the original TP methodology, as established in March 1998, a TP
replaced all bid prices within the incremental - decremental price overlap.
The TP was calculated as the market-clearing price ("MCP") that would result
if the overlapping incremental and decremental bids were matched with one
another and Dispatched in merit order through BEEP.  Graphically, this
Target Price can be calculated as the intersection between the incremental
supply curve and the mirror image of the decremental supply curve over the
price axis, as shown in Figure 1. 

 <<...OLE_Obj...>> 
Figure 1. Price overlap elimination by Target Price

The interim, or short-range, TP methodology differs from the original TP
methodology in the following ways: 
*	Only bids from Generating Units under Participating Generator
Agreements ("PGA") or Loads with Participating Load Agreements ("PLA") will
be eligible to set the TP.  This restriction is needed to ensure compliance
with FERC requirements that only participating resources are eligible to set
the MCP.  When the ISO does not Dispatch Imbalance Energy, the TP will
become the MCP.  Thus, only Generators with PGAs and Loads under PLAs will
be eligible to set the TP.  For this reason, inter-tie transactions will not
be eligible to set the TP.
*	Only capacity that can be Dispatched within 10 minutes will be
eligible to set the TP.  This requirement ensures that the TP can only be
set by Generating Units that actually can be Dispatched to meet California's
Load.  This capacity will be based on the total of all Energy and Capacity
products and services bids submitted by each Generating Unit.    For
example, a Generating Unit with a 1MW/minute ramp rate can only increase or
decrease its output by 10 MW within a 10-minute interval, regardless of the
combination of Ancillary Services capacity and Supplemental Energy bids it
has submitted  Thus, its qualifying capacity would be 10 MW.  Priority in
allocating bids to the qualifying capacity will be based first on lowest bid
price, and then on increasing qualities of service.  Although only
qualifying capacity will be considered in the TP calculation, all bids
within the price overlap will be adjusted to the resulting TP.
*	As a final adjustment, the TP will not be higher than the lowest
available gas-fired resource proxy price, as calculated for the
corresponding hour, unless such a proxy price is below the bottom of the
price overlap.  In any such case, the TP will be set to the lowest
incremental Energy bid. The Target Price will also not exceed the applicable
Price Cap.  This provision will ensure that bids dispatched under the TP
will conform to the FERC's requirements on market mitigation pricing.
The short-term TP methodology will use the following equation:
	TP? = max{0, min{TP, LPP, PRC }, LIP}	(1)
where:
TP?	is the adjusted Target Price;	
TP	is the Target Price that clears the price overlap;	
LPP	is the lowest proxy price (applicable to gas-fired resources)	
LIP	is the lowest incremental price.	
PRC	is the applicable Price Cap.	
Please direct questions regarding the TP methodology and this Market Notice
to Greg Ford at gford@caiso.com <mailto:gford@caiso.com>  or Telephone:
(916) 351-2144. 
Client Relations Communications
CRCommunications@caiso.com <mailto:CRCommunications@caiso.com>