Overview
A market thrives when there is open and fair competition among participants. The IESO has embedded aspects of the Market Power Mitigation framework within registration, system operations, settlements and ex-post review processes to drive efficient market outcomes for consumers.
The physical constraints of the transmission system and the need to maintain system reliability may, on occasion, provide a market participant the opportunity to exercise market power by either economically or physically withholding supply from the market.
- Economic withholding occurs when portion of or all available supply is offered at prices higher than IESO-determined reference levels.
- Physical withholding occurs when a portion of or all available capacity is not offered into the market.
The Market Power Mitigation framework executes the following steps when deciding whether to mitigate market participant offer data:
- Check for constrained area conditions resulting in the potential for the exercise of market power.
- If constrained area conditions exist, perform a “conduct test” of submitted dispatch data by determining if the parameter was above pre-established reference levels when accounting for allowable conduct thresholds.
- If the conduct test fails, perform the “price impact test” that determines if the offers result in prices higher than allowable thresholds when compared to prices that would have existed had the market participant offered in at their reference level value.
- If the price impact test also fails, the relevant submitted dispatch data is replaced with the associated reference level value.
IESO will then establish schedules, prices and settlement payments based on the revised set of mitigated parameters.
The following sections describe how mitigation checks are performed within IESO processes.
Validations
To mitigate the exercise of market power through non-financial dispatch data, the IESO validates submitted dispatch data of a resource against its reference levels and predefined conduct thresholds. Conduct thresholds are allowable tolerances outside of the established reference levels.
If the submitted non-financial dispatch data is outside the acceptable range determined by the reference level plus the conduct threshold, that non-financial dispatch data is rejected. Testing of non-financial dispatch data does not include a price impact test.
Ex-Ante Mitigation
To mitigate the impact of economic withholding in energy and operating reserve markets, the IESO performs ex-ante conduct and price impact tests. This methodology determines whether dispatch data submitted by market participants deviates from what would be expected under full competition, and if those dispatch data values would have raised prices as a result.
Under this methodology, mitigation of the relevant dispatch data values only occurs if prices are affected.
When market power has been exercised, and energy or operating reserve prices have been affected, any dispatch data value that differs from its relevant reference level by more than the allowable conduct threshold is substituted with the corresponding reference levels. This ex-ante mitigation process ensures that Market Power Mitigation is built into the day-ahead and pre-dispatch scheduling, helping to ensure that prices are appropriately signaling the cost of providing the product to the market to inform efficient supply and consumption decisions.
Settlement Mitigation
To mitigate the impact of economic withholding, the IESO performs make-whole payment impact tests as part of the settlement process using the conduct and impact testing methodology.
For any resource that fails:
- both ex-ante conduct and price impact tests, relevant dispatch data values are substituted with their applicable reference level values as part of the mitigation process.
- the ex-ante conduct test, but passes the ex-ante price impact test, the ex-ante conduct test results are used by the settlement process to determine the impact to make-whole payments.
Any resource that was not subject to ex-ante conduct testing for a price impact but meets the conditions to test for make-whole payment impact, is subject to conduct and impact tests for make-whole payment impacts.
The impact test is failed if:
- the make-whole payment value using the dispatch data used by the calculation engines to form schedules and prices is greater by a specified make-whole payment impact threshold than the make-whole payment value based on the use of reference levels.
Settlement mitigation is exercised only if make-whole payments fail the impact test. In such instances, the IESO substitutes the relevant dispatch data values that differ from the relevant reference levels by a defined amount with the corresponding reference levels to determine the make-whole payments.
Ex-Post Mitigation
Physical withholding can increase price due to shortage of supply and affect system reliability as the act of reducing supply can, in the extreme, lead to demand that cannot be met. Unlike economic withholding, the mitigation of physical withholding can only occur ex-post because the IESO cannot perform assessments of missing supply in real-time due to time constraints and cannot dispatch supply that was not offered.
The IESO uses an ex-post process to identify instances of potential physical withholding in the energy and operating reserve markets. Ex-post mitigation are actions that are taken by the IESO after the determination of dispatch schedules and prices and the final settlement of the energy and operating reserve markets. The ex-post mitigation process involves conduct and impact tests for the mitigation of physical withholding.
- Conduct test determines if offered quantities were lower than what would have been offered under competitive conditions.
- Impact test determines if prices would have been lower had the withheld quantities been offered into the market.
If both the conduct and impact tests are failed, the IESO may notify market participants on the initial findings of the tests.
Market participants will have an opportunity to make representations regarding the reference quantity used in the initial conduct and impact tests before the IESO issues any settlement charge. If the IESO is satisfied with justification, no settlement charge will be issued.
When justification is not provided by the market participant or is not acceptable to the IESO, and the tests for market power for physical withholding fail, the IESO will issue a settlement charge.
Related Information
For More Information
Contact Customer Relations
Tel: 905.403.6900
Toll Free: 1.888.448.7777
Email: Customer Relations or the Market Power Mitigation team at mpm@ieso.ca.