Technical ConferenceJune 28, 2010

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Southern Company Energy AuctionTechnical Conference Agenda

• Welcome and Introductions• Energy Auction Overview• Auction Emphasis Week• Survey Results• Enhancements Under Consideration• Clearing Logic Discussion• Next Steps

Energy Auction Overview

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Southern Company Energy AuctionWhat Is It?

• A bid-based and offer-based auction of electrical energy for delivery into the Southern Balancing Authority Area (SBAA)– Two Day-Ahead energy auctions (recallable and firm-LD)– Hour-Ahead energy auctions– Auction participants can offer to sell energy into or bid to buy

energy from any or all of the energy auctions– Open to all entities doing business in the SBAA who have

completed the registration process

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Southern Company Energy AuctionWhat is its Purpose?

• To mitigate potential concerns about Southern Company’s alleged generation dominance in the SBAA– Mitigates physical withholding

• By requiring Southern Company to offer all of its available capacity

– Mitigates economic withholding• By placing a seller offer price cap on Southern Company’s

mandatory offers

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Southern Company Energy Auction Other Attributes

• Southern Company’s compliance with the auction rules is monitored by an Independent Auction Monitor– The Brattle Group

• Day-to-day administration of the energy auction is now conducted by an Independent Auction Administrator– TranServ

• Other auction participants are not governed by the mitigation measures of Southern Company

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Southern Company Energy AuctionDay-Ahead Energy Auctions

• Firm-LD (16 hours) and recallable energy (16 hours)• “Into SoCo”• Bid period opens at 12N two days prior to Delivery Day• Bid period closes and auction evaluated at 6:45 AM one

day prior to Delivery Day• Auctions held every business day except for NERC

holidays

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The Southern Company Energy AuctionHour-Ahead Energy Auctions

• Non-firm energy for the upcoming hour• “Into SoCo”• Bid period open 75 minutes prior to Delivery Hour• Bid period closes and auction is evaluated 60 minutes prior

to Delivery Hour• Auctions held every hour including weekends and NERC

holidays

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Energy Auction History and TimelinePhase I

• Initial Phase I FERC filing (10/17/08)– Southern Company only seller; other participants can only bid to buy– DAE auction closed at 6:30 AM– HAE auction ran from 60-45 minutes prior to Delivery Hour

• FERC conditionally accepts filing (12/18/08)– Conditioned upon allowing third-party sellers within one year (Phase II)

• Phase I implemented (4/23/09)

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Energy Auction History and TimelinePhase II

• Phase II Technical Conference held (8/3/09)– Sent out survey prior to Technical Conference to solicit industry feedback– Proposed adjustments to timing as result of survey– Discussed complexities of clearing logic with multiple sellers

• Phase II FERC filing (10/19/09)– Implemented ability for third parties to sell– Day-Ahead auction closing shifted from 6:30 AM to 6:45 AM– Hour -Ahead bid period moved: opens at 75 minutes prior; closes at 60

minutes prior• FERC accepts filing (12/17/09)• Phase II implemented (1/4/10)

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Energy Auction History and TimelineRecent Events

• IAM filed annual report (4/23/10)• Auction Emphasis Week (AEW) (5/17/10-5/21/10)• Sent out survey at the end of AEW• Technical Conference (6/28/2010)

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Auction Training Materials Available

• Set up new users and roles• Entering bids and offers• Setting up counterparty credit limits• General webMarket system tutorials• Market clearing process tutorial

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http://www.southerncompany.com/energyauction/trainingTools.aspx

• Phase II training tools (Effective 12/4/10)– New Buyer and New Seller Instructions (PDF 243 KB) – Making a Bid in webMarket (PDF 181 KB) – Making an Offer in webMarket (PDF 172 KB) – Energy Auction Clearing Methodology (Phase II-Third

Party Sellers) (PDF 51 KB)

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TranServ Contacts and Training Material

• Questions on auction registration, adding users, setting up credit, other general questions contact :– TranServ International Support desk: 763-205-7099– E-mail: Support@TranServInternational.net

• Detailed training materials can be found on the Southern Company Energy Auction website: http://www.southerncompany.com/energyauction/trainingTools.aspx

Questions?

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Auction Emphasis Week

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Auction Emphasis Week• May 17-21, 2010

– Day-Ahead energy auctions• Tues, May 18 for delivery Wednesday, May 19• Wednesday, May 19 for delivery Thursday, May 20• Thursday, May 20 for delivery Friday, May 21

– Hour-Ahead energy auctions• HE 12 through HE 22, Tuesday, May 18• HE 12 through HE 22, Wednesday, May 19 • HE 12 through HE 22, Thursday, May 20

• Participation– Nine third-party participants

Dreamland picture used by permission

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Survey Results11 completed responses

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Question #1

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Question #2

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Question #3

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Question #4

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Question #5

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Question #6

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Question #7

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Question #8

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Question #9

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Question #10

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Question #11

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Question #12

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Question #13

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Question #14

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Question #15

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Question #16

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Question #17What primary factors have caused your company to not participate (or to not regularly participate) in the Southern Company Energy Auction?

Lack of participation in host CA

Not a true market indicator. Bilaterals are more efficient.

Lack of participation from other counterparties

Generally, a lack of overall interest from the marketplace

Bilateral market easier to use

As a seller, there appears to be a lack of buyer participation. Also, the prices of the SoCo mkt in general are also not always advantageous to a seller outside of SoCo.

N/A

We find it hard to see what we have submitted and or been rewarded.

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Questions #18-20

Southern Company is open to considering enhancements to the webMarket system. Please indicate how each of the following enhancements would affect your likelihood of participating in the energy auction:

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Question #18

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Question #19

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Question #20

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Question 21Are there other enhancements to the webMarket software or to the energy auction process that would increase the likelihood of your participation in the Southern Company Energy Auction? If so, please list and provide a brief explanation.

Allowing submission of strips in the HAE. Allowing the bidder or seller to know the pricing of each hour, not just the cleared price of a successful auction. I would think this would all more aggressive bidding/offering and as well giving the Southern Control Area participants a more clear picture of the markets.

Rib dinner for every cleared market

1) idea of auction is great and want it to work (2) find it hard to see what we have submitted (3) find it hard to see what has been rewarded (4) find the system cumbersome to use, (5) we have to close offer screen and reopen to get results, (6) would also be easier to have 1 screen with bids/offers instead of having to have 2 different screens open (one bid/one offer) (7) would like to be able to submit multiple hrs instead of 1 at a time (8) I think our over-all feeling is that the auction is great but web system is so cumbersome to use that we stay away from the auction.

Questions?

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Enhancements Under Consideration

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Enhancements Under Consideration

• Allowing submission of bids prior to opening of bid period (but bids are not “effective” until bid period)– Primarily needed for the Hour-Ahead energy auction– Bid period is only “open” for 15 minutes– Several auction participants have requested the ability to submit

bids multiple hours in advance

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Enhancements Under Consideration

• Making the bid/offer spread available in real time during the bid period– Could be posted as either the spread (e.g., $5) or the lowest

bid/highest offer (e.g., 30/35)– Creates additional transparency during the bid period

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Enhancements Under Consideration

• Posting the bid/offer spread after the fact– Currently, price is only posted if a transaction clears– Bid/offer spread would be posted whenever a transaction does

not clear– Would be posted on the same schedule as the clearing price– Provides a trend of indicative prices every hour and every day

regardless of whether a transaction clears– Could be posted as either the lowest bid/highest offer (e.g.,

30/35) or the median between the lowest bid and highest offer (e.g., $32.50)

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Enhancements Under Consideration

• Limited transmission modeling– Incorporate transmission modeling similar to the Florida

brokerage system for intra-balancing authority transactions– Would facilitate “Into GTC” and “Into MEAG” delivery points– Could also incorporate automated tagging for intra-balancing

authority tags

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Enhancements Under Consideration

• Complex transmission modeling– Incorporate transmission modeling, including first-tier markets

(similar to the Florida brokerage system)– Would facilitate selling into the auction from sources outside the

Southern Balancing Authority Area– Could also incorporate automated tagging

Revised Clearing Logic

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Auction Clearing Protocol Discussion• Phase I clearing protocol

– One seller; multiple buyers– Determined the economic crossover of the supply and demand curves– Maximized buyer-seller surplus– Greatest complexity was treatment of linked bids and offers

• Phase II introduced additional complexities– Assignment constraints

• No enabling contract• Credit constraints• Statutory limitations

– Linked bids and offers

• Options for Phase II logic– Modify Phase I logic to handle additional complexities– Develop new, optimization-oriented clearing logic

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Existing Clearing Protocol• Initial credit screen• Pass 1 - Determine auction clearing price

– Traverse bid and offer stack to find unconstrained crossover point (where the next bid is higher than the next offer)

• Determine set of potentially winning bid/offer blocks• Pass 2 – Initial matching of winning bids and offers

– Attempt to match bids to offers– Set aside (temporarily infeasible) any bid or offer that is constrained

• Pass 3 – Secondary matching of winning bids and offers– Attempt to resolve all temporary infeasibilities

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Potential Limitations of Existing Clearing Protocol

• With no credit or linking constraints, Phase II clearing logic produces exactly the same result as the Phase I clearing logic

• Under lightly constrained conditions, Phase II clearing logic produces exactly the same result as an optimization-oriented solution

• Under certain highly constrained conditions, Phase II clearing logic could leave a higher priority unconstrained bid or offer unmatched in order to resolve a lower priority constraint– To date, the Phase II clearing logic has never produced such a solution

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Enhancements Under ConsiderationPossible solutions:1. Elimination of linking

– Linking originally established to handle issues such as minimum loading on a combined-cycle

– Elimination of linking greatly simplifies clearing protocol– Sellers with partially sold units can either buy back the sold

portion of the unit or sell the remaining unsold portion in the post-auction bilateral markets, depending upon market price at that time

2. Revised clearing mechanism

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Alternative Auction Clearing Protocol• Implement a clearing logic that determines a single Auction

Clearing Price (ACP) and all possible transactions at that price that:– Generates the maximum total buyer-seller surplus, and– Does not leave any higher-priority unconstrained bids or offers

unmatched,– Subject to

• Assignment constraints• Linked bid or offer constraints

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Auction Clearing Protocol• Protocol premises

– Economic equilibrium of demand and supply will provide maximum economic surplus

– To guarantee matching of higher priority, unconstrained bids/offers first, optimization is run first without linking constraints

• Basic construct of protocol– Step 1: Initialization– Step 2: Optimization – Step 3: Finalization

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Step 1: Initialization• 1-1: Create bid/offer stacks (sort in priority order)

– Same process as current protocol• 1-2: Create credit matrix

– Establishes who can do business with whom• 1-3: Create surplus matrix

– Calculates the buyer/seller surplus for all possible bid/offer combinations

• 1-4: Determine unconstrained crossover– Same process as current protocol

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Step 2: Optimization• 2-1 Determine price level

– For initial iteration, begin with the bid price at the crossover point– For subsequent optimization, increment up and then down the bid stack from

the crossover point to establish price• 2-2 Run optimization process

– Objective is to create matches between bids and offers that maximize surplus– Include all bids/offers willing to transact at the price level determined in Step

2-1– Observes credit constraints as identified in credit matrix in Step 1-2– Does not observe linking constraints– Utilizes surplus matrix created in Step 1-3

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Step 2: Optimization• 2-3 Feasibility checks for links

– Determine if the optimized solution results in the violation of a link constraint

– If no link violations exist, add solution to “solution candidates” list• Note: if all bids or offers are matched in the priority order at the

crossover point, optimization is complete (proceed to step 3)– If linking violations exist, iterations will be necessary

• Eliminate highest priority bid or offer with a link violation and re-run optimization Step 2-2 (continue until no violations exist)

• Repeat steps 2-1 thru 2-3 for next price level– Continue until bid stack is exhausted or time limit is reached

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Step 3: Finalization

• Determine optimized solution and calculate ACP– Find “solution candidate” with maximum surplus– Greater of the offer price of the last offer block matched and the

bid price of the next bid block after the last block matched.– Matched volume and lower ACP will be used as tiebreakers in the

event mualtiple ACPs result in the same surplus

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2. Search

1. Initialization1.1 Sort bids/offers1.2 Calculate Credit Matrix1.3 Calculate Surplus Matrix1.4 Calculate Point of Crossover

2.1. Determine price levelDetermine bids/offersAdjust credit/surplus matrices

2.3. Run OptimizationAssume NO links

2.2. Feasibility

Check

Eliminate unmatched linked bid/offer

Feasible Add the solution to the candidate list

Infeasible

3. Finalize Determine the optimal matching

3.Optimum at CO

No solution

Questions?

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Next Steps

Technical ConferenceJune 28, 2010