498

IEEE Transactions on Power Systems, Vol. 14, No. 2, May 1999

Competitive Procurement of Ancillary Services

by an Independent System Operator
Harry Singh
Member

Alex Papalexopoulos
Senior Member

Pacific Gas and Electric Company

San Francisco, California
Abstract
This paper discusses the competitive procurement of
Ancillary Services by an Independent System Operator
(ISO). The paper assumes the existence of an underlying
market for energy and explains why this energy market
must be accompanied by a market for Ancillary Services.
These services include operating reserves and Automatic
Generation Control (AGC) both of which may require
generators that are infra-marginal in the energy market to
choose between supplying energy or Ancillary Services.
The paper discusses the design of an auction for these
services that has formed the basis for the Califomia ISOs
Ancillary Services market. The paper also discusses the
real-time dispatch of Ancillary Services.
Keywords: Electric Power Deregulation, Auctions,
Operating Reserves.

dispatch instructions issued by the Independent System

Operator (ISO).
The operation of the real time market is a fundamental
responsibility of the ISO. Since the IS0 does not own any
generation, it must ensure that there is sufficieni. unloaded
capacity among on-line generators to participilte in the
balancing market and secure the required amount of
reserves needed for maintaining the reliability of the system.
The IS0 must also ensure that there is a sufficient quantity
of Automatic Generation Control (AGC) capability and
quick-start generation capacity, and conform to mandated
reliability criteria [7]. One way the IS0 can meet these
requirements is to create a competitive market for Ancillary
Services.

A premise of this paper is that competitive markets for

energy
require competitive markets for Ancillary Services.
1. Introduction
This is particularly true for those services that bear a
Competitive energy markets are being instituted in many complementarity to energy markets. Two particular
jurisdictions as electricity supply industries are restructured examples are spinning reserves and AGC. Both these
in steps towards deregulation. In general, these services require generating units to maintain on-line
arrangements require some form of a central auction for unloaded capacity that can respond within 10 minutes.
electricity to be delivered over short time periods. There are These services are used in real-time by the ISO, either for
two distinct fonns of market structure that have already balancing purposes or for replacing energy that had been
been implemented around the world; a real-time market, scheduled to be provided by a unit that malfunctions.
such as the one that has been instituted in the Australian
state of Victoria, and day-ahead (forward) markets such as The main characteristic of the ancillary services discussed in
those that have been instituted in England and Wales, this paper is that capacity is reserved and prcicured in
Norway, and California [ 1,2,3].
advance and then incremental energy is dispe.tched in
Since electricity is delivered instantaneously, it is obvious
that a day-ahead market requires a balancing service with an
associated real-time market. In England and Wales, the
balancing function is provided at the day-ahead price. In
California, the balancing function is priced separately at an
ex-post price that is determined in the real time market
based on an auction for imbalance energy and the associated
PE-427-PWRS-0-06-1998 A paper recommended and approved by
the IEEE Power System Analysis, Computing and Economics
Committee of the IEEE Power Engineering Society for publication in the
IEEE Transactions on Power Systems. Manuscript submitted January
5, 1998; made available for printing June 12, 1998.

response to real-time imbalances. This means that there are

two relevant prices to be paid to generators. One is the price
paid for reserved capacity and the other is the pricc: paid for
energy that is dispatched under certain defined conditions.
Since the generator cannot anticipate or control the amount
of energy it will be called on to produce, it is entitled to a
variable energy payment. Since balancing markets are likely
to be much smaller than day-ahead markets, it is essential
that market designers and regulators ensure thai: reserve
generators do not achieve market power in these real-time
energy markets.
Efficient dispatch may require some generating units that
are infra-marginal in the energy market to contribute

0885-8950/99/$10.00 0 1998 IEEE

499

towards the reserve requirements in a control area. These

infra-marginal units may incur an opportunity cost for
setting aside a part of their capacity to provide reserves
instead of selling energy in the competitive market. One
approach to pricing the reserve services is to simultaneously
procure reserves and energy in a single combined auction
and compensate the units providing reserves at their
opportunity costs derived from the energy auction. This
approach can work in a market structure where the entity
responsible for procuring Ancillary Services is also
responsible for operating the energy market.

total cost curves are convex (that is, the bid curves are
convex and if one assumes generators bid their costs then
they would be claiming to have convex total cost curves).
Furthermore, the PX auction model adopted in California
and discussed here recognizes no operational or intertemporal constraints. There may be iterations in the energy
auction to help bidders satisfy their operational
requirements, but they are not significant in describing the
ancillary services procurement model [2,3].

This means that the PX prices and associated dispatch

patterns are not likely to lead to the conventional costAnother approach is to set up a separate auction for minimizing dispatch for each hour. Units need not bid pure
procuring reserves. A separate reserve auction is better variable costs and are encouraged to internalize all physical
suited for market structures where the Independent System constraints. This helps reduce the opportunities for arbitrage
Operator (ISO) is separate from the Power Exchange (PX), between the PX and the ISO's balancing market and makes
the entity that operates the forward energy market. This the pricing process more transparent.
paper discusses the competitive procurement of Ancillary
Services by an IS0 under such a market structure. Section The goal of the PX auction is not necessarily to minimize
2 of the paper describes the operation of the day-ahead production costs but to facilitate trade. The PX auction is
energy market. Section 3 discusses the California model for intended to discover the prices at which parties are willing
procuring Ancillary Services while Section 4 presents the to transact.
role and the financial responsibilities of the purchasers of
3. Procurement of Ancillary Services
the ancillary services. Section 5 describes how opportunity
costs are incurred in providing reserves while Section 6 The Ancillary Services which the Califomia IS0 is
presents the structure of the reserves auction. Section 7 responsible for procuring include spinning reserves, nonpresents the interactions between the various energy and spinning reserves, AGC, replacement reserves, voltage
ancillary services markets. Section 8 describes how support and black start'. The Western Systems Coordinating
ancillary services are dispatched in real-time and Section 9 Council (WSCC) definition refers to the first two as
addresses practical limitations of the proposed ancillary operating reserves and the first three are as contingency
services auction model arising from market power concerns. reserves [7]. Spinning reserves refer to unloaded generating
capacity that is on-line and synchronized to the system and
all of which can be made available within 10 minutes. Non2. The Day Ahead Energy Market
spinning reserves refer to unloaded generating capacity that
Given the close relationship between the energy and the can be made available within 10 minutes but is not
ancillary services markets it is desirable to start by briefly necessarily on-line or synchronized to the system. The
describing the structure of the day-ahead energy markets. reserves and AGC services are usually provided by
The market structure assumed in this paper consists of a generators by setting aside unloaded capacity in the energy
separate grid operator or IS0 and market operator or Power auction for possible use in real time by the ISO. The first
Exchange (PX). This model has been adopted in Califomia. four services can be procured by the IS0 by means of daily
It is useful to begin with a conceptual description of the PX competitive auctions. These auctions occur after the PX
energy auction. The PX auction is actually a series of 24 energy auction is completed. The sequence of the auctions
auctions, one for each hour, conducted simultaneously. is AGC, followed by spinning reserves, non-spinning
Generators submit price curves that describe their energy reserves, and replacement reserves. This sequence allows
offers as a function of price; the quantity of energy offered capacity bids that are not selected in one auction (e.g. AGC)
must be a monotonically increasing function of price. to be considered in a subsequent auction (e.g. spinning
Loads submit similar curves which must be decreasing. The reserves). The last two ancillary services, i.e., black start
bid curves may be different for different hours.
capability and VAR support, are more suitable for
purchasing based on long-term contracts from among those
The PX aggregates the curves into aggregate supply and units physically capable of providing them. Spinning and
demand curves for each hour. It determines the point at
which each hour's supply and demand curves intersect.
This point sets the PX Market Clearing Price (MCP) for that ' The definitions of the various Ancillary Services used in this
hour. The bid structure forces generators to bid as if their paper are based on those used by the California IS0 and are
consistent with standards set by the WSCC.

500

non-spinning reserve requirements for the IS0 are defined

5. Opportunity Costs
by traditional reliability criteria [712. In addition, the IS0
Before proceeding with the design of an auction for
needs to make sure it has enough capacity online for a wellreserves, it is important to understand the struclure of the
functioning balancing market. For this, the IS0 may arrange
costs incurred in providing reserves. There are two types of
for replacement reserves which are defined as unloaded
generation capacity (not necessarily on-line) that can be costs that must be represented. These include the
opportunity costs of providing reserves and the costs
made available within 60 minutes.
incurred in case the generator is actually dispatched. To
understand
how opportunity costs arise, consider the case of
One can interpret operating reserves as a call option. The
a single reserve category, spinning reserves. We use
strke price associated with the call option could be the
spinning reserves as a prototype to motivate the zialysis but
energy price that is agreed to at the time of purchasing the
the same logic applies to other ancillary services $,haringthe
reserves. The exercise value of the option is the price that
characteristic that capacity is reserved in advance and then
would otherwise be paid for balancing energy. However, an
used as dispatched generation in real-time.
important characteristic of reserves, as distinct from
financial options, is that they are procured not based on any
Suppose that for a given hour the system load requirement
dynamic hedging strategy but based on preset reliability
is 6000 MW and that the spinning reserve requirement is
standards defied by NERC and WSCC that relate the
200 MW. Assume that 5600 MW of demand is met by a
reserve requirement to overall generation.
base load nuclear plant operating at h l l output. For the
remaining 400 MW of demand and the 200 MW of spinning
4. Ancillary Services Settlements
reserves, there are two units A and B with incremental
The costs incurred by the I S 0 for purchasing reserves can energy bids of 4ckWh and 5cikWh respectivdy and a
be classified into two categories, (a) those that are mandated capacity of 300 MW each. In the absence of any ramping
by reliability protocols, and (b) those that can be assigned to rate limits, the economic solution would be to dispatch unit
the ISOs customers as a function of their observed A at its upper limit of 300 MW and unit B at 100 MW. Unit
performance and behavior. For our purposes it is sufficient B would provide the spinning reserve from its unloaded
to assume that the ISOs customers are represented by capacity. Since unit B is the marginal unit in the energy
Scheduling Coordinators (SCS)~ consistent with the dispatch, it does not incur any opportunity cost in providing
California energy market model. Since the reliability spinning reserves.
requirements are proportional to scheduled load, the reserve
responsibility can be allocated pro-rata to Scheduling Next assume a more realistic scenario where both units are
Coordinators in proportion to their submitted schedules.
constrained by ramping rate limitations; each i s able to
provide a maximum of 100 MW in 10 minutes. In this case,
The one exception is the case of replacement reserves which the spinning reserve must be provided by both units and
are procured (at least in part) on the basis of what the IS0 both are dispatched at 200 MW. Unit A is an infra-marginal
expects to be the difference between its own load forecast unit, that incurs an opportunity cost to be able to provide
and the sum of the SC submitted schedules. In case the spinning reserves. In current operation, it is common to see
replacement reserves are actually dispatched, their costs are infra-marginal units incurring opportunity costs in
allocated to the Scheduling Coordinators in proportion to providing reserves during peak load hours. This suggests
positive imbalances.
that bidders should be allowed to bid in a coinpetitive
auction for reserves their assessment of opportunity costs in
terms of a capacity reservation bid,

The wscc requires

an operating reserve requirement of 7

percent of scheduled demand in addition to any provisions made
for interruptibleimports and firm exports.
A call option is a financial instrument that gives the holder a
right to buy the underlying asset at a certain time at a certain price.
A Scheduling Coordinator submits a set of balanced generation
and demand schedules to the I S 0 in the day-ahead market and
settles with the I S 0 for any imbalances in the real-time market.
The PX is also a Scheduling Coordinator.
For a given Scheduling Coordinator, an imbalance is defined as
the difference between the actual aggregate load and actual
aggregate generation. An imbalance is positive when actual load
exceeds actual generation.

The one case where a capacity bid may reflect actual costs
instead of opportunity costs is AGC. AGC requires a
generator to operate at a level higher that its rninirnum
output, in order to allow movement of the unit in downward
as well as upward directions. For example a unit Qith costs
of 5 ckWh would not normally operate at levels higher than
its minimum output when the price in the energy market
falls below 5 c/kWh. In order for it to do so, it is entitled to
bid for a capacity payment to cover the actual costs the unit
may incur.

501

6. The Reserves Auction

This section presents the basic structure of an auction for
competitively procuring ancillary services. The prsotgd
market structure assumes that there are separate a u c t i w o r
each category of reserves (spinning, non-spinning and
replacement). Each bidders submits a separate capacity bid
R, ($/MW), and energy bid E, ($/MWh) for each service.
Successful bidders are paid a capacity reservation payment
that is intended to reflect their opportunity costs. Bidders
are also paid for energy if they are called on to provide it in
real time. Depending on the specific case (as determined
later in this section by the value of a weighting factor x) this
energy price can be the real-time market price or a strike
price as if an option were being exercised in the real-time
balancing market.

where Q, is the quantity of reserves offered by resource i, R,

and Ei are the associated capacity reservation and energy
bids, and QFaXis the maximum capacity that the resource
can offer based on its ramp-rate. QTq is the quantity of
reserves that needs to be procured.
Next altemative auction designs are examined
corresponding to different values for the parameter x.

The (x = 1) case:
By setting x=l, the IS0 can determine the maximum extent
of its payments [l]. Under assumptions of cost revealing
bids, the x=l scenario allows a bidder to be indifferent
between providing spinning reserve or energy. Successful
The auctions for reserves differ from the PX auction in one bidders are paid a capacity payment at a price Ciwhere
very important aspect. The goal of the PX auction is to
facilitate trade because there will be many participants on
C i =max {R + E i } - E ,
i;isn
both sides, i.e., buyers and sellers6. Ancillary services are
and
ZZ
is
the
set
of
all successful bidders. They are paid their
fully the ISOs responsibility, so the IS0 acts as the single
purchaser in reserve auctions to meet its reliability energy strike price Ei for any energy they are called upon
obligations. If the purchaser of energy from reserves could to generate in real-time.
be identified in advance it could be forced to schedule
capacity. Because the energy purchase is a random event, The (0 5 x I 1) case:
the IS0 as the agent for all market participants buys the In the design described in [2], the IS0 proposed an auction
reserves according to a preset formula. As a single buyer loosely based on the notion of purchasing call options on
the IS0 can seek to minimize its costs; the formula that the real-time balancing market. In order to pursue a cost
governs the purchase should prevent strategic withholding minimizing bid evaluation, the IS0 would use an unbiased
estimate of the probability x (between 0 and 1). In this case,
of reserve demand.
the bids are ranked according to R, + xEi. Successful
An important property of opportunity costs is that the more bidders are paid at a price
Ci=max {Ri +xE,} - x E i
infra-marginal a unit (the deeper in the loading order), the
i;isfl
greater its opportunity costs in providing spinning reserves. A reserve generator is paid its energy strike price Ei if it is
Thermal units capacity reservation bids should reflect their called upon to generate in real-time, irrespective of the
opportunity costs, which in turn reflect lost profit (market balancing market price.
energy price minus marginal cost).
The capacity
reservation bids R,should be inversely related to the energy The (x=O) case:
bids E;, if energy bids are cost-reflective as they ought to be The (0 I x S 1) case may be criticized as being too complex
in a competitive market. Thus, to minimize the expected and susceptible to being gamed. It is only an approximation
cost of reserves, the IS0 cannot consider only the capacity to the true cost minimization, as the probability of calling
or only the energy bids, but must estimate the probability upon a successful bidder to generate in real-time is likely to
that reserves will be utilized in real-time. It must include a vary according to the energy bids. Presumably, intelligent
probability factor represented by a parameter x in the bid bidders could game this market structure to increase their
evaluation, i.e., bids are ranked on the basis of Ri+XEi. In revenues. One scenario involves bidders lowering their
order to keep the auction transparent, x must be set by the energy bids in order to increase their capacity payments.
IS0 prior to bid submission.
However, this also increases the probability of the bidders
getting called upon to generate in real-time. Ideally, a
bidder would like to lower its energy bid as much as
possible without altering its position in the merit order
stack. Finally, the option-based case does not result in a
The PX energy auction is a double auction while the ISOs uniform price for reserve capacity payments making it less
transparent.
ancillary services auctions are single sided auctions.

The ISOs reserve auction can then be expressed as the

following cost minimization problem:

502

An alternative design, is to rank bids solely on the capacity Table 3. Table 2 shows the selected quantities and Table 3
reservation: i.e., the IS0 takes bids in order of reservation shows the capacity prices that are paid to the selected
bids, and pays each successful bidder the highest reservation bidders.
bid among those accepted.
Table 2: Spinning reserve auction results
Since the energy bids are ignored in the bid evaluation,
there is less justification to consider them as fixed strike
Selected MW quantities
prices. It might appear reasonable to assume that the
reserve mils are price-takers in the real-time market, i.e.,
they cannot set the real-time price which they must accept.
0.5
80
100
Clearly if all reserve units are price takers (and there is no
1
0
100
80
obligation to replace reserves that are used), the IS0 could
end up dispatching all the reserves without impacting the
Table 3: Capacity payments to successful b,'dders
real-time price.
~~

To solve this problem, reserve units are deemed to bid their

(preset) energy prices into the balancing market plus any
additional costs the IS0 may incur. Reliability Council
requirements mandate that the IS0 should replace spinning
reserves that are used in real-time within the hour (i.e., if
energy is taken from a spinning reserve unit, the IS0 needs
to procure additional spinning reserve within a certain timeframe in order to get its reserves back to the WSCCmandated level). The IS0 must factor the cost of such
replacements into dispatch decisions. To do so, the energy
bids are increased by additional costs such as capacity
replacement.

0.5
1

4
0

10.5

10

12

The analysis put forth to support this alternative assumed

that reserve bidders would bid their true energ)' costs, and
that their capacity reservation bids woullil be the
corresponding opportunity costs. Those asseitions were
based in turn on the assumption that the reserve market
would be competitive as well as the market fo:: balancing
energy.
That second assumption may not hold if
opportunity
costs are large enough that non-reserve units are
Under this design, energy bids are predetermined, but not
payments. For their generation, bidders will be paid the eliminated from the balancing market. Therefore, the
uniform balancing market price. This might seem counter- argument against an explicitly cost-minimizing solution is
intuitive from a cost minimization perspective. However, it less compelling than in the case of the PX auction.
emerged as the best alternative in the California electric
7. Interactions Between the Various Markets
industry restructuring debate under the assumptions of a
competitive real-time market.
The ancillary services markets are embedded in a series of
energy and capacity markets including the forward energy
The three alternatives for bid evaluation are illustrated by markets (day-ahead and hour-ahead) and the real-time
using a simple example. Suppose there are three generating balancing market. It important to manage the interactions
units that submit bids as shown in Table 1 into the spinning between the two markets.
reserves auction.
For example, the IS0 is responsible for ensuring reliability.
Table I : Bids for spinning reserves auction
Therefore it needs to make sure there is sufficient
generation available to match with demand spikes. It buys
Unit
that energy from the real-time market but because there is
($/MW) ($NWh) (MW/min) capacity (MW)
no price set on reliability (and no known cost for failure to
serve) it cannot assume that the real-time price will suffice
22
100
to secure sufficient supply. Therefore, the IS0 may have to
12
20
10
100
schedule replacement reserves, in excess of the WSCC
requirement for reserves, to ensure liquidity in the real-time
Suppose that the IS0 needs to procure 180 MW of spinning market.
reserves. Depending on the value chosen for x, the outcome
of the auction can be different. The results of the ISO's Just like generators, loads can choose between fie forward
auction for different values of x are shown in Table 2 and and real-time markets. In other words, a load without

503

---P

prescheduled supply can just choose to appear in the realPrice

time market. In fact, if forward prices exceed incremental
costs but real-time prices do not - because they are based on
incremental bids from already-operating units, or because
fixed costs of operation are covered by reservation
payments - we should expect massive desertion of load
Generation > L o a d
L o a d > Generation
from the forward markets into the real-time markets. The
Figure
1:
Supply
curve
for
real-time
dispatch
solution for mitigating against this possibility that has been
put forward is to make real-time market load deviations
responsible for replacement reserve capacity payments Every ten minutes, the IS0 conducts a single sided a~ction
for buying or selling energy depending on whether there is
[VI.
excess demand or excess generation in the system. In this
There are also relations between the various reserve sense, the reserves are used along with other available
markets, and the real-time market. The IS0 may not always resources in the real-time balancing market. The highest
be able to choose the cheapest source of energy from the price resource used in the interval sets the price for that ten
real-time market. For example, a unit receiving capacity minute interval. A weighted average of the ten minute
reservation payments as replacement reserve, while it may prices is calculated at the end of the hour to apply to all
have the lowest energy bid among available generators, it uninstructed deviations. A detailed description of the realmay not be able to respond to the ISOs call in a timely time market is beyond the scope of this paper.
manner. The IS0 may have to take a spinning reserve unit
9. Market Power and Regulation
instead. On the other hand, the IS0 will probably try to
avoid taking energy from spinning or 10-minute reserve In order to secure the regulators permission to sell energy
units whenever possible because of the high associated at market based prices, utilities typically must present a
replacement costs.
detailed analysis showing the absence of market power.
Similarly, they must show that they lack market power in
This means that when the I S 0 looks for real-time generatior. the ancillary services markets in order to be able to sell
it looks only at a subset of the available balancing units. ancillary services at market based prices. There have been
However, one cannot consistently identify the relevant few, if any, attempts to analyze market power in the case of
energy market as associated with a particular reserve ancillary services. This means that utilities must agree to
category. Thus, the size of the reserve energy market is accept cost-based rates for ancillary services and
small, raising market power concerns; these concerns, albeit particularly for reserve capacity. However, determining the
serious, are hard to quantify.
cost based rates can be equally arbitrary. Moreover, by
choosing a single price to serve as an upper bound or cap
8. Dispatch of Ancillary Services
for all the hours creates more problems than it solves. For
All schedules received by the IS0 from the PX and other example, in peak hours the opportunity cost of supplying
SCs are balanced. In real-time, deviations from scheduled spinning reserves for a generator can be higher than the cost
generation and load levels are inevitable, either as a result based cap. This would eliminate incentives for infraof normal load and generation variation or as a result of marginal generators to make unloaded capacity available for
larger unplanned outages, or as a result of strategic reserves instead of supplying energy. The net consequence
decisions by market participants. Such uninstructed would be a shortfall in ancillary services. On the other hand,
deviations from schedules result in an energy imbalance that in off-peak hours, because of the acknowledged possibility
is manifested in the Area Control Error (ACE). The of market power, it is quite possible that the prices for
generators on AGC are the first to respond to the reserves could approach the cost-based rates, which can be
imbalances. This action takes place within a time-frame of higher than the competitive prices. This observation seems
seconds. In order to periodically, restore the AGC units to to be the case in the initial experience in the California
their set-points, the IS0 must procure energy by means of market. The prices and quantities for spinning reserves are
instructed deviations from resources that have submitted the illustrated in Figure 2 for a given day. The prices
appropriate energy price/quantity bids to the ISO. This throughout the day were at or near the bid caps. During the
action takes place on a slightly slower time-frame; say every hours 1-6 and 22-24, the prices were at or near 7.40 $/MW
ten minutes. The energy bids (Ei) from the various resources
including the three types of reserves can be aggregated to
At any given instant, the IS0 is either buying or selling energy.
form a supply curve as shown in Figure 1.
The IS0 does not attempt to optimize the dispatch by
simultaneously selling and buying energy.

504

and during the hours 7-21, the prices were at or near 9.50
$/MW8. The quantities procured in the hours 7-21 were less
than in the lower priced hours, suggesting insufficient
supply at the capped prices. In cases of such price-cap
induced shortfalls, the IS0 may be forced to rely on the
increased use of generators on long-term Reliability Must
Run (RMR) contracts, at costs that can easily outweigh any
savings that result from the price caps.
Spinning Reserves Market (42/98)

- 10
8 8
--4

I-MW

--

-$/MW/
I

.rt

-0

cu
cu

Figure 2: Spinning reserves market results

Disclaimer
This paper does not necessarily reflect the positions of
PG&E. Any errors or omissions are the sole responsibility
of the authors.
References
[ 11 Federal Energy Regulatory Commission (FEW). Joint
application of Pacific Gas and Electric Company, San Diego
Gas and Electric Company, and Southem California Edison
Company for authorization to convey operational control of
designated jurisdictional facilities to an Independcnt System
Operator, (Phase I IS0 filing), FERC Docket No. ER961663-000, April 29, 1996.
[2] Federal Energy Regulatory Commission (FERC).Phase
I1 filings for the California I S 0 and PX, FERC Clocket No.
ER96-1663-001, March 31, 1997.
[3] Federal Energy Regulatory Commission (FERC).
Amended Phase I1 filings for the Califomia I S 0 and PX,
FERC Docket No. ER96- 1663-003, August 15, 1997.
[4] E. Hirst and B. Kirby, Creating Competitivi: Markets
for Ancillary Services, Oak Ridge National L Iboratory,
October 1997.
[5] L.D. Kirsch and H. Singh, Pricing Ancillary Electric
Power Services, The Electricity Journal, October 1995.
[6] Wilson, Robert, Priority Pricing of Ancillary Services,
Report to the Trust for Power Industry Restructuring, May
17, 1997.
[7] Minimum Operating Reliability Criteria (MORC),
Western Systems Coordinating Council (WSCC),
September 1996.

The reserve capacity markets are only loosely coupled to

the other parts of the restructured energy market. The realtime balancing market, on the other hand, is much more
closely related to the forward energy markets. Balancing
energy is freely substitutable for forward energy. On the
other hand, balancing energy is supplied largely from units
receiving reserve capacity reservation fees. If the regulators
accept that utility market power is mitigated in the forward
energy market, but not in the ancillary service market,
where does the real-time market fall? A determination that Harry Sinah received a Ph.D. in Electrical Engineering from the
bidders in the real-time market can only receive cost-based University of Wisconsin-Madison in 1994. He is current y with the
rates can have serious repercussions on the prices in the Pacific Gas and Electric Company in San Francisco where he has
worked on the implementation of the Califomia PX and ISO.
forward energy markets.
Harry was one of designers of the Califomia ISOs ancillary
services market. His research interests include power systems
10. Conclusion
analysis, energy economics, and mathematical programing. He is
Competitive markets for electricity require competitive a member of IEEE, SIAM, and Sigma Xi.
markets for reliability or ancillary services. This paper
presents a market structure for the competitive procurement Alex D.Paualexououlos received the Electrical and h4echanical
of such services and discusses the role of the opportunity Engineering Diploma from the University of Athens, Greece in
costs incurred in providing these. The design of an auction 1980 and the M.S. and Ph.D. degrees in Electrical Engineering
for ancillary services such as reserves presents an interesting from the Georgia Institute of Technology, Atlanta, Georgia in
1982 and 1985 .respectively. Alex is heavily involvcd in the
dilemma between strict cost-minimization and efficient electric industry restructuring efforts in California where he was a
incentives for bidders. The proposed design seeks to choose key developer of the market rules for the California IS0 and the
efficient incentives over strict cost-minimization under the PX and he led the implementation of the IS0 business systems. He
assumptions of a well functioning and competitive market.
is a senior member of IEEE and a member of Sigma X i and the
Technical Chamber of Greece. Alex has published iumerous
papers in IEEE and he is the 1992 recipient of PG&Ej Wall of
8 In the actual implementation of the Califomia ISOs ancillary Fame Award and the 1996 recipient of IEEEs PES Prize Paper
services auction only those bidders that are not subject to price- Award.
caps are eligible to receive the market clearing price. Bidders
subject to price-caps are paid according to their bids. This
departure from a uniform price auction may also contribute to an
increase in prices.
~