Two ISOs shared transmission facilities near their border. Each ISO had the right to use a defined share of the transmission capacity on the shared facilities in its market.

The ISOs sought to implement a process to transfer the right to use a quantity of the shared capacity between their real-time markets. Their goals were to increase the total value derived by the two ISOs from using the shared facilities and to improve price convergence between the ISOs’ real-time markets.

The ISOs ran their real-time markets every five minutes. They transferred the right to use a quantity of transmission capacity in the next market run to the ISO whose most recent real-time market run placed a higher marginal value on the capacity (Buying ISO) from the ISO that placed a lower marginal value on the capacity (Selling ISO) in its most recent real-time market run.

In the original design, the transferred rights to capacity were treated as fixed in the next real-time market run by each ISO. As a consequence, the shadow price on capacity in a given ISO’s market was set by the marginal supply and demand resources in that ISO’s market. Since the ISOs did not share marginal resources between their markets, this prevented convergence of shadow prices and interfered with identifying profitable exchanges.

We showed that having the Buying ISO treat the transfer of transmission capacity as a variable in its market optimization allowed the transfer to be a marginal resource in the Buying ISO’s market. Pricing the transfer in the Buying ISO’s market at the cost to the Selling ISO of adjusting its resources to enable the transfer, essentially let the Buying ISO see the costs of the resources that the Selling ISO adjusted to make the transfer possible. This allowed price convergence to take place.

This approach was implemented by the two ISOs resulting in improved price convergence between their real-time markets and increased efficiency.