Price Formation in Organized Wholesale Electricity Markets 

Docket No. AD14-14-000 

Staff Analysis of

Energy Offer Mitigation in RTO and ISO Markets

October 2014 

For	further	information,	please	contact:	

Emma	Nicholson	

Office	of	Energy	Policy	and	Innovation	

Federal	Energy	Regulatory	Commission	

888	First	Street,	NE	

Washington,	DC	20426	

(202)	502‐8846	

emma.nicholson@ferc.gov

This report is a product of the Staff of the Federal Energy Regulatory Commission. 

The opinions and views expressed in this paper represent the preliminary analysis of 

the Commission Staff. This report does not necessarily reflect the views of the 

Commission. 
Table of Contents

1. Executive Summary ..................................................................................................... 1

2. Approaches to Market Power Mitigation .................................................................... 3

2.1. Structural Approach ............................................................................................... 4

2.2. Conduct and Impact Approach .............................................................................. 5

2.3. Reference Level Calculation .................................................................................. 6

3. Empirical Analysis ...................................................................................................... 7

3.1. Introduction ............................................................................................................ 7

3.2. ISO-NE ................................................................................................................... 8

3.2.1. Data and Methodology ................................................................................. 8

3.2.2. Markups ..................................................................................................... 10

3.2.3. Offer Scores ............................................................................................... 19

3.3. CAISO .................................................................................................................. 24

3.3.1. Data and Methodology ............................................................................... 25

3.3.2. Markups ..................................................................................................... 25

3.4. Conclusion ........................................................................................................... 28

Appendix: Tariff Review of Energy Offer Mitigation Provisions ...................................... 1

A.1 CAISO .......................................................................................................................... 1

A.2 ISO-NE ......................................................................................................................... 4

A.3 MISO ............................................................................................................................ 8

A.4 NYISO ........................................................................................................................ 11

A.5 PJM ............................................................................................................................. 13
 1 

1. Executive Summary 

This	paper	is	part	of	an	effort	to	evaluate	matters	affecting	price	formation	in	the	

energy	and	ancillary	services	markets	operated	by	Regional	Transmission	Operators	

(RTOs)	and	Independent	System	Operators	(ISOs)	subject	to	the	jurisdiction	of	the	

Federal	Energy	Regulatory	Commission	(Commission).		The	RTO	and	ISO	market	

structures	are	designed	to	encourage	competitive,	efficient	outcomes	through	

resource	offers	made	consistent	with	marginal	cost	bidding	and	the	use	of	least	cost	

centralized	dispatch.		When	that	is	not	possible	because	of	structural	or	behavioral	

issues,	market	power	mitigation	rules	take	effect.		This paper: (1) reviews and 

summarizes the different approaches to market power mitigation that apply to 

incremental offers in the day-ahead and real-time energy markets in the RTOs and ISOs; 

(2) uses information regarding incremental energy supply offers submitted through the 

RTOs and ISOs’ economic market clearing processes, as reported in data submitted to the 

Commission pursuant to Order No. 7601

, to analyze the operation of market power 

mitigation rules during a representative peak hour in 2013 for ISO New England Inc. 

(ISO-NE) and the California Independent System Operator Corporation (CAISO)2

; and 

(3) make some initial observations based on an empirical analysis of the data. 

Central to well-functioning market power mitigation, as currently used by the RTOs and 

ISOs, is the measurement of marginal cost. The mitigation rules employed by the RTOs 

and ISOs are designed to ensure that resources are able to bid their marginal costs, but are 

not able to exercise market power. In practice, however, measuring marginal cost can be 

a complicated endeavor. For example, fuel costs, particularly the costs of natural gas and 

fuel oil, can change substantially day-to-day and potentially within the day; further 

opportunity costs for some resources can be difficult to determine with precision. For all 

of these reasons, mitigation rules have been designed to allow resources some bidding 

flexibility. Despite this flexibility, other RTO and ISO bidding rules not related to 

market power mitigation can impair the ability of a resource to bid its marginal cost. 

Some stakeholders argue that bidding rules that require generators to submit offer prices 

 

1 Enhancement of Electricity Market Surveillance and Analysis Through Ongoing Electronic Delivery of Data from 

Regional Transmission Organizations and Independent System Operators, Order No. 760, FERC Stats. & Regs. ¶ 

31,330 (2012). Paragraph 35 of Order No. 760 states the Commission may make publicly available staff white 

papers, among other things, that contain analyses derived from data that the Commission uses. 

2

 Out-of-market commitments are not included in this analysis because such commitments do not occur in a 

competitive framework. Out- of-market commitments often face more stringent market power mitigation rules that 

are not addressed in this paper.
 2 

far in advance of real-time operation or that require the same offer for every hour of the 

day may limit a resource’s ability to reflect its true marginal cost in its offer price.3

 In 

addition, a generator’s perception that the rules result in excessive mitigation may lead it 

to routinely offer in a manner that avoids mitigation but is not necessarily reflective of its 

marginal cost. As such, this paper attempts to make observations regarding resources’ 

offers relative to their respective marginal costs as represented by their reference levels. 

An analysis of incremental energy supply offers shows that in both ISO-NE and CAISO: 

 More than half of all resource offers have no markup above reference 

levels. This is in part because a significant percentage of resources submit 

self-schedules or negative offers. 

 Markups in most portions of the supply curve tend to stay relatively 

constant as load increases. 

 Resource offers in the portion of the supply curve that includes the 

marginal resource (ignoring transmission constraints) tend to have 

relatively low markups. 

o In ISO-NE, resources that are just above or just below the 

intersection of supply and real-time demand have a mean markup of 

between 7 and 13 percent at almost all load levels. 

 The median markup of such resources was zero for virtually 

all load levels 

 The 75th percentile markup for such resources were between 5 

and ten percent for most load levels. 

o In CAISO, relevant resource offers have a mean markup between 2 

percent and 7 percent relative to reference levels that include a ten 

percent adder. 

 The markups of the highest ten percent of offers are substantially more than 

marginal cost (roughly 60 percent in ISO-NE and 177 percent in CAISO). 

In addition, the mean markup of resources in the most expensive part of the 

supply curve is also substantially greater than marginal cost. 

The observation that offers are concentrated at levels very close to marginal cost is 

consistent with either the suggestion that market forces are putting competitive pressure 

on resource offers or that a resource is inclined to offer close to its reference level to 

 

3 See Electric Power Supply Association, Post-Technical Conference Comments, Docket No. AD14-8-000, at 23-25 

(May 15, 2014). 
 3 

avoid mitigation. The observation that at least some offers exceed marginal costs as 

represented by the reference levels could be viewed as evidence that the mitigation rules 

provide some flexibility to account for inaccurate marginal cost estimates. Alternatively, 

recognizing there may be legitimate reasons resources bid above marginal cost, offers 

substantially above marginal cost could suggest the lack of competitive pressure to 

discipline offers. 

This paper does not attempt to assess whether existing market power mitigation 

provisions are appropriate or require revision. The paper is intended to spur discussion 

and lead to a more comprehensive understanding of how market power mitigation 

procedures affect price formation. The conference scheduled for October 28, 2014 will 

provide an opportunity for the Commission staff to learn the views of market monitors, 

market participants, and RTOs and ISOs. 

2. Approaches to Market Power Mitigation 

The Commission ensures that the rates, terms and conditions of wholesale market service 

established by market rules are just and reasonable and not unduly discriminatory or 

preferential. Prices in organized electricity markets are established through tariffs and 

practices that enable a competitive market. Market power mitigation measures help to 

ensure competitive outcomes and are carried out by a combination of independent 

internal market monitoring units within each RTO and ISO and an independent external 

market monitor, or an independent external market monitor alone.4

 

The mitigation procedures in the RTO and ISO energy markets, as set forth in the 

Commission-jurisdictional tariffs, are based on the premise that in a competitive 

wholesale electricity market, a resource’s offer will be approximately equal to its shortrun marginal cost (including opportunity costs). All energy offers are capped at an 

administratively determined value of $1,000/MWh, such that, in the absence of market 

power mitigation, resources are allowed to offer at any price up to $1,000/MWh. If a 

resource does not have market power, competitive pressure should discipline the resource 

into bidding offer prices at or near its marginal cost. 

 

4

 ISO-NE and New York Independent System Operator, Inc. (NYISO) have both internal and external market 

monitors while PJM Interconnection, L.L.C. (PJM) and Midcontinent Independent System Operator, Inc. (MISO) 

have external market monitors. CAISO has an internal market monitor and a Market Surveillance Committee that 

serves as an external market advisor. 
 4 

The details of the market mitigation provisions in each RTO and ISO vary, but two 

general approaches are used: “Structural” and “Conduct and Impact.” PJM and CAISO 

use a Structural approach. ISO-NE, MISO and NYISO use a Conduct and Impact 

approach.5

 These approaches are discussed in more detail below. 

The following elements are common to all six RTOs and ISOs: the use of reference 

levels, the $1,000/MWh offer cap, the use of transmission constraints to identify system 

conditions where resources may require mitigation, and the consideration of resource 

ownership and affiliation.6

 Generally speaking, if a resource is deemed to have market 

power under the mitigation procedures, the resource’s offer will be mitigated to that 

resource’s reference level.7

 

Either the market monitors, or the resources themselves in the case of PJM, develop 

reference levels, which are based on short-run marginal cost estimates for each resource 

and updated regularly (daily in most markets) based on information from resources and 

fuel price indices. The marginal cost estimates are referred to as “reference levels” in 

ISO-NE, MISO, and NYISO, “cost-based offers” in PJM, and “default energy bids” in 

CAISO. For simplicity’s sake, this paper refers to such estimates as “reference levels.” 

Reference levels in CAISO and PJM include marginal cost estimates plus a ten percent 

adder, while reference levels in ISO-NE, MISO, and NYISO only include a marginal cost 

estimate. 

 

2.1. Structural Approach 

In a Structural approach to market power mitigation, resource offers are subject to 

mitigation when pre-specified conditions are met. The conditions focus on the 

concentration of ownership among the set of suppliers available to relieve binding 

transmission constraints that limit competition from neighboring areas. 

 PJM applies the Three Pivotal Supplier test any time that the market solution indicates 

that out of merit resources are needed to relieve a given transmission constraint.8

 

Specifically, the Three Pivotal Supplier test determines, using resource distribution 

 

5

 Southwest Power Pool, Inc. (SPP) also uses a Conduct and Impact approach. SPP’s market power mitigation rules 

are largely excluded from this discussion because its Day-2 market is fairly new and some of the issues related to 

SPP’s market power mitigation provisions are currently pending before the Commission. 6

 Throughout this paper, “supplier” refers to an entity that owns one or more resources. 7

 Resources that bid below their reference levels are not mitigated. 

8

 Monitoring Analytics, LLC, 2013 State of the Market Report for PJM, at 81 (Mar. 13, 2014), available at

http://www.monitoringanalytics.com/reports/pjm_state_of_the_market/2013.shtml. 
 5 

factors, the set of resources that are available to relieve a given transmission constraint. 

For this set of resources, the Three Pivotal Supplier test assesses whether the three largest 

suppliers available to relieve a given constraint are jointly necessary to relieve the 

constraint. Resources that fail the Three Pivotal Supplier test in PJM are mitigated to 

their reference level offers, which consist of a marginal cost estimate plus a ten percent 

adder.9

 

CAISO uses a test similar to the Three Pivotal Supplier test to assess whether a constraint 

is structurally competitive or non-competitive. If the three largest resources available to 

relieve a given constraint are jointly pivotal, then the constraint is deemed noncompetitive and all of the resources that can relieve that constraint are subject to potential 

mitigation, even if a resource is not among the set of jointly pivotal resources.10 

Resources that are dispatched to relieve a non-competitive constraint in CAISO are 

mitigated to the higher of their reference level and a competitive proxy price calculated 

by the internal market monitor. Like PJM, CAISO’s reference level includes a ten 

percent adder above marginal cost. 

2.2. Conduct and Impact Approach 

The Conduct and Impact mitigation approach requires two steps. The first prong is a 

Conduct test that establishes whether a resource’s offer exceeds its reference level by a 

pre-specified threshold. The second prong is the Impact test that assesses the impact of 

that offer on the market clearing price for energy. If a resource’s offer fails the Conduct 

test and the impact of its offer exceeds the pre-specified Impact threshold, that resource’s 

offer is mitigated to its reference level. Thus, mitigated resource offers are replaced with 

reference level offers. 

The Conduct and Impact approach also uses transmission constraints to identify areas 

vulnerable to market power abuses. ISO-NE, MISO, and NYISO adopted similar 

approaches and generally define two market “areas” where market power concerns can 

arise due to transmission constraints: unconstrained and constrained. In unconstrained 

areas, a resource’s energy offer fails the Conduct test if it exceeds its reference level by 

the lower of $100/MWh or 300 percent. It is then subject to the Impact test, which 

determines if that resource’s offer will raise the clearing price by the lower of 200 percent 

or $100/MWh. Resource offers that fail both the Conduct and Impact tests in 

unconstrained areas have their offers replaced with reference levels before the market 

clearing process is executed. In ISO-NE, only pivotal suppliers are subject to the 

 

9 See Appendix for details about PJM’s mitigation procedures. 10 See Appendix for details about CAISO’s mitigation procedures.
 6 

unconstrained area Conduct and Impact tests, while all resources in MISO and NYISO 

are subject to them.11

Resources located within chronically constrained areas are subject to more stringent 

Conduct and Impact tests. These chronically constrained areas are typically identified on 

a static basis, with the designation lasting for approximately 12 months.12 The New York 

City zone in NYISO and the Western Upper Michigan zone in MISO are examples of 

chronically constrained areas. The Conduct and Impact tests for constrained areas in 

ISO-NE, NYISO, and MISO differ slightly but have the same general structure with a 

single threshold that serves as both the Conduct and Impact threshold that is applied 

during periods when transmission constraints bind. 

The threshold in ISO-NE is based on a fixed $/MWh and percentage values, whereas the 

thresholds in MISO and NYISO depend on other factors and can vary by location. ISONE’s Conduct and Impact tests for constrained areas evaluate whether a resource’s offer 

exceeds its reference level by the lower of $25/MWh or 50 percent. The constrained area 

Conduct and Impact thresholds in MISO are based on the net annual fixed cost of a new 

peaker divided by the number of constrained hours in the constrained area during the past 

12 months.13 NYISO’s constrained area Conduct and Impact threshold rises with the 

average historical electricity price in the area and falls with the number of constrained 

hours.14 The Appendix provides further details about the market power mitigation 

provisions in each RTO and ISO. 

2.3. Reference Level Calculation 

Both the Conduct and Impact and Structural approaches to market power mitigation 

require the development of reference levels. Market monitors (internal or external) for 

ISO-NE, MISO, CAISO and NYISO calculate reference levels for incremental energy 

and ancillary service offers. If fuel prices change daily, as is the case with natural gas 

resources, the market monitor may update the reference price every day. If a resource in 

these RTOs and ISOs believes that the market monitor has miscalculated its reference 

levels, it has the opportunity to contact the market monitor and request that the reference 

 

11 The Commission approved ISO-NE’s proposal to eliminate General Area Conduct mitigation on pivotal suppliers 

in the Day-Ahead market once ISO-NE implements its new Flexible Offer Rules in December 2014. ISO New 

England Inc., 145 FERC ¶ 61,014 (2013). 12 Chronically constrained areas can be redesignated as unconstrained if the transmission topology changes due to 

new transmission or generation capacity. 

13 MISO posts the Narrow Constrained Area Mitigation thresholds on its website. See, e.g., MISO, Narrow 

Constrained Area Mitigation Thresholds (Mar. 7, 2014), available at https://www.misoenergy.org/ 

Library/Repository/Report/IMM/2014_NCA_Threshold_Update.pdf. 

14 See Appendix for details about NYISO’s mitigation procedures.
 7 

levels be updated. In contrast, resources in PJM submit their own reference levels 

pursuant to PJM’s Cost Development Guidelines.15 

The market monitors in each RTO and ISO estimate reference levels differently. Market 

monitors in CAISO, ISO-NE, NYISO and MISO calculate reference levels via several 

methods, including using a resource’s lowest previous offers, using the lowest previous 

prices at a resource’s node, and deriving marginal cost from fundamentals like fuel prices 

and heat rates. All of the RTOs and ISOs, including PJM, include provisions to account 

for opportunity costs in reference levels. A key distinction between the Structural and 

Conduct and Impact approaches is that reference levels in the Structural approach include 

a ten percent markup over estimated marginal cost. Reference levels equal an estimate of 

marginal cost in the Conduct and Impact approach.16 

3. Empirical Analysis 

3.1.Introduction 

Staff undertook an empirical analysis of energy supply offers for a representative peak 

hour in 2013 for ISO-NE, and CAISO for the purpose of observing offers relative to 

respective marginal cost as represented by reference levels.17 

The analysis attempts to shed light on whether competitive pressures result in resource 

offers that are consistent with a resource’s short-run marginal cost while allowing a 

resource to offer at least its short-run marginal cost. Understanding the answers to these 

questions is an important element to understanding whether energy market power 

mitigation is inappropriately impeding price formation. 

Staff selected one RTO or ISO from each market power mitigation approach for the 

analysis. ISO-NE was selected for its use of the Conduct and Impact approach and 

CAISO was selected for its use of a Structural approach.18 The analysis uses real-time 

 

15 PJM, Manual 15 Cost Development Guidelines. 

16 Mitigation provisions often permit resource offers that are frequently mitigated to include costs above marginal 

costs where appropriate. 

17 The analysis does not attempt to discern whether resource offers would be higher in the absence of the mitigation 

rules. In part, this is because staff took as given the principle that resource offers should reflect short-run marginal 

cost at all times. In addition, it is inherently difficult to measure the degree to which market power mitigation rules 

discipline offer prices because the only outcomes observable are those from a regime where all resources are subject 

to market power mitigation procedures. 

18 This paper’s focus on CAISO and ISO-NE is not intended to suggest concern with the manner by which either 

implements its mitigation procedures. 
 8 

incremental energy offers submitted by resources and resource reference levels calculated 

by the market monitors to estimate resource markups. The markup represents the extent 

to which a resource’s real-time energy offer exceeded its reference level. Real-time 

markets were selected because real-time loads are more volatile and real-time price 

spikes are more frequent. In addition, some of the uncertainties inherent in measuring a 

resource’s marginal cost are more acute when applied to real-time offers.19 

3.2. ISO-NE 

ISO-NE uses Conduct and Impact tests to implement market power mitigation. ISONE’s mitigation rules depend on whether a resource is located in an area deemed to be 

constrained. All resources in Constrained Areas20 are subject to the Conduct and Impact 

screens while only pivotal suppliers in General Areas are subject to them.21 Resources in 

Constrained Areas may not submit offers that exceed their reference levels by the lower 

of: $25/MWh and 50 percent (i.e., a 50 percent markup). Resources that are pivotal in 

General Areas may not submit offers that exceed their reference levels by the minimum 

of $100/MWh and 300 percent of its reference level (i.e., a 300 percent markup). 

Resources that are not located in a Constrained Area and are not pivotal in a transiently 

constrained General Area are not subject to Conduct and Impact mitigation and are 

instead subject to a system-wide cap of $1,000/MWh. If an ISO-NE resource’s markup 

exceeds the relevant Conduct threshold and the impact of that conduct on the clearing 

price for energy exceeds the pre-determined Impact threshold, that resource’s offer is 

mitigated to its reference level. 

3.2.1. Data and Methodology 

During the calendar year 2013 study period, resources in ISO-NE were permitted to 

submit a single incremental energy offer in the day-ahead market that applied to all 24 

hours of the following operating day. Offers or portions of offers that did not clear the 

day-ahead market could be re-offered into the real-time market during the re-offer period, 

which closed before the operating day began. Offers that cleared the day-ahead market 

 

19 An examination of day-ahead incremental energy offers yielded similar results to the real-time results presented 

here. 

20 The definition of a Constrained Area in ISO-NE depends on whether the resource is offering supply into the realtime market or the day-ahead market. Constrained Areas in the real-time market are located on the import side of a 

binding constraint. Constrained Areas in the day-ahead market are defined as resource nodes with LMPs that 

exceed the Hub by more than $25/MWh. See ISO-NE Tariff, Market Rule 1, App. A, § III.A.5.2.2. 21 A resource is deemed to be pivotal if its output is necessary to satisfy load because transmission constraints 

restrict the availability of supply from other (non-affiliated) resources. 
 9 

remained in effect throughout real-time. Resources were also permitted to submit selfschedules into the day-ahead market, which in most cases guarantees that the resource 

would be committed and generate an amount equal to at least its self-schedule quantity.22 

As such, the real-time offers consist of a combination of self-schedules, cleared dayahead offers, original day-ahead offers that did not clear the day-ahead market, and reoffers. During periods of extreme fuel price volatility, it is possible that offer prices were 

not reflective of the actual cost of production simply because actual fuel costs were 

realized after offers were submitted. To the extent a resource did not request a fuel price 

adjustment to its reference level calculation, this will tend to overstate markups during 

periods of extreme fuel price volatility. 

The results that follow are based on calendar year 2013 data that ISO-NE provided 

pursuant to Order No. 760. The data includes resource offers and resource reference 

levels that were calculated by the market monitors. However, the data only includes a 

resource’s mitigated offer (which was equal to its reference level). Given that mitigation 

was relatively rare in ISO-NE during the study period, staff does not expect that using 

mitigated offers will have a significant impact on the results.23 Additionally, the data 

available do not indicate whether resources were subject to General Area mitigation, 

Constrained Area mitigation, or neither. 

The analysis focused on real-time markups at different load levels because market 

conditions change with the level of demand. Given that short-run supply is fixed, low 

periods of demand are typically characterized by more competition than during high 

demand levels.24 It is instructive to examine markups at different load levels because it 

gives some sense of how markups change with the level of competition. The hour ending 

18:00 is when loads are typically at their highest in ISO-NE. ISO-NE real-time system 

loads for each day during the hour ending 18:00 are plotted in Figure 1. 

 

 

22 Resources that self-schedule their capacity essentially self-commit and forego any uplift payments from the RTO 

or ISO associated with starting up and producing the self-scheduled MW. 

23 According to ISO-NE’s Internal Market Monitor, resource energy offers were mitigated on a total of 129 

occasions in 2013 in the day-ahead and real-time markets combined. See ISO New England Internal Market 

Monitor, 2013 Annual Markets Report, at 30 (May 6, 2014), available at http://www.iso-ne.com/staticassets/documents/markets/mkt_anlys_rpts/annl_mkt_rpts/2013/2013_amr_final_050614.pdf. 

24 This is not always the case because supply can be tight relative to demand during periods of relatively low 

demand due to generator maintenance cycles. However, higher demand typically implies tighter market conditions. 
 10 

Figure 1 

ISO-NE system 2013 real-time load in the hour ending 18:00 

Source: ISO-New England 

ISO-NE loads in the hour ending 18:00 were highest in the summer months of July and 

August 2013, and lowest in the spring and fall periods. The peak load during the study 

period was 27,088 MW and the average load was 17,083 MW. 

3.2.2. Markups 

Resource markups measure the extent to which a resource’s real-time energy offer 

exceeded its reference level and are defined as follows: [offer - reference level]/reference 

level.25 For example, if a resource offers 10 MW at $35/MWh and has a $30/MWh 

reference level, its markup is 16.7 percent (($35-$30)/$30). If a resource submitted a 

self-schedule or an offer less than or equal to its reference level, its markup was recorded 

as zero.26 Markups were also capped at 300 percent in an effort to limit the impact that 

high markups bias the summary statistics.27 While a resource’s reference level may not 

exactly equal its marginal cost, the reference level should generally move in the same 

direction as a resource’s actual marginal cost. If the reference level is too low, then the 

 

25 Separate components of block energy supply were treated as separate offers. It was only possible to calculate 

markups when ISO-NE provided a reference level estimate for the resource. 26 45.6 percent of the markups were coded to zero to reflect self-schedules.

27 For example, if a resource offer had a markup of 340 percent, its markup was replaced with a 300 percent markup 

for purposes of this analysis. Of the sample, 2.3 percent of the markups were replaced with 300 percent because 

they exceeded 300 percent. Capping the markups at 300 percent does not change the results qualitatively but does 

increase the average markup and standard deviation.

0

5

10

15

20

25

30

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

System Load GW)
 11 

markup in this analysis will be overstated, and if the reference level is too high, the 

markup will be understated. 

Table 1 presents summary statistics for real-time markup in ISO-NE during the study 

period. The bottom panel of the table contains markup values at key points of the 

distribution, including its median and major quartiles. The average markup was 21.56 

percent and the median markup was zero, which means the bottom 50 percent of resource 

offers involved a zero or negative markup.28 Many of the zero markups are associated 

with self-schedules. 

Table 1: ISO-NE markup summary statistics from 

submitted real-time offers 

Mean 21.56% 

Standard Deviation 55.42% 

n. obs. 239,926 

Quartiles and key deciles 

10% 0.00%

25% 0.00%

50% (median) 0.00%

75% 12.81%

90% 59.63%

100% (max) 300%

Source: 760 Database, January 1-December 31, 2013 

 

The 75th percentile markup is 12.81 percent, which is lower than the mean markup, 

evidence that the distribution is skewed. 

Several resource offers during the study period had markups that were well above both 

the General and Constrained Area thresholds.29 Resources with such high markups 

typically include resources that fall into one of the following categories: resources with a 

Forward Reserve Requirement30 that are instructed by ISO-NE to submit relatively high 

 

28 If resource offers with negative markups are not coded at zero and instead left unchanged, the mean markup 

equals 18.72 percent. 

29 In ISO-NE, the Unconstrained Area Conduct threshold is a resource offer that exceeds its reference level by the 

lower of $100/MWh or 300 percent and the Constrained Area Conduct threshold is a resource offer that exceeds its 

reference level by the lower of $25/MWh or 50 percent. 

30 Forward Reserve Resources are resources that have received a forward payment to provide reserves. These 

resources are instructed to submit offers into the real-time energy market “at or above the Forward Threshold 

Reserve Price” which “should provide a high probability that the generating resource will not be producing Energy, 

thus allowing the Resource to supply the delivered reserve megawatts when needed.” ISO-NE, Manual 36 for 

Forward Reserve, Revision 18, § 4.1. The Forward Reserve Threshold price is updated daily based on an assumed 
 12 

energy offers that indicate they are available but reduce the probability that the resource 

will clear the energy market; resources that have higher short-run marginal costs than the 

market monitor’s reference level estimate; and resources that simply submit high 

markups. Recognizing there may be legitimate reasons resources bid above marginal 

cost, the existence of markups in excess of 60 percent (the 90th percentile) leaves open the 

possibility that competitive pressure is not disciplining such offers, though further 

analysis would be needed to reach any conclusion. ISO-NE’s external Market Monitor 

examined energy offers and found little evidence of economic withholding in 2013.31 

The statistics in Table 1 represent markups of all incremental offers submitted into the 

real-time market for the hour ending 18:00 – not just cleared offers. Self-schedules and 

resources that submit low offers are virtually guaranteed to clear and thus constitute a 

larger proportion of cleared offers than they do submitted offers. As a result, the 

markups inherent in cleared offers are much lower than the markups of submitted offers. 

In its 2013 State of the Market report, ISO-NE’s internal market monitor found that 

markups contained in the offer of the marginal resource contributed an average of 

$6.30/MWh to the cleared energy price in 2013. The average real-time hub price was 

$56.06/MWh, which suggests that the average resource offer on the margin had a markup 

that was well below the average markup of all submitted offers in Table 1 (21.56 

percent).32 

One would expect that markups depend, at least in part, on where a resource falls in the 

supply mix. Baseload resources that are operating in all hours are likely to either selfschedule or bid at or below their reference cost to avoid being cycled during low load 

periods. Energy limited resources and resources that have a forward reserve obligation 

may bid well above their reference cost. 

To better understand how the dynamics of resource markups change in relation to where 

the resource is in the supply stack, the loads for the hour ending 18:00 on each day were 

separated into ten groups, or load deciles groups (L-0 through L-9),33 and energy offers 

 heat rate and the natural gas price. For example, the daily Forward Reserve Threshold was $49.99/MWh on 

September 9, 2014. 

31 Potomac Economics, 2013 Assessment of the ISO New England Electricity Markets, at 183 (June 2014) available 

at http://www.iso-ne.com/static-assets/documents/markets/mktmonmit/rpts/ 

ind_mkt_advsr/isone_2013_emm_report_final_6_25_2014.pdf. 

32 ISO New England Internal Market Monitor, 2013 Annual Markets Report, at 58-59 (May 6, 2014), available at 

http://www.iso-ne.com/staticassets/documents/markets/mkt_anlys_rpts/annl_mkt_rpts/2013/2013_amr_final_050614.pdf. 

33 Decile L-0 represents the lowest ten percent of the hour ending 18:00 loads, and L-9 represents the highest ten 

percent of the hour ending 18:00 loads. 
 13 

that made up the real-time supply stack were separated into ten offer deciles (O-0 through 

O-9).34 

Table 2 summarizes the mean markup by load and offer decile. The results are also 

graphed in Figure 2. Focusing on offer decile 5 (O-5), and reading down the O-5 column 

of Table 2 gives some indication of how bids in the fifth offer decile changed due to load. 

For example, in the lowest ten percent of load hours, the mean markup in the O-5 offer 

decile was 22.8 percent, as compared to 12.7 percent in the top ten percent of load hours 

(L-9), suggesting that resources in this part of the supply stack may submit lower offers 

relative to their reference level (which implies a lower markup) in order to increase the 

likelihood of being dispatched. Viewed across the rows, the markups on days with loads 

in the bottom ten percent of load during the study period (L-0) show how the average 

markup changed across the supply stack. 

From Figure 2, it can be seen, not surprisingly, that the resource offers with the lowest 

offers also tended to have the lowest markups. At all demand levels, the bottom 20 

percent of the supply stack (O-0 and O-1) consisted of “price takers” that are either selfscheduling or submitting offers at or below reference cost. Recall from the sample 

summary statistics in Table 1 that the bottom 50 percent of markups are equal to zero. 

The figures in Table 2 present the mean (rather than median) markups by load and offer 

deciles, but they also indicate that the bottom portion of the supply curve submits offers 

with zero or negative markups. More price sensitive behavior occurs at other points of 

the supply stack. Bidding behavior by resources at the 40th and higher percentiles of the 

supply stack does not appear to be substantially constrained by the mitigation rules 

regardless of the load level. 

The plots in Figure 2 show that markups for the bottom 40 percent of the supply stack in 

ISO-NE’s real-time market are relatively stable across load levels. It is interesting to 

note that the middle of the supply stack has lower mean markups at the highest load 

levels as compared to lower load levels (O-4 and O-5, respectively at 7.9 and 12.7 for L-9 

as compared to 15.7 and 22.1 for L-8). At the top of the supply stack (O-9), the plots 

show that the markup tends to remain fairly stable or increase as load levels increase. 

Finally, mean markups tend to fall in all offer deciles during the highest load decile (L-9). 

 

34 The prices were first calculated at the bid-step level for every real-time “market-day” and then sorted into deciles 

and assigned a decile value of O-0 through O-9. Markups were calculated independently for each portion of a 

resource’s offer given that marginal costs and offers can vary by output level. 
 14 

Table 2: ISO-NE mean markups from submitted real-time offers 

by load and offer deciles

offer decile 

load decile O-0 O-1 O-2 O-3 O-4 O-5 O-6 O-7 O-8 O-9 

L-0 0.0% 0.0% 8.7% 9.9% 12.5% 22.8% 35.5% 21.3% 22.2% 67.1%

L-1 0.0 0.0 9.9 9.5 12.7 23.9 35.1 21.2 34.1 76.2 

L-2 0.0 0.0 5.9 8.7 14.3 24.1 38.5 31.0 35.8 68.9 

L-3 0.0 0.0 3.0 8.1 13.0 21.4 40.3 35.7 33.7 51.1 

L-4 0.0 0.0 4.8 8.2 17.5 25.9 35.1 32.4 33.9 64.1 

L-5 0.0 0.0 4.5 9.9 16.9 28.2 41.3 34.8 32.9 62.3 

L-6 0.0 0.0 3.9 9.7 18.1 27.3 35.6 31.8 29.0 60.5 

L-7 0.0 0.0 2.3 6.9 14.0 20.0 30.5 36.3 30.1 61.7 

L-8 0.0 0.0 3.6 7.9 15.7 22.1 32.6 36.9 30.4 60.6 

L-9 0.0 0.0 2.8 5.2 7.9 12.7 24.8 43.2 29.1 57.6 

Source: 760 Database, January 1-December 31, 2013 

Figure 2 

ISO-NE real-time markups by load and offer deciles 

Because Conduct and Impact screens are more likely to be implemented during hours 

with high loads when transmission constraints bind (roughly L-7 though L-9), lower 

markups could be expected during these load ranges if the mitigation measures limit 

energy offers in a systematic way. However, the data do not appear to support this. 

Markups are fairly stable along the supply stack (from O-0 to O-8). Mean markups tend 
 15 

to fall between load deciles L-8 and L-9, but mean offers in L-9 still involve positive 

markups that increase with the offer price. 

It warrants mention that some of the mean markups in offer decile O-9 are substantial, 

mostly in excess of 60 percent. Recall that only resources located in Constrained Areas 

and pivotal suppliers in General Areas during constrained periods are potentially subject 

to market power mitigation in ISO-NE. Resources located in areas with sufficient 

competition are not subject to mitigation and are only subject to the system-wide offer 

cap of $1,000/MWh. Resources that offer in the top ten percent of the supply stack rarely 

clear the real-time market because there is typically more than enough capacity in the 

supply stack to serve load. Given that some resources in the O-9 offer decile submit 

offers with relatively high markups, they are seemingly unconstrained in their bidding 

behavior. There may be legitimate reasons to bid above marginal cost. For instance, 

energy limited resources may bid above marginal cost to preserve limited operating 

hours. Nonetheless, offers substantially above marginal cost could suggest the lack of 

competitive pressure to discipline offers. 

Some of the dynamics of mean markups apparent in Table 2 seem to suggest that bidding 

behavior is dependent on when a resource is close to being marginal. For instance, as 

noted above, resource offers in the 60th and 70th percentile of the supply stack (O-5 and 

O-6) have lower markups as load reaches the 80th and 90th percentiles (L-8 and L-9). 

This is consistent with the suggestion that such resources need to bid more competitively 

to ensure that they are able to operate as load increases to the point that these resources 

may be close to marginal. Conversely, resources in the 80th percentile (O-7) have higher 

mean markups as load levels increase. In order to explore this perspective on bidding 

behavior further, the markups were also examined by “offer group” where the daily offer 

curve is divided into groups by their proximity to the quantity demanded for that hour. 

When resources’ real-time offers are finalized in ISO-NE’s re-offer period, real-time 

demand is unknown. Therefore, a range of resources along the supply curve could 

potentially be the marginal unit, depending on where real-time demand intersects the 

supply curve. In a competitive market, resources with costs in the region of the supply 

curve that is likely to intersect with demand need to bid at or near their marginal cost to 

be sure they are called on to operate.35 Resources with costs that typically fall clearly 

above the intersection of supply and demand - comprising the highest cost resources on 

the supply curve - are not typically adversely affected by offers higher than their marginal 

 

35 In a market where some resources have the potential to exercise market power and are part of a larger portfolio of 

resources, they may be able to increase corporate profits by bidding above marginal costs for some resources. 
 16 

cost because an offer at marginal cost is unlikely to clear in the first place. Finally, the 

portion of the supply curve to the left of the intersection of supply and demand always 

contains resources that either self-schedule or submit offers that are virtually guaranteed 

to clear. 

In order to understand how bidding behavior changes depending on whether a resource is 

clearly inframarginal, close to marginal, or clearly not economic, offers have been 

grouped into four categories. The first step was to make a market-wide supply curve for 

real-time offers in the hour ending 18:00 for each day in the sample period by sorting the 

offers in ascending order of price. As displayed in Figure 3, the next step was to separate 

the offers into four offer groups based on their proximity to the quantity demanded in a 

given hour (green vertical line).36 The offer groups are defined as follows: G1 - offers 

that fell on the portion of the supply stack below 95 percent of the quantity demanded 

(Q*); G2 - offers that fell between 95 and 100 percent of the quantity demanded; G3 - 

offers that fell between 100 and 105 percent of the quantity demanded; and G4 - offers 

above 105 percent of the quantity demanded.37 This grouping was performed for every 

day in the sample period. 

 

 

36 Real-time imports were subtracted from ISO-NE’s real-time load in the hour ending 18:00 to estimate the 

quantity demanded from internal ISO-NE resources. 37 Staff performed a sensitivity analysis of the 5 percent threshold to determine offer groups and found that using 

2.5, 7.5, and ten percent thresholds yields similar results.
 17 

Figure 3 

Offer Grouping Example 

 

By design, “potentially marginal” resources would fall within group G2 or G3. As the 

focus of this analysis is on whether market power mitigation is affecting offers in ISONE at the margin, the focus is on offers in G2 and G3. If the resource offers in G2 and 

G3 are able to bid above marginal cost, but in a manner that appears to demonstrate 

similar competitive behavior, then there would be evidence consistent with the suggestion 

that competitive pressure is appropriately disciplining offers at or near the margin while 

market power mitigation provisions provide flexibility to allow resource offers to reflect 

marginal cost. 

Table 3 and Figure 4 present the mean markup implicit in offers submitted into the realtime market by offer group. The markups of resources in groups G2 and G3 are similar, 

which suggests that ISO-NE’s current market power mitigation provisions affect 

potentially marginal resources in a similar way. Furthermore, average markup statistics 

of the potentially marginal resources in G2 and G3 are significantly below the 50 percent 

margin that forms one element of the Constrained Area threshold at all load levels. 

 

Price

($/MWh)

Demand (MW)

P*

Q*

G1

G2 G3

G4

reference level

offer curve
 18 

Table 3: ISO-NE average submitted markup by offer group 

(%) 

 offer group 

load decile G1 G2 G3 G4 

L-0 2.7% 8.2% 9.8 27.7% 

L-1 3.7 8.6 8.2 32.0 

L-2 2.4 6.7 7.0 33.4 

L-3 1.6 6.8 6.2 31.2 

L-4 2.1 7.1 7.3 33.5 

L-5 2.7 7.7 11.1 35.4 

L-6 2.5 16.3 10.4 33.2 

L-7 1.6 8.3 10.7 32.0 

L-8 2.9 11.3 13.2 34.5 

L-9 3.4 11.6 20.5 36.9 

Source: 760 Database, January 1-December 31, 2013 

As such, the markups by offer group do not indicate that market power mitigation 

procedures have systematically limited offers below marginal cost. With the exception of 

load deciles L-6 and L-9, markups in offer groups G2 and G3 are similar, as shown in 

Figure 4 below. The markups of potentially marginal resources also increase with load. 

Figure 4 

ISO –NE Average markup by offer group and load decile 
 19 

The within-group variation in the offer groups at each load decile is significant. Table 4 

below presents the median and 75th percentile markups to better characterize the markups 

in the potentially marginal groups. 

Table 4: ISO-NE potentially marginal resource markup summary statistics 

G2 G3

load 

decile mean median 75th % mean median 75th % 

L-0 8.2% 0.0% 8.3% 9.8% 0.0% 9.8% 

L-1 8.6 0.0 8.5 8.2 0.0 12.3 

L-2 6.7 0.0 6.3 7.0 0.0 7.8 

L-3 6.8 0.0 5.4 6.2 0.0 5.7 

L-4 7.1 0.0 5.0 7.3 0.0 7.4 

L-5 7.7 0.0 5.3 11.1 0.0 10.0 

L-6 16.3 0.0 13.1 10.4 0.0 8.1 

L-7 8.3 0.0 4.3 10.7 0.0 8.4 

L-8 11.3 0.0 6.3 13.2 0.0 12.2 

L-9 11.6 0.0 7.8 20.5 0.9 18.2 

Source: 760 Database, January 1-December 31, 2013 

The mean markup for resources in G3 at high load levels approach the level at which it 

may be appropriate to consider whether the mitigation rules are working as designed to 

encourage competitive bidding. That said, the median markup in load decile L-9 for both 

G2 and G3 is below 1 percent. This suggests that at least 50 percent of resource offers 

have markups of zero or less than one percent. However, markups increase between the 

median and 75th percentile, to 7.8 and 18.2% in G2 and G3, respectively. The mean 

markup for L-9 is higher than the 75th values for both G2 and G3, a further indication of 

the skew in the data characterized by the majority of resources having zero or no markup 

and a relatively small share of resources with higher markups. Thus, to the extent that the 

mitigation rules may not be resulting in competitive bidding for all resources at high load 

levels, the number of resources that are bidding substantially above marginal cost appears 

to be relatively small. 

3.2.3. Offer Scores 

Staff developed an offer score to better understand how resources use the flexibility that 

mitigation rules provide. The offer score estimates the difference, or “headroom,” 

between a resource’s offer price and the General Area Conduct thresholds for energy 

offers. Because data available for this analysis do not indicate which Conduct and 
 20 

Impact thresholds resource offers are subject to, the following analysis assumed that all 

resources were subject to the General Area Conduct threshold, which essentially limits 

resources to the minimum of a $100/MWh or a 300 percent markup. 

The headroom “score” was calculated for each offer segment submitted in the real-time 

market during the study period. The score for resource j’s offer on day t is defined as 

follows: 

scorejt = [offerjt– reference pricejt] / [General Area thresholdjt– reference pricejt] 

The score is restricted to a value between zero and one. If the General Area Conduct 

threshold was systematically restricting bids (e.g., because reference levels were 

measured poorly or with a systematic low bias), the offer scores would approach one. 

Offers with scores above one do not contribute to the analysis because they suggest that 

the resources were not restrained to General Area Conduct threshold. Instead, the 

resource is likely subject to the system-wide ISO-NE offer cap of $1,000/MWh.38 These 

scores are an imperfect measure because some resources in ISO-NE are subject to the 

more stringent Constrained Area threshold, and their scores as calculated here are biased 

downwards. 

Table 5 presents summary statistics of the real-time offer scores in ISO-NE during the 

study period. Similar to the markup, examining the mean or standard deviation in 

isolation does not fully describe the score’s characteristics. The mean score is 0.139 (i.e., 

resources use just about 14 percent of the headroom available to them under the General 

Area Conduct threshold), which implies generous headroom in the average offer and that 

the General Threshold cap is not constraining average real-time energy offers.39 As 

before, restricting attention to the sample mean score can be misleading. Table 5 also 

reflects that a significant portion (at least 50 percent) of resources bid at or below their 

respective reference levels. The 90th percentile score is 0.545, indicating significant 

headroom that the resource could have included in its energy offer without triggering the 

General Area Conduct threshold. It is not surprising that the General Area Conduct 

threshold did not constrain markups because it enables a resource’s offer to exceed its 

reference level by the lower of 300 percent and $100/MWh. 

 

38 Offers that fail the General Area Conduct Threshold are not mitigated if they pass the Impact test, meaning that 

the offer did not increase the real-time energy price at the resource’s node by 300 percent or $100/MWh, whichever 

is lower. Further, only pivotal suppliers in the General Area are subject to the Conduct and Impact tests. 

39 If the Constrained Area general thresholds are used to compute the scores, the mean score is 0.273, which is 

higher than the score implied by the General Area threshold. It still indicates that, on average, even when subject to 

the more stringent mitigation thresholds, resources could have submitted higher offers without being mitigated. 
 21 

Table 5: ISO-NE real-time score 

summary statistics

Mean 0.139 

Standard Deviation 0.277 

n. obs. 239,926 

Quartiles and key deciles 

10% 0.000 

25% 0.000

50% (median) 0.000

75% 0.127

90% 0.545

100% (max) 1.0000 

Source: 760 Database, January 1- December 31, 2013 

Approximately 6 percent of bids have a score of one. However, many of the scores equal 

to one involve offers that were well above the General Area Conduct threshold, which 

suggests that the resource may not have been subject to any energy offer mitigation.40 

Table 6 presents the mean scores of ISO-NE resource bids for the hour ending 18:00 by 

both offer and load decile. Figure 5 plots the mean scores presented in Table 6. The 

score results across offer and load deciles are similar to the markup results. 

 

 

40 The offers with a score equal to one almost always involved offers well in excess of the General Area threshold. 

The average amount by which the offer exceeded the resource-specific General Area threshold was $139/MWh. 
 22 

Figure 5 

ISO-NE Scores by load and offer decile 

The average scores in offer groups G2 and G3 also exhibit similar characteristics. Table 

7 presents the scores by offer group and Figure 6 plots them. As with the markups, the 

scores of resource offers in G2 and G3 are very similar. Given the significant headroom 

implied by the scores, these results suggest that General Area Conduct thresholds do not 

Table 6: ISO-NE average real-time score 

offer decile 

load 

decile O-0 O-1 O-2 O-3 O-4 O-5 O-6 O-7 O-8 O-9 

L-0 0.000 0.000 0.029 0.037 0.053 0.103 0.204 0.167 0.204 0.528 

L-1 0.000 0.000 0.033 0.037 0.057 0.111 0.194 0.160 0.231 0.509 

L-2 0.000 0.000 0.020 0.035 0.070 0.126 0.217 0.222 0.240 0.487 

L-3 0.000 0.000 0.011 0.038 0.065 0.116 0.219 0.237 0.241 0.437 

L-4 0.000 0.000 0.017 0.034 0.081 0.129 0.204 0.220 0.233 0.459 

L-5 0.000 0.000 0.016 0.045 0.088 0.153 0.242 0.248 0.236 0.454 

L-6 0.000 0.000 0.014 0.050 0.104 0.154 0.225 0.230 0.235 0.460 

L-7 0.000 0.000 0.008 0.032 0.076 0.114 0.186 0.246 0.228 0.447 

L-8 0.000 0.000 0.014 0.043 0.085 0.125 0.197 0.250 0.247 0.449 

L-9 0.000 0.000 0.010 0.023 0.042 0.065 0.137 0.277 0.198 0.395 

Source: 760 Database, January 1-December 31, 2013
 23 

have a systematic or significant effect on resources that are potentially marginal. In 

addition, even resource offers that were clearly not economic (group G4) had substantial 

headroom on average, again suggesting that the mitigation rules did not artificially 

restrict offers. 

Table 7: ISO-NE RT average score by offer group

 offer group 

load decile G1 G2 G3 G4 

L-0 0.009 0.028 0.034 0.188 

L-1 0.013 0.031 0.031 0.196 

L-2 0.009 0.025 0.029 0.212 

L-3 0.007 0.029 0.029 0.209 

L-4 0.008 0.030 0.029 0.211 

L-5 0.011 0.038 0.053 0.231 

L-6 0.012 0.074 0.056 0.231 

L-7 0.007 0.039 0.050 0.215 

L-8 0.015 0.054 0.072 0.237 

L-9 0.015 0.064 0.118 0.241 

Source: Order 760 Database, January 1-December 31, 2013 

Figure 6 

ISO –NE average score by offer group and load decile 

Similar to the markups, the scores in ISO-NE also increase with the loads, particularly in 

the highest ten percent of loads. Table 8 presents the mean, median, and 75th percentile 

scores for the potentially marginal offer groups. The offer group scores, like the 
 24 

markups, exhibit a high within-group variance. The median score of the potentially 

marginal resource is zero in all load deciles except the 90th percentile (L-9). 

Table 8: ISO-NE potentially marginal resource score summary statistics

 G2 G3 

load decile mean median 75th % mean median 75th % 

L-0 0.028 0.000 0.028 0.034 0.000 0.034 

L-1 0.031 0.000 0.030 0.031 0.000 0.045 

L-2 0.025 0.000 0.022 0.029 0.000 0.029 

L-3 0.029 0.000 0.022 0.029 0.000 0.021 

L-4 0.030 0.000 0.018 0.029 0.000 0.028 

L-5 0.038 0.000 0.021 0.053 0.000 0.046 

L-6 0.074 0.000 0.066 0.056 0.000 0.041 

L-7 0.039 0.000 0.016 0.050 0.000 0.038 

L-8 0.054 0.000 0.028 0.072 0.000 0.062 

L-9 0.064 0.000 0.043 0.118 0.005 0.120 

Source: Order 760 Database, January 1-December 31, 2013 

 

3.3. CAISO 

CAISO employs Structural mitigation. CAISO’s internal market monitor, the 

Department of Market Monitoring, uses a dynamic competitive path assessment to 

determine whether constraints are competitive or non-competitive. In CAISO, resources 

that can relieve non-competitive constraints are presumed to potentially possess market 

power and are consequently subject to automatic Local Market Power Mitigation. 

CAISO mitigates these resource offers if they exceed the higher of the resource’s 

reference level and the internal market monitor’s estimated competitive proxy price for 

the resource’s node.41 Resources that are mitigated have their bids replaced by the higher 

of their reference level and the competitive proxy price. During the study period, 

resources in CAISO were permitted to update their offers between day-ahead and realtime and throughout the operating day. Real-time offers were due 75 minutes prior to the 

operating hour. 

 

41 See Appendix for details about CAISO’s mitigation procedures. 
 25 

3.3.1. Data and Methodology 

Unlike the analysis above for ISO-NE, this analysis focuses exclusively on markups as 

they vary across load levels and across supply curve position. This was necessary 

because CAISO does not use the Conduct and Impact structure from which to compute 

offer scores. In addition, CAISO is frequently congested, preventing development of a 

market supply curve and the ability to reliably categorize resource offers into offer 

groups.

42 The following analysis of markup in CAISO energy offers mirrors the analysis 

of markups in ISO-NE. 

Reference levels in CAISO are based on marginal cost estimates plus a ten percent adder. 

Accordingly, when interpreting the results below, the reader should keep in mind that the 

reference level estimate is designed to be ten percent higher than a resource’s marginal 

cost. Because imports can be a significant resource to CAISO, import offers were used to 

place offers in the offer deciles. However, imports were excluded from the markup 

summary statistics because of a lack of access to reference levels for imports. 

3.3.2. Markups 

Staff examined real-time offers in the hour ending 14:00 during calendar year 2013 

because the hour ending 14:00 is frequently the daily peak hour of the day. Figure 7 plots 

CAISO’s system load in the hour ending 14:00 during the sample period, which was 

28,797 MW on average and 42,591 MW at its peak. 

Figure 7

CAISO system 2013 real-time load in the hour ending 14:00 

Source: Ventyx Velocity Suite, 2014 

 

42 If one were to identify the marginal resource based on the intersection of quantity demanded and an unconstrained 

supply curve, the marginal resource would typically be in offer decile O-4 for low load levels and offer decile O-5 

for higher load levels. 

0

5

10

15

20

25

30

35

40

45

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

System Load GW)
 26 

Markups were calculated for each offer based on the internal market monitor’s reference 

levels. The mean real-time markup in CAISO during the study period was 25.09 percent, 

with a standard deviation of approximately 64 percent. As in the ISO-NE analysis, selfschedules and negative markups were recorded as zero and markups were capped at 300 

percent.43 Table 9 presents key summary statistics of markups. The CAISO markup 

statistics are based on the set of mitigated offers that were used to clear the real-time 

market.44 Similar to ISO-NE, the bottom 50 percent of markups in CAISO were at or 

below zero.45 This indicates that a significant amount of resources in CAISO selfschedule or submit energy offers below their reference levels. 

Table 9: CAISO markup summary statistics from 

submitted real-time offers 

Mean 25.09% 

Standard Deviation 64.30% 

n. obs. 368,964 

Quartiles and key deciles 

10% 0.00% 

25% 0.00% 

50% (median) 0.00% 

75% 9.44% 

90% 77.24% 

100% (max) 300.00% 

Source: 760 Database, January 1-December 31, 2013 for hour ending 14:00. 

The markups summarized in Table 9 reflect all offers submitted into CAISO’s real-time 

market during the hour ending 14:00, many of which did not clear. The markups inherent 

in real-time cleared offers - the offers that ultimately affect real-time prices - were much 

lower during the sample period. CAISO’s internal market monitor estimated that the 

marginal resource offer (i.e., the offer that established the clearing price for energy) in 

2013 contained a negative 3.8 percent markup on average relative to a competitive 

baseline.46 While this figure is not directly comparable to the hour ending 14:00 markups 

 

43 Of the total sample, 42.4 percent of markups were coded at zero to correct for negative offers, self-schedules, or 

regulatory must-take schedules and 3.2 percent were coded at 300 percent. 

44 Given the infrequency of mitigated markups relative to the sample as a whole, the sample mean of markups that 

were not mitigated is quite similar at 25.21 percent. 

45 If negative markups during the study period were not coded as zero the mean markup of submitted offers falls 

from 25.09 to 11.55 percent. The CAISO offers contained more negative markups relative to reference levels than 

the ISO-NE offers because the CAISO reference level includes a ten percent markup. 46 CAISO Department of Market Monitoring, 2013 Annual Report on Market Issues & Performance, at 65-66 (Apr. 

2014), available at http://www.caiso.com/Documents/2013AnnualReport-MarketIssue-Performance.pdf. 
 27 

in Table 9, it suggests that resources that submit offers with high markups typically do 

not clear the market and thus do not impact the market clearing price, except to the extent 

a resource would have been economic but for bidding above its marginal cost. The 

markups implicit in cleared offers are much lower than the markups in submitted offers. 

Table 10 presents the average markup in CAISO during the sample period by both load 

and offer decile. The average markups are plotted in Figure 8. The markups are fairly 

stable across the load deciles, suggesting that average markups are not highly sensitive to 

loads. Like ISO-NE, the resources concentrated at the top of the supply curve submitted 

energy offers with significant markups. Recall that resources that are not capable of 

relieving a non-competitive constraint in CAISO are free to bid up to the $1,000/MWh 

system-wide offer cap. Resource offers below the 70th percentile of offers tend to have 

very modest markups. This may be in part because the reference cost includes a ten 

percent adder. As long as the reference cost, including the ten percent adder, is a 

reasonable estimate of marginal cost, low markups are consistent with competitive 

pressure disciplining offers and are not necessarily indicative of overly restrictive 

mitigation rules. 

Table 10: CAISO markups from submitted real-time offers 

by load and offer deciles 

offer decile 

load 

decile O-0 O-1 O-2 O-3 O-4 O-5 O-6 O-7 O-8 O-9 

L-0 0.0% 0.0% 0.0% 1.9% 5.4% 3.8% 10.8% 25.1% 75.4% 174.1%

L-1 0.0 0.0 0.0 1.2 5.6 3.4 12.2 30.2 75.4 177.0 

L-2 0.0 0.0 0.0 1.4 6.5 4.1 11.8 22.7 69.0 171.3 

L-3 0.0 0.0 0.0 0.8 6.5 4.4 10.1 25.2 75.5 175.9 

L-4 0.0 0.0 0.0 0.8 7.1 3.5 10.1 22.7 70.5 173.1 

L-5 0.0 0.0 0.0 0.4 5.2 4.0 11.4 28.3 64.9 175.9 

L-6 0.0 0.0 0.0 0.2 5.4 2.0 11.6 27.9 58.7 160.6 

L-7 0.0 0.0 0.0 0.0 4.5 2.5 11.4 31.5 64.4 173.9 

L-8 0.0 0.0 0.0 0.0 3.2 2.6 8.3 32.5 60.6 178.7 

L-9 0.0 0.0 0.0 0.0 1.5 2.7 5.2 24.1 55.4 174.3 

Source: 760 Database, January 1-December 31, 2013 for hour ending 14:00. 
 28 

 Figure 8 

Average markups by load and offer deciles 

 

3.4. Conclusion 

This paper employed an empirical analysis in two ISOs that use different approaches to 

mitigation in an attempt to ascertain whether mitigation is affecting price formation. An 

analysis of incremental energy supply offers shows that in both ISO-NE and CAISO: 

 More than half of all resource offers have no markup above reference 

levels. This is in part because a significant percentage of resources submit 

self-schedules or negative offers. 

 Markups in most portions of the supply curve tend to stay relatively 

constant as load increases. 

 Resource offers in the portion of the supply curve that includes the 

marginal resource (ignoring transmission constraints) tend to have 

relatively low markups relative to reference levels. 

o In ISO-NE, resources that are just above or just below the 

intersection of supply and real-time demand have a mean markup of 

between 7 and 13 percent at almost all load levels. 

 The median markup of such resources was zero for virtually 

all load levels. 

 The 75th percentile markup for such resources was between 5 

and ten percent for most load levels. 

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

L-0 L-1 L-2 L-3 L-4 L-5 L-6 L-7 L-8 L-9

average markup

load decile

O-0 O-1 O-2 O-3 O-4 O-5 O-6 O-7 O-8 O-9

offer

decile
 29 

o In CAISO, relevant resource offers have a mean markup between 2 

percent and 7 percent relative to reference levels that include a ten 

percent adder. 

 The markups of the highest ten percent of offers are substantially more than 

marginal cost (roughly 60 percent in ISO-NE and 177 percent in CAISO). 

In addition, the mean markup of resources in the most expensive part of the 

supply curve is also substantially greater than marginal cost. 

The observation that offers are concentrated at levels very close to marginal cost is 

consistent with either the suggestion that market forces are putting competitive pressure 

on resource offers or that a resource is inclined to offer close to its reference level to 

avoid mitigation. The observation that at least some offers exceed marginal costs as 

represented by the reference levels could be viewed as evidence that the mitigation rules 

provide some flexibility to account for inaccurate marginal cost estimates. Alternatively, 

recognizing there may be legitimate reasons resources bid above marginal cost, offers 

substantially above marginal cost could suggest the lack of competitive pressure to 

discipline offers. 

The conference scheduled for October 28, 2014 will provide an opportunity for the 

Commission staff to learn the views of market monitors, market participants, and RTOs 

and ISOs on these observations and other issues associated with the mitigation rules. 
Appendix 

 A-1 

Appendix: Tariff Review of Energy Offer Mitigation Provisions 

The following is a summary of the market power mitigation provisions that govern 

incremental energy offers submitted into the day-ahead and real-time markets for certain 

RTOs and ISOs. These provisions are designed to identify and mitigate economic 

withholding, whereby a resource attempts to increase its profits by raising its incremental 

energy offer above the competitive level. The RTOs and ISOs have separate market 

mitigation provisions for resources that are committed out of market, but these provisions 

are beyond the scope of this paper and not summarized below. 

A.1 CAISO

Markets/products Subject to Mitigation 

 Energy 

 Ancillary services 

Monitoring Structure 

 Internal: Department of Market Monitoring 

 Market Advisor: Market Surveillance Committee 

Mitigation Summary 

CAISO’s market monitoring is conducted by the Department of Market Monitoring, the 

internal market monitor. The Market Surveillance Committee serves as an external 

advisor to the CAISO’s Chief Executive Officer and Governing Board.47 CAISO 

executes automated local market power mitigation procedures in the day-ahead market, 

the Hour-Ahead Scheduling Process, and the real-time market.48 Under CAISO’s 

mitigation procedures, only resources that affect constraints deemed non-competitive are 

potentially subject to mitigation. Local market power mitigation uses a competitive path 

assessment to determine whether constraints on the system are competitive or noncompetitive. Constraints that require three jointly pivotal suppliers to relieve them are 

deemed to fail the Three Pivotal Supplier test and are consequently deemed noncompetitive.49 Any resource that is dispatched to relieve a non-competitive constraint is 

 

47 CAISO Tariff, Att. O, § 1. 

48 CAISO completed implementation of its local market power mitigation procedures in April 2012 in the day-ahead 

market and in May 2013 for the Hour-Ahead Scheduling Process and real-time market. 

49 CAISO Department of Market Monitoring, 2013 Annual Report on Market Issues & Performance, at 157 (Apr. 

2014), available at http://www.caiso.com/Documents/2013AnnualReport-MarketIssue-Performance.pdf. 
Appendix 

 A-2 

subject to mitigation. Such a resource is mitigated if its offer would increase the price at 

the constraint above a competitive proxy price calculated by the market monitor. The 

competitive proxy price estimates what the price would be in the absence of the noncompetitive constraint. 

Resources that are mitigated have their offers replaced with the higher of their reference 

level (referred to as a default energy bid in CAISO), or a competitive proxy price. The 

internal market monitor explained in a 2013 third quarter report that resource offers were 

more likely to be mitigated to a competitive proxy price than their reference levels.50 

CAISO also maintains a system-wide $1,000/MWh offer cap. 

The local market power mitigation process is performed in a pre-market mitigation run 

and the market (day-ahead or real-time market) is cleared on the set of bids that have 

been mitigated (where appropriate). While virtual bids and bids from demand response 

resources are monitored, they are not currently subject to automated local market power 

mitigation.51 

Calculation of Reference Levels 

CAISO refers to reference levels as default energy bids. A resource can request that the 

CAISO use one of the following three options to calculate its “default bid”:52

1. Variable cost option: incremental costs are calculated based on the following 

formula: fuel costs + greenhouse gas allowance costs + variable operation and 

maintenance costs. The reference level is equal to 1.1 times incremental costs 

(i.e., incremental costs plus a ten percent adder). A Bid Adder is included for 

frequently mitigated units, if applicable.53 

2. Negotiated Rates option: a resource submits a proposed default bid with 

documentation that is either approved or rejected by the CAISO. If rejected, and if 

good faith negotiations are not successful, the market participant can make a filing 

with the Commission. 

 

50 CAISO Department of Market Monitoring, Q3 2013 Report on Market Issues and Performance, at 72 (Nov. 14, 

2013), available at http://www.caiso.com/Documents/2013ThirdQuarterReport-MarketIssues_PerformanceNov2013.pdf. 

51 CAISO Tariff, § 31.2. 

52 CAISO Tariff, § 39.7.1. 

53 A Bid Adder is available for units that were mitigated in 80 percent of hours where they offered energy during the 

past 12 months. Bid Adders are either negotiated with the CAISO or set at a default level of $24/MWh. CAISO 

Tariff, §§ 39.8.1-38.8.3.
Appendix 

 A-3 

3. LMP option: weighted average of the lowest quartile of LMPs in the relevant 

market (i.e., day-ahead or real-time) at the resource’s node during hours when the 

resource was dispatched in the last 90 days. Weights are based on the MWh the 

resource would have been dispatched under its Default Energy Bid curve. 

When natural gas-fueled units use the variable cost option, CAISO updates reference 

levels daily through the use of at least two publically available natural gas price indices. 

Non-natural gas resources must submit an average cost curve to the CAISO with up to 11 

operating points. A resource may contact the internal market monitor and request 

changes if it believes its calculated reference levels do not reflect its actual incremental 

operating costs. 

Market Monitor Comments about Mitigation Practices 

In its 2013 market report, CAISO’s internal market monitor, the Department of Market 

Monitoring, explained that completing its transition to the enhanced mitigation 

procedures increased the number of units potentially subject to mitigation but mitigation 

remained relatively low. In 2013, an average of 16 units per hour were subject to 

potential mitigation in the day-ahead market while an average of 0.5 units had their bids 

changed (i.e., were mitigated). Approximately 0.4 units were mitigated per hour in the 

real-time, compared to 1 unit per hour in the Hour-Ahead Scheduling Process.54 

The internal market monitor calculated “competitive baseline prices” for the year 2013 

based on market simulation that replaced natural gas unit bids with reference level bids, 

removed virtual bids, and used actual load levels. The internal market monitor found that 

the competitive baseline prices were roughly equal to actual day-ahead prices in most 

months in 2013, while real-time prices were lower than competitive baseline prices in 

most months.55 The internal market monitor also estimated “price-cost markups” by 

comparing the competitive baseline prices to total average wholesale energy costs and 

found that the overall combined average of prices in the day-ahead and real-time market 

was approximately $1.50/MWh (or 3.8 percent) lower than the competitive baseline 

prices.56

 

 

54 CAISO Department of Market Monitoring, 2013 Annual Report on Market Issues & Performance, at 165-166, 

(Apr. 2014), available at http://www.caiso.com/Documents/2013AnnualReport-MarketIssue-Performance.pdf. 55 Id. at 64-65. 56 Id. at 65-66.
Appendix 

 A-4 

A.2 ISO-NE

Markets subject to mitigation 

 Energy 

 Unit Commitment 

 Ancillary services 

 Capacity 

 Virtual bids 

Monitoring Structure 

 Internal: Internal Market Monitor 

 External: Market Monitoring Unit -Potomac Economics 

Mitigation Summary 

ISO-NE has both an internal and external market monitor. ISO-NE takes a two-part 

“Conduct and Impact” approach to mitigation, which first screens for specific conduct 

and then estimates the impact of that conduct on market outcomes. The criteria used to 

determine whether a resource is subject to the Conduct and Impact mitigation tests 

depends on whether the resource is located in a constrained area or not. ISO-NE’s 

definition of a Constrained Area changes depending on which market the resource 

submits an offer to. A real-time resource supply offer is subject to Constrained Area 

mitigation if it is located on the import side of a binding constraint and the resource is 

dispatched to relieve the binding constraint.57 A day-ahead resource supply offer is 

subject to Constrained Area mitigation if the LMP at its node exceeds the LMP at the 

Hub by more than $25/MWh.58 

A General Area is defined as any area that is not a Constrained Area. A resource located 

in a General Area is only subject to General Area Conduct and Impact mitigation if it is 

owned by a supplier that is unilaterally pivotal.59 A supplier is unilaterally pivotal if the 

sum of the resources it owns in a given area is necessary to relieve a binding constraint in 

a General Area. ISO-NE uses a unilateral pivotal supplier screen in this case, as opposed 

to the three pivotal suppler test used in CAISO and PJM. Resources in General Areas 

that are not owned by pivotal suppliers are not subject to mitigation.60 

 

57 ISO-NE Tariff, Market Rule 1, App. A, § III.A.5.2.2(a). 

58 ISO-NE Tariff, Market Rule 1, App. A, § III.A.5.2.2(a). 

59 ISO-NE Tariff, Market Rule 1, App. A, § III.A.5.2.

60 During the 2013 study period, the General Area Conduct and Impact tests were imposed in the day-ahead market. 

After the implementation of Flexible Offer Rules in December 2014, ISO-NE will not implement the General Area 
Appendix 

 A-5 

The Conduct and Impact thresholds are more stringent in Constrained Areas than they are 

in General Areas. ISO-NE’s Conduct test for General Areas for unilaterally pivotal 

suppliers during constrained periods evaluates whether a resource’s offer exceeds its 

reference level by the lower of 300 percent and $100/MWh. The Impact test for General 

Areas assesses whether the resource offer will raise the clearing price (be it day-ahead or 

real-time) by the lower of 200 percent or $100/MWh. Resource offers below $25/MWh 

in General Areas are not subject to the Conduct test.61 The Constrained Area Conduct 

test evaluates whether a resource’s offer exceeds its reference level by the lower of 

$25/MWh or 50 percent. The Constrained area Impact test evaluates whether the 

resource’s offer will raise the LMP by the lower of $25/MWh or 50 percent (the same as 

the Conduct test).62 If a resource’s conduct and impact exceed the predetermined 

thresholds, that resource’s original offer is replaced with its reference level offer. 

Mitigation is conducted before the final LMPs are calculated in both the day-ahead and 

real-time markets. ISO-NE’s day-ahead market power mitigation is executed manually 

while the real-time mitigation is executed automatically and runs in parallel with the RT 

dispatch model.63 

Calculation of Reference Levels 

ISO-NE’s internal market monitor calculates resource reference levels according to the 

following order of preference: 

(1) Offer-based: reference level based on a resource’s accepted offers during 

previous competitive periods in the last 90 days. The internal market monitor 

calculates the mean and median of those offers and uses the lower of the two to 

establish that resource’s reference level. Offer-based reference levels are adjusted 

for fuel prices as necessary.64 

(2) LMP-based: calculate reference levels based on LMP’s at the resource’s node 

during the lowest-priced 25 percent of the hours that the resource was dispatched 

 Conduct and Impact mitigation in the day-ahead market. See ISO New England Inc., 145 FERC ¶ 61,014, at PP 4-6 

(2014). Instead, ISO-NE will cap start-up and no-load fees in day-ahead energy offers to a 200 percent increase 

above reference levels. 

61 ISO-NE Tariff, Market Rule 1, App. A, § III.A.5.5.1. 

62 ISO-NE Tariff, Market Rule 1, App. A, § III.A.5.5.2. 

63 Potomac Economics, 2013 Assessment of the ISO New England Electricity Markets, at 188 (June 2014), available 

at http://www.iso-ne.com/static-assets/documents/markets/mktmonmit/rpts/ind_mkt_advsr/ 

isone_2013_emm_report_final_6_25_2014.pdf. 

64 ISO-NE Tariff, Market Rule 1, App. A, § III.A.7.3. 
Appendix 

 A-6 

during the previous 90 days. LMP-based reference levels are also adjusted for fuel 

price changes and differences between weekday and weekend LMPs.65

(3) Cost-based: reference levels are calculated by the internal market monitor 

based on information provided by the resource, including original equipment 

manufacturer recommendations, applicable environmental permit costs, and 

verifiable physical operating characteristics. 66 Reference levels are also indexed 

for changes in the daily, or hourly at the internal market monitor’s discretion, ICE 

natural gas index prices at New England trading hubs.67 The internal market 

monitor calculates incremental energy costs with the following formula: 

incremental energy cost = (incremental heat rate * fuel costs) + (emissions rate * 

emissions allowance price) + variable operating and maintenance costs + opportunity 

costs. 

Opportunity costs may include, but are not limited to emissions costs (not already 

captured), water storage limits; and, other operating permits that limit production of 

energy.68 

The ICE natural gas price index may differ from a resource’s actual fuel costs given the 

unique characteristics of the resource’s fuel supply portfolio (often composed of multiple 

contracts of varying lengths), differences between gas nomination and energy market 

bidding schedules, and differences between same-day and next-day gas prices. A gasfired generator can request a Fuel Price Adjustment from the internal market monitor if 

its expected fuel costs differ from the internal market monitor’s reference price 

calculation. 

The internal market monitor received 4,298 requests for fuel price adjustments in the 

period between November 2012 and January 2014. The requests were concentrated in 

the winter months, with a total of 71 units requesting at least one fuel price adjustment 

during the period.69 ISO-NE will implement new offer-flexibility changes will allow 

resources to submit day ahead energy supply offers that vary by hour and update their 

 

65 ISO-NE Tariff, Market Rule 1, App. A, § III.A.7.4. 

66 ISO-NE Tariff, Market Rule 1, App. A, § III.A.7.5. 

67 ISO-NE Tariff, Market Rule 1, App. A, § III.A.7 

68 ISO-NE Tariff, Market Rule 1, App. A, § III.A.7.5 

69 ISO New England Internal Market Monitor, 2013 Annual Markets Report, at 40, (May 2012), available at

http://www.iso-ne.com/static-assets/documents/markets/mkt_anlys_rpts/annl_mkt_rpts/ 

2013/2013_amr_final_050614.pdf.
Appendix 

 A-7 

real-time supply offers up to 30 minutes prior to the beginning of the real-time hour, 

which includes some changes to the reference level calculations.70 ISO-NE also has a 

$1,000/MWh cap on incremental energy offers. 

Market Monitor Comments about Mitigation Practices 

Table 11 shows the instances of mitigation of energy offers in 2013 and 2012. 

Table 11: ISO-NE day-ahead and real-time 

energy offer mitigation events 

Year number of events 

2012 131 

2013 129 

Source: ISO New England, “2013 Annual Markets Report”, May 2014, at 30 

and ISO New England “2012 Annual Markets Report”, May 2013, at 31. 

According to ISO-NE’s external market monitor Potomac Economics, 51 of the instances 

of mitigation in 2013 were automatic mitigation in the real-time energy market. ISO-NE 

has stated that, during the past ten years, no General Area mitigation has been imposed in 

the day-ahead market. 71 As mentioned previously, in implementing new Flexible Offer 

Rules, ISO-NE proposed to eliminate General Area Threshold mitigation in the dayahead market. In its place, ISO-NE proposed offer caps that limit start-up and no-load 

offer parameters to three times their respective reference level parameters.72 The 

Commission approved ISO-NE’s proposal to be effective in December 2014.73 

ISO-NE’s internal market monitor estimated that in 2013, markups at the margin 

contributed an average of $6.30/MWh to the real-time clearing price for energy, which 

was $56.06/MWh on average at the hub in real-time.74 The internal market monitor also 

estimated average real-time gross margins, which is the resource’s revenue minus its 

reference level on a $/MWh basis. The internal market monitor estimated two annual 

 

70 ISO New England Inc., 145 FERC ¶ 61,014 at PP 4-6. 71 ISO New England Inc. and New England Power Pool, Direct testimony of Robert V. Laurita and Mario S. 

DePillis Jr., Docket No. ER14-1147, at 15-16 (filed Jan. 24, 2014). 72 Id. at 8. 73 ISO New England Inc., Docket No. ER14-1147-000 (July 9, 2014) (delegated letter order). 74 ISO New England Internal Market Monitor, 2013 Annual Markets Report, at 2, 58-59 (May 6, 2014), available at

http://www.iso-ne.com/staticassets/documents/markets/mkt_anlys_rpts/annl_mkt_rpts/ 

2013/2013_amr_final_050614.pdf. 
Appendix 

 A-8 

MW-weighted average gross margins for each resource: one based on its actual offers 

and another based on reference level offers. The average difference between actual offerbased margin and the reference level-based margin was $4.40/MWh in 2013, which the 

internal market monitor referred to as the average gross margin above marginal cost.75 

A.3 MISO 

Markets and Offers monitored by external market monitor: 

 Energy 

 Operating Reserves 

 Unit commitment/Revenue Sufficiency Guarantees 

 Voluntary Capacity Auctions 

 FTRs 

Structure: 

 Internal: None 

 External: Independent Market Monitor - Potomac Economics 

Mitigation Summary 

MISO’s external market monitor monitors for economic withholding via examining 

offers for energy, operating reserves, start-up and no-load, and related physical 

parameters. The external market monitor also monitors for the following activities: 

physical withholding; uneconomic production; uneconomic virtual transactions; and any 

bidding practices that distort competitive outcomes in MISO-administered markets.76 

MISO’s external market monitor relies on a Conduct and Impact structure to implement 

its market mitigation procedures in energy markets. The Conduct and Impact thresholds 

to which a resource is subject depends on whether it is located in a Narrow or Broad 

Constrained Area as defined below: 

 Narrow Constrained Area: Area with transmission constraints or reserve zone 

constraints that are expected to bind for at least 500 hours during a given 12-

month period and where one or more resources is pivotal to relieving the 

constraint. Narrow Constrained Areas are defined in advance by the external 

market monitor.77

 

75 Id. at 58-59. 76 MISO Tariff, Module D, § 63.3 

77 MISO Tariff, Module D, § 63.4.1 
Appendix 

 A-9 

 Broad Constrained Area: Area where transmission constraints and reserve zone 

constraints bind infrequently but in which substantial market power can result 

when constraints bind. Broad Constrained Areas are not defined in advance by the 

external market monitor. Instead, MISO continuously monitors for constraints in 

Broad Constrained Areas.78

MISO’s Narrow Constrained Areas in 2013 were Minnesota, Western-Upper Michigan 

System, and North Western-Upper Michigan System in the Midwest region and Amite 

South and West of the Atchafalaya River Basin in the South region.79 If a resource’s 

offer exceeds its reference level by an amount in excess of the Conduct and Impact 

thresholds described below and there is a binding transmission constraint, MISO will 

mitigate its offer. 

In Broad Constrained Areas, energy offers trigger the Conduct threshold if they exceed 

reference levels by the lower of 300 percent or $100/MWh. Offers below $25/MWh are 

not mitigated.80 The Impact test in Broad Constrained Areas evaluates whether a 

resource’s offer will result in a 200 percent or $100/MWh increase in the LMP, 

whichever is lower. The Conduct test for resources located in Narrow Constrained Areas 

is triggered when a resource energy offer exceeds its reference level by more than the 

Narrow Constrained Area Threshold, which is equal to the net annual fixed cost of a new 

peaker divided by the number of constrained hours during the past 12 months.81 MISO 

posts the Narrow Constrained Area mitigation thresholds on its website and they vary by 

location.82 During periods when constraints bind, the Narrow Constrained Area Impact 

test assesses whether the resources’ offer raises the LMP by an amount that exceeds the 

relevant Narrow Constrained Area threshold.83 

If a resource is mitigated, the relevant part of its offer is replaced with reference levels. 

The mitigation takes place before the final network model run is performed. A resource 

that is not located in either a Narrow Constrained Area or a Broad Constrained Area is 

not subject to MISO’s automatic market power mitigation provisions and only subject to 

the $1,000/MWh offer cap. 

 

78 MISO Tariff, Module D, § 63.4.2

79 Potomac Economics, 2013 State of the Market Report for the MISO Electricity Markets, at 65-66 (June 2014), 

available at https://www.misoenergy.org/Library/Repository/Report/IMM/ 

2013%20State%20of%20the%20Market%20Report.pdf. 

80 MISO Tariff, Module D, §§ 64.1.1-64.1.3 

81 MISO Tariff, Module D, § 64.1.2. 

82 See, e.g., MISO, Narrow Constrained Area Mitigation Thresholds (Mar. 7, 2014), available at

https://www.misoenergy.org/Library/Repository/Report/IMM/2014_NCA_Threshold_Update.pdf 83 MISO Tariff, Module D, § 64.2.1.c. 
Appendix 

 A-10 

Calculation of Reference Levels 

Reference levels in MISO are calculated based on one of the following three methods, 

subject to data availability, using the first method for which sufficient data is available: 

1. Offer-based: The lower of the mean or the median of the unit’s accepted offers 

during competitive periods in similar hours or load levels during the previous 90 

days, adjusted for fuel prices. 

2. LMP-based: The mean of the LMP or applicable Market Clearing Price at the 

unit’s location during the lowest 25 percent of hours where the unit was 

dispatched during the previous 90 days, for similar hours or load levels, adjusted 

for fuel prices . 

3. Cost-based: Consultation between the external market monitor and the market 

participant wherein the resource submits supporting cost information to the 

external market monitor. These costs can include risk premiums and opportunity 

costs, or justifiable technical characteristics for physical offer parameters.84

If sufficient data for options 1 through 3 do not exist, the external market monitor will 

determine a reference level based on (a) its estimate of the costs taking into account 

operating cost data, input from the market participant, and the best information available 

to the external market monitor, or (b) an appropriate average of competitive offers of one 

or more similar generation resources. 

If a resource’s reference levels are developed through consultation with the external 

market monitor, they may be based on the resource’s documented going-forward costs. 

Fuel price adjustments to the offer- and LMP-based reference levels are based on fuel 

price indices that are updated daily. Resources may contact the external market monitor 

and request changes if their reference levels do not reflect their incremental operating 

costs. 

Market Monitor Comments on Mitigation Practices 

The external market monitor’s 2013 State of the Markets report for MISO indicated that 

mitigation was infrequent in 2013. Mitigation was higher in the real-time market as 

compared to the day-ahead market. In 2013, 41 Broad Constrained Areas unit-hours 

(1,825 MWh) were mitigated compared to 40 Narrow Constrained Areas unit-hours (or 

 

84 MISO Tariff, Module D, § 64.1.4. 
Appendix 

 A-11 

1,504 MWh).85 The external market monitor estimated that the average markup of the 

system marginal price in MISO was 1.7 percent in 2013.86 

A.4 NYISO 

Markets and offers subject to mitigation 

 Energy 

 Ancillary services 

 Bid production cost guarantees 

 Installed Capacity Auctions 

 Transmission Congestion Contracts 

Structure 

 Internal: Market Monitoring Unit 

 External: Market Monitoring Unit - Potomac Economics 

Mitigation Summary 

NYISO has both an internal and external market monitor. NYISO’s internal market 

monitor is called the Market Monitoring Unit.87 NYISO, like ISO-NE and MISO, 

implements market mitigation based on Conduct and Impact tests. Mitigation applies to 

two broad categories: resources in Unconstrained Areas; and resources in Constrained 

Areas. A resource is defined as located in a Constrained Area if the interface or facility 

into the area in which it is located has a shadow price greater than $0.04/MWh. A 

resource is defined as located in Unconstrained Area if it does not meet the definition of 

located in a Constrained Area. 

The Constrained Area Conduct test assesses whether a resource’s energy offer exceeds its 

reference level by more than the following threshold: 

[2%*Avg. Price *8760]/[constrained hours] 

where the “Avg. Price” is the relevant average price (be it real-time or day-ahead), 

adjusted for fuel prices and out-of-merit generation and “constrained hours” is the 

 

85 Potomac Economics, 2013 State of the Market Report for the MISO Electricity Markets, at A-171 (June 2014), 

available at https://www.misoenergy.org/Library/Repository/Report/IMM/ 

2013%20State%20of%20the%20Market%20Report.pdf. 

86 Id. at 66. 87 NYISO also has a Market Mitigation and Analysis Department that works collaboratively with the Market 

Monitoring Unit and NYISO to carry out the NYISO tariff. See NYISO Tariff, Market Services, Att. O, § 30.3.3. 
Appendix 

 A-12 

number of hours when the shadow price of the constraint exceeded $0.04/MWh during 

the past 12 months.88 If the Unconstrained Area threshold is lower than the Constrained 

Area threshold, then the Constrained Area resource is subject to the Unconstrained Area 

threshold. 

The Constrained Area Conduct threshold is designed to become less stringent as the 

number of congested hours falls. If the area has been constrained for less than 2 percent 

of the hours during the previous 12 months, then a resource in a Constrained Area can 

submit an offer that exceeds its reference level by an amount equal to the average LBMP 

for its location in the past 12 months. If the area has only been constrained during 1% of 

the hours in the previous 12 months, a resource’s offer can exceed its reference level by 

twice the average locational based marginal price (LBMP) for its area. If a given 

Constrained Area were constrained for 50 percent of the hours during the past 12 months, 

then a resource in that area can submit offers that exceed its reference levels by up to 4 

percent of the average LBMP in the past 12 months. The Constrained Area Impact 

threshold assesses whether the resource offer will raise the clearing price by an amount 

that exceeds the Constrained Area Conduct threshold. 

In Unconstrained Areas, a resource’s energy offer fails the Conduct test if it exceeds its 

reference level by the lower of $100/MWh or 300 percent. If a resource offer fails the 

Unconstrained Area Conduct test, it is subject to the Impact test, which determines if that 

resource’s offer will raise the clearing price by the lower of 200 percent or $100/MWh. 

If a resource’s offer fails the Conduct and Impact tests, NYISO mitigates the offer and 

replaces any mitigated offer parameters with reference level parameters.89 NYISO also 

has a $1,000/MWh offer cap on incremental energy offers.90

Calculation of Reference Levels 

Reference levels can vary over the output range of each unit and are computed for all 

elements of a resource’s bid, including start-up cost, economic minimums, and the 

physical parameters governing the operation of the unit.91 The internal market monitor 

accepts three types of reference level in the following order of preference: 

 

88 NYISO Tariff, Market Services, Att. H, § 23.3.1.2.2.1.

89 NYISO Tariff, Market Services, Att. H, §§ 23.3.1.2.3 and 23.3.2.2.3 

90 NYISO Tariff, Market Services, Att. H, §§ 21.4 and 21.5.1. 

91 NYISO Tariff, Market Services, Att. H, § 23.3.1.4. 
Appendix 

 A-13 

1) Offer-based: compute reference levels based upon the resource’s accepted bids 

during periods deemed competitive in the previous 90 days, adjusted for fuel prices 

as necessary.92 

2) LMP-based: calculate reference levels based on the mean of the LBMP at the 

resource’s location during the lowest-priced 50 percent of hours when the resource 

was dispatched in the previous 90 days. 93 

3) Cost-based: determine reference levels in consultation with the resource based on the 

resource’s documented marginal costs, which are defined as follows: (heat rate * fuel 

costs)+(emissions rate * emissions allowance price) + other variable O&M costs.94

The internal market monitor updates reference levels based on daily fuel indices but 

resources may request consultation with NYISO and the market monitor to revise their 

reference levels if necessary. 

Market Monitor Comments about Mitigation Practices 

According to NYISO’s 2013 State of the Market report, which was written by the internal 

market monitor, the majority (92 percent) of automatic energy offer mitigation in NYISO 

occurs in the day-ahead market because most of the load is scheduled day-ahead. Areas 

within New York City were mitigated most frequently.95 Automatic mitigation of 

incremental energy offers in NYISO’s day ahead and real-time energy markets fell from 

an hourly average of 95 MW in 2012 to 55 MW in 2013.96

A.5 PJM 

Markets subject to mitigation 

 Energy 

 Ancillary services 

 Capacity 

Monitoring Structure 

 

92 Reference levels are based on the lower of the mean or median of a resource’s accepted bids from hour ending 

7am to hour ending 10pm, excluding weekends and holidays during competitive periods during the previous 90 

days. NYISO Tariff, Market Services, Att. H, § 23.3.1.4.1.1. 

93 NYISO Tariff, Market Services, Att. H, § 23.3.1.4.1.2. 

94 NYISO Tariff, Market Services, Att. H, § 23.3.1.4.1.3. 

95 Potomac Economics, 2013 State of the Market Report for the New York ISO Markets, at 20 (May 2014), available 

at http://www.nyiso.com/public/webdocs/markets_operations/documents/ 

Studies_and_Reports/Reports/Market_Monitoring_Unit_Reports/2013/2013%20State%20of%20the%20Market%20

Report.pdf.. 

96 Potomac Economics Analytic Appendix - 2013 State of the Market Report for the New York ISO Markets, at A-58 

(May 2014), available at http://www.nyiso.com/public/webdocs/markets_operations/documents/ 

Studies_and_Reports/Reports/Market_Monitoring_Unit_Reports/2013/2013%20State%20of%20the%20Market%20

Report.pdf. 
Appendix 

 A-14 

 Internal: none 

 External: Market Monitoring Unit – Monitoring Analytics 

Mitigation Summary 

PJM market power mitigation is carried out by an external market monitor and employs 

the Three Pivotal Supplier test. The Three Pivotal Supplier test is used in both the dayahead and real-time energy markets when operators have to re-dispatch out-of-merit to 

relieve a transmission constraint.97 The Three Pivotal Supplier test determines whether 

the three suppliers are jointly necessary to relieve a given constraint. PJM examines the 

distribution factors (dFax) of a constraint to identify which resources as physically 

capable of relieving the constraint. Resources with a dFax value of three percent are 

deemed capable of relieving the constraint.98 To identify the set of resources against 

which PJM will measure the three largest suppliers’ market share, PJM considers only 

those suppliers that are offering capacity at or below a price level equal to 1.5 times 

clearing price that would result from the intersection of supply and demand, including the 

demand necessary to relieve the constraint.99 PJM considers the capacity offered by 

suppliers in this range to be the only meaningful competition that the three pivotal 

suppliers face. 

Once the relevant resources are identified, PJM conducts the Three Pivotal 

Supplier test on the three largest suppliers by calculating the following ratio for each 

supplier deemed capable of relieving the constraint:100 

Three Pivotal Supplier testi = (S - L2 – Si) / [MW needed to relieve constraint]; 

where S is the sum of the effective supply available to relieve the constraint, Si is the 

capacity of the resource i being tested, and L2 is the sum of the capacity of the two 

largest suppliers available to relieve the constraint (other than resource i).101 If the ratio 

is less than one, PJM deems resource i to be jointly pivotal with the two largest suppliers 

 

97 Monitoring Analytics, 2013 State of the Market Report for PJM, at 81 (Mar. 13, 2014), available at

http://www.monitoringanalytics.com/reports/PJM_State_of_the_Market/2013.shtml. 

98 PJM may change the dfax value from three percent and changes will be posted to the PJM website pursuant to 

Section 6.4 of Attachment K to the PJM tariff. 

99 Monitoring Analytics, 2010 State of the Market Report for PJM: Technical Reference for PJM Markets, at 45 

(Mar. 10, 2011), available at http://www.monitoringanalytics.com/reports/Technical_References/docs/2010-sompjm-technical-reference.pdf. 

100 The Three Pivotal Supplier test does not evaluate resources on a standalone bases. Resource ownership is taken 

into consideration and resource capacity is aggregated by owner or “supplier”. 101 Monitoring Analytics, 2010 State of the Market Report for PJM: Technical Reference for PJM Markets, at 45-46 

(Mar. 10, 2011), available at http://www.monitoringanalytics.com/reports/Technical_References/docs/2010-sompjm-technical-reference.pdf.
Appendix 

 A-15 

and replaces resource i’s offer with its cost-based offer. The two largest suppliers are 

deemed jointly pivotal if the third largest resource is found to be jointly pivotal. This 

calculation is done until all pivotal suppliers are identified. 

PJM does not mitigate resources that have already been committed to operate during the 

interval.102 Resources that fail the Three Pivotal Supplier test are mitigated to their “costbased” bid, equal to 110 percent of incremental production costs or to costs plus relevant 

adders for frequently mitigated units.103 All energy offers in PJM are subject to a 

$1,000/MWh cap.104 Mitigation occurs before the final network model run that 

determines dispatch and LMPs. 

Calculation of Reference Levels 

Resources in PJM submit a single incremental energy offer for the entire operating day 

(i.e., energy offers may not vary hour-to-hour). PJM defines incremental production 

costs as the sum of fuel, emissions, and other variable operations and maintenance costs. 

Resources calculate their own reference level costs, which are referred to as cost-based 

offers, pursuant to a fuel cost policy that must be approved by PJM.105 

A resource can also include opportunity costs that are legitimate and verifiable such as an 

operating constraint imposed by an external regulatory agency (e.g., an air permit).106 

The external market monitor can verify the incremental costs submitted by resources at 

its discretion.107 Resources may contact the external market monitor and request changes 

if their calculated reference levels do not reflect their actual incremental operating costs. 

Finally, units that are frequently mitigated are entitled to Frequently Mitigated Unit 

adders which were originally designed to ensure that such units are able to recover all 

fixed costs. 

Market Monitor Comments on Mitigation Practices 

The 2013 State of the Market report for PJM indicates that the Three Pivotal Supplier test 

results in very few mitigation events in its energy markets. Table 12 summarizes the 

instances of mitigation in PJM from 2009 through 2013. In 2013, 0.4 percent of unit 

 

102 Monitoring Analytics, 2013 State of the Market Report for PJM, at 81 (Mar 13, 2014), available at

http://www.monitoringanalytics.com/reports/PJM_State_of_the_Market/2013.shtml. 

103 PJM Tariff, § 6.4.2. 104 PJM Tariff, Att. K App., § 1.10 105 PJM, Manual 15 Cost Development Guidelines, § 2.3. 106 PJM, Manual 15 Cost Development Guidelines, § 12.1. 107 PJM Tariff, Att. M, § II.A.2. 
Appendix 

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hours were capped in the real-time market and 0.1 percent of unit hours were capped in 

the day-ahead market.108 

Table 12: PJM summary of energy offer mitigation 

Real-Time Day-Ahead

 Unit hours 

capped 

MW 

capped 

Unit hours 

capped 

MW 

Capped 

2009 0.4% 0.1% 0.1% 0.0% 

2010 1.2% 0.4% 0.2% 0.1% 

2011 0.6% 0.2% 0.0% 0.0% 

2012 0.8% 0.4% 0.1% 0.1% 

2013 0.4% 0.1% 0.1% 0.0% 

Source: Monitoring Analytics, LLC. “2013 State of the Market Report for PJM” at 80 (Table 3-20). 

Note: mitigation statistics exclude mitigation of units committed for reliability reasons. 

PJM’s external market monitor examined the markups of marginal resources (i.e., 

resources whose offer set the energy component of the LMP) and found that 93 percent 

of marginal offers in the real-time market had average dollar markups (measured in 

$/MWh) that were less than zero in 2013 as measured against the resource provided 

reference cost (or cost-based offer), which includes the ten percent adder of measureable 

costs. In 2013, ninety-nine percent of the offers that were marginal in the day-ahead 

market had average dollar markups below zero.109

 

109 Monitoring Analytics, 2013 State of the Market Report for PJM, at 83 (Mar. 13, 2014), available at

http://www.monitoringanalytics.com/reports/PJM_State_of_the_Market/2013.shtml.