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2009 State of the Market Report

Market Performance

The figure shows the average cleared and offered amounts of virtual supply and virtual demand in the day-ahead market. It shows the components of daily virtual bids and offers and the net virtual load (cleared virtual load less virtual supply) in the day-ahead market from 2007 to 2009. The virtual bids and offers that did not clear (because they were not economic given the prevailing market prices) are shown as dashed areas at the end points of the solid bars.

Cleared virtual transactions decreased 50 percent in 2009, while total offered virtual transactions decreased only 12 percent. These decreases were due primarily to:

  • Tightened credit conditions early in the year – volumes increased in the second half as

these attenuated; and

  • Changes in the allocation of real-time RSG costs described below.

The Commission issued a series of Orders from April 2006 to November 2008 that established a real-time RSG cost allocation rate (the “Interim Rate”) to be used until the new RSG cost allocation is implemented. The Interim Rate allocates nearly all real-time RSG costs to deviations between the day-ahead and real-time markets, such as real-time physical load changes, virtual supply, and import schedule changes. However, RSG charges are also caused by peaking resources not setting prices, congestion, reliability needs, and outages. Hence, the Interim Rate over-allocates costs to deviations relative to the portion of the RSG they actually cause, including virtual supply, which bore roughly 24 percent of all real-time RSG costs under this rate in 2009.

Reduced virtual trading activity raises potential concerns regarding the performance of the day- ahead market because active virtual trading in the day-ahead market promotes price convergence with the real-time market. Good price convergence, in turn, facilitates an efficient commitment of generating resources. Active virtual supply also protects the day-ahead market against market manipulation and market power abuses.

Figure 21 shows monthly average gross profitability of virtual purchases and sales, as well as the volume of virtual supply and demand that cleared the market. Gross profitability is the difference between the price at which virtual traders bought and sold positions in the day-ahead

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