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2009 State of the Market Report

Executive Summary

the day-ahead market that has contributed to substantial underfunding, recommending that this type of constraint be removed from the day-ahead market.

E.

External Transactions

The Midwest ISO continues to rely heavily on imports from adjacent areas, averaging 3.8 GW in on-peak hours in 2009 and 2.4 GW in off-peak hours. Although the direction of the power flows depend on prevailing prices, the Midwest ISO generally imports power from PJM and Manitoba and exports power to IESO. Net import levels can fluctuate substantially. Large NSI changes contribute to increased price volatility and can raise reliability issues. Large changes in real-time net imports can cause the Midwest ISO to have to commit additional generation and rely more heavily on peaking resources.

Our analysis indicates that prices between Midwest ISO and PJM are relatively well arbitraged in most hours. However, some hours exhibit large price differences because transactions must be scheduled physically at least 30 minutes in advance. This suggests that significant savings could be achieved from optimizing the dispatch of the external interfaces. Hence, we have recommended that the Midwest ISO develop a joint agreement with IESO, NYISO, and PJM to optimize the flow on these interfaces and to modify scheduling and settlement provisions to better align physical flows (i.e., loop flows) with the settlements by the RTOs for transactions around Lake Erie. The RTOs have begun these discussions and developed the Broader Regional Market initiatives to address these issues.

In addition to addressing energy transactions between areas, we recommend that the Midwest ISO remove barriers to trading capacity between regions. This will include working actively with PJM to ensure that undue barriers do not prevent Midwest ISO suppliers from selling in PJM’s capacity market.

F.

Competitive Assessment and Market Power Mitigation

Section VI of our report is a competitive assessment of the Midwest ISO markets that includes a review of potential market power indicators, an evaluation of participants’ conduct, and a summary of the imposition of mitigation measures in 2009. Our analysis shows that market

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