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2009 State of the Market Report

Executive Summary

concentration measured using the Herfindahl-Hirschman Index (“HHI”) is low for the overall Midwest ISO region, although it is considerably higher in the individual regions.

However, a more reliable indicator of potential market power is whether a supplier is “pivotal”, which occurs when its resources are necessary to satisfy load or manage a constraint. In the examination of pivotal suppliers, we focus particular attention on the two types of constrained areas that are defined for purposes of market power mitigation: Narrow Constrained Areas (“NCA”) and Broad Constrained Areas (“BCA”). NCAs are chronically constrained areas – three are currently defined: one in Minnesota, one in WUMS, and one in North WUMS (a subset of WUMS) – that raise more severe potential local market power concerns (so tighter market power mitigation measures are employed), while BCAs include all other areas within the Midwest ISO that are isolated by a binding transmission constraint.

Sixty-four percent of active BCA constraints had a pivotal supplier in 2009, up from 59 percent in 2008. Seventy-five percent of the active NCA constraints into WUMS have a pivotal supplier (down from 79 percent in 2009), as do 75 percent of the active NCA constraints into Minnesota (up from 69 percent). In addition, nearly 80 percent of all intervals in 2009 exhibited an active BCA constraint with at least one pivotal supplier, while 30 percent and 6.5 percent of the intervals exhibited an active NCA constraint with at least one pivotal supplier in WUMS and Minnesota, respectively. These results indicate that local market power persists with respect to both BCA and NCA constraints, and that market power mitigation measures remain critical.

Although the report shows that structural market power remains a significant issue in the Midwest ISO, our analyses of participant conduct show little evidence of attempts to physically or economically withhold resources to exercise market power. Figure E-7 shows our “output gap” metric, which we use to detect instances of potential economic withholding and some forms of physical withholding. The output gap is the quantity of power not produced from resources whose operating costs are lower than the LMP by more than a threshold amount. We perform the output gap analysis using a higher threshold (the mitigation threshold) and a lower threshold (one-half of the mitigation threshold).

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