2009 State of the Market Report
continued in 2009 and can be explained by their consistent profitability. Since the beginning of 2007, these transactions have netted average profits over $10 per MWh, and occasionally over $20 per MWh. The profitability of these transactions has declined over time and tends to be inversely correlated with the volumes. Profitability is calculated based on the prices in PJM and IESO minus the Midwest ISO’s wheeling charge. It does not include costs allocated by IESO, which would reduce the profitability. These transactions may not always be efficient, even though they are generally profitable.
If these transactions had to pay for the congestion they caused in New York, many would be unprofitable. This raises efficiency concerns. Additionally if PJM priced the transactions at its Midwest ISO interface (instead of its current pricing method for IESO), the average profitability would drop to -$1.30 per MWh. The large difference between the PJM’s IESO and Midwest ISO prices may create incentives to combine other transactions with these wheels to acquire that difference. The expanded use of PARs could help improve the consistency between the schedules and flows. However, this has been significantly delayed by the lack of necessary agreements between the relevant transmission owners and operators, and the Midwest ISO is limited in its ability to facilitate these agreements.
In addition, we have recommended that the Midwest ISO develop a joint agreement with IESO, NYISO, and PJM to modify scheduling and settlement provisions to better align physical flows with the settlements. These modifications should substantially reduce loop flows, increase efficiency, and eliminate inequitable cost transfers. Over the past year, the Midwest ISO has worked with these RTOs to develop the BRM Initiative, which addresses many of these issues. The outline of the BRM proposals were conditionally accepted by the Commission on July 15, 2010, and work should continue to implement them.
Convergence of Prices between the Midwest ISO and Adjacent Markets
Our next analysis evaluates the price convergence and net imports between the Midwest ISO and adjacent markets. Like other markets, the Midwest ISO relies on participants to increase or decrease their net imports to cause prices to converge between markets. Given the uncertainty