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2009 State of the Market Report

Executive Summary

In April 2009 the Midwest ISO identified an issue with PJM’s market flow calculations that understated PJM’s market flows and settlements from 2005 until the problem was corrected in June 2009. This matter is now the subject of complaints at the Commission and the RTOs are improving their auditing and validation of the market-to-market settlements to minimize future errors. Other JOA issues have arisen that have prompted us to make two referrals on PJM to the Commission’s Office of Enforcement, as well as a number of disagreements between the RTOs regarding the interpretation of the JOA. We recommend that the RTOs work together to clarify the JOA in a number of areas to minimize future disagreements and ensure efficient outcomes.


Financial Transmission Rights

FTRs are important in an LMP-based energy market because they provide an opportunity for the FTR holder to hedge against day-ahead congestion since day-ahead congestion over the path that defines an FTR is rebated to the holder. We analyzed the performance of the FTR market by evaluating how FTR prices reflect the value of their entitlements (i.e., the value of day-ahead congestion associated with the FTRs). Our evaluation shows that FTR pricing has improved substantially since 2005, which indicates that market liquidity has improved and participants have gained experience with the LMP market.

The report also evaluates FTR prices by comparing them to the actual value of congestion payable to FTRs (higher payments are FTR “profits”). FTR profits have decreased from the start of the markets through 2009. This suggests that the overall performance of the FTR market is improving as it becomes more liquid and participants improve their ability to properly value FTRs.

Day-ahead congestion in 2009 was 17 percent less than the obligations due to FTR holders. This compares to a 14 percent shortfall in 2008 and a 19-percent shortfall in 2007. The primary factors contributing to the continued shortfall include difficulties in accurately forecasting loop flows on the Midwest ISO network and topology differences between the FTR and the day-ahead models, including significant line outages that reduced transfer capability assumed in the FTR auctions. To address the under-funding, the Midwest ISO modified assumptions on loop flows and the transmission limits used in the FTR market in prior years. However these results indicate that further improvements are possible. This report identifies one type of constraint in

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