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Review of the Reserves and Operable Capability Markets: New England's Experience in the First Four Months

I review the performance of the operating reserves and the operable capability markets in New England. The review covers the first four months of operation from May 1 to August 31, 1999. The review is based on my knowledge of the market rules and their implementation by the ISO, and the market data during this period, including bidding, operating, and settlement information. In the review, I (1) identify the potential market flaws with these markets, (2) look at the performance of the markets to see if the potential problems have materialized, (3) evaluate the ISO's short-term remedies for these market flaws, and (4) propose alternative medium-term solutions to the identified problems. I find that the OpCap and reserve markets have serious flaws that must be addressed. The ISO's short-term fixes have been necessary and effective at addressing the immediate problems. However, better solutions can be adopted in the medium term. In particular, I recommend (1) eliminate the OpCap market, (2) establish a downward sloping demand curve for reserves, (3) pay the clearing price to all resources that provide the service, (4) establish the true real-time supply curve as simply the quantity of the resource made available in real time, (5) establish back down bids in the TMSR market (bids would be infrequent, perhaps monthly), (6) never set a price in the TMSR market less than the largest lost opportunity cost, (7) continue to cascade the quantities of the bids between operating reserve products, and (8) correct the classification of off-line units that provide a service that looks and acts like TMSR. All of these changes are consistent with the long-term solutions proposed for NEPOOL. These changes represent an important step toward the long-term solution involving multi-settlement energy and reserve markets. These markets should be designed carefully to address the basic economic and engineering issues necessary for an efficient wholesale electricity market.