ONTARIO: Straddling the Northeast and Midwest RTOs

1. ONTARIO: Straddling the Northeast and Midwest RTOs Presentation to Ontario Power Summit Update on Regional market Developments June 11, 2002 Toronto, Ontario Amir Shalaby Manager of Regulatory and Government Affairs The Independent Electricity Market Operator Toronto, Ontario, Canada

2. Scope of Presentation • Overview of Ontario electricity markets • Ontario’s participation in current policy choices at FERC • RTO developments in the Midwest & Northeast • Next frontiers for markets and regional scope for Ontario

3. Ontario: Quick Background • 11 million people. 3 Million Customers .Sales of 150 TWh; valued at Over $10 billion /year.. • Trade with US: ± 5 TWh/yr (± 3% of production) • 6,000 MW interconnection with the U.S. (Northeast and Midwest) and Canadian Provinces • Totally unbundled industry structure • Four Transmitters, 90 distributors, many generators, an Independent Operator • Divestiture and privatization of the former Ontario Hydro is underway • Wholesale and retail electricity markets were open on May 1, 2002

4. Ontario Straddles the Northeast and the Midwest Manitoba (369 MW Limit) Ontario Quebec (North) (80 MW Limit) Quebec (South) (1130 MW Limit) Minnesota (150 MW Limit) (* 200 MW Limit) New York (East) (400 MW Limit) Michigan (2450 MW Limit) New York (Niagara) (2100 MW Limit)

5. The Neighbourhood: Midwest ISO/TRANSLink/SPP/Alliance/PJM/NERTO Midwest ISO Service Territory TRANSLink (Non-MISO Members) SPP Service Territory Alliance Service Territory PJM West Service Territory PJM Service Territory NERTO Ontario

6. Northeast & Midwest: Different Origins, Different Evolution Plans Northeast:• Evolves from operating ISOs • High density, frequent congestion, geographically small • Current focus is on market design / role of ITCs/ cost benefits • Ontario’s IMO active in discussions Midwest:• Numerous control areas and transmission Owners • Largest geographic RTO • Early stages of market development • Focus is on consolidation of control areas, role of ITCs, Transmission agreements and coordination with other RTOs. • Ontario’s IMO starting discussions NY/NE ISOs and PJM

7. Active Two-way Trade with New York and US Midwest Trade Between Ontario and Michigan Trade Between Ontario and New York

8. Day Ahead Prices Source: London Economics

9. Illustrative Wholesale Electricity Price in Ontario ($65/MWh) Congestion Management and Ancillary Services 2.9 Wholesale Market Services Charges 6.2 Line Losses 1.3 Debt Retirement Charge 7.0 Transformation Connection Service Charge IMO Administration Charge 1.0 Transmission Charges 9.0 Line Connection Service Charge Rural Rate Settlement Charge 1.0 Network Service Charge Commodity Charge 43

10. Regulatory Developments and IMO Views on Policy Choices at FERC

11. A Flurry of Regulatory Developments Ontario: Market based permits, Merchant transmission proposals, Market evolution Canada:NEB Permits. Lobbying and influence in U.S., Provincial policy developments U.S.: Comprehensive Legislation, , DOE Infrastructure Study, Busy FERC Agenda, evolving organizations: Northeast RTO, Midwest ISO, NAESB/NERC

12. Developments at FERC: • Standard Market Design and Tariff • Generation Interconnection Standards • Various RTO rules/orders/announcements • Standards Developments (reliability, business practices) • Office of Market Oversight

13. IMO Perspective on Standard Market Design • Ontario’s market design is compatible in principles, concepts and in certain aspects in detail design • Two incomplete components in Ontario are LMP and day ahead markets • Comfortable with Financial Transmission reservations and rights , not physical

14. IMO Perspective on Allocation of RTO Functions • Straightforward if SMD is adopted • Most RTO functions belong with the independent entity of the RTO due to the integrated nature of functions of a SMD • Transmission owners are asset operators and managers, proponents for transmission rates, and partners in planning and congestion relief. • April decisions on Translink and Alliance provide guidance

15. IMO Perspective on Standards Developments • Process should enable various jurisdictions to adopt compatible standards • Best facilitated with an international, self-governing , industry based organization • Reliability standards have a public interest nature to them • Reliability standards do interact with business practices. Coordination is therefore in the best interest of the entire industry

16. RTO Developments in the Midwest and Northeast

17. NYISO and ISO-NE committed to: • Developing a common NY and NE energy market • Evaluating the economic benefits and system reliability implications while maintaining integrity of current markets • Preparing a comprehensive integration plan with orderly transmission • Ensuring stakeholder input • Maximizing reuse of existing assets • Submitting a filing to FERC by June 30th

18. Ontario’s Involvement in RTO Developments • Submissions to FERC on: design/allocation of functions/standards development • Participation in Northeast evolution: MOU agreement, mediation at FERC, NERTO design, seams mending at FERC(June 12) • Discussions with MISO • Review of emerging standards

19. Possible Northeast Market Evolution (including Ontario) CONSOLIDATE MARKETS Value Creation STANDARDIZE MARKET DESIGN Stage 3 – Consolidated Market IMO Stage 2 - NY Implements SMD 2.0 IMO NPCC IMO IMO Stage 1 - NE Implements SMD 1.0 NPCC NYISO ISO-NE SMD2.0 IMO ISO-NE NYISO IMO SMD2.0 SMD 1.0 MACC NYISO ISO-NE PJM NPCC PJM Stage 0 - Current State Markets NY SMD 1.0 PJM IMO PJM IMO MACC NYISO ISO-NE PJM NY NEPOOL PJM PJM PJM Timing Now Month 12 Month 24 Month 36

20. Next Frontiers for Markets and Regional Scope for Ontario

21. Opportunities with Neighbouring RTOs • Shared reserves and other synergies • Coordinated scheduling of transactions • Eliminating export transmission tariffs • Coordinated planning • Dealing with circulating power • Joint assessment of interconnection projects near borders • Closer coordination of outage plans • Common energy day ahead market and other features

22. Relevance of Regulatory Developments to Ontario • Increased emphasis on independence • Challenge to integrate markets and reliability • Move to converge to “standard market Design” • Further context for evaluation of ‘unfinished business’ in Ontario: • LMP and day ahead markets are central to SMD • PBR for transmission has been deferred • Interregional coordination with U.S. RTOs (day ahead, license plates, Open System Scheduling, Transmission Planning) • Merchant transmission framework

23. Additional Resource Materials • IMO Web site: www.theimo.com • Great source of information • On-Line Web Courses (capability training courses) • Training Guides • Market Rules and Manuals • IMO Help Centre: • 1-888-448-7777 • 905-403-6900 • helpcentre@theIMO.com

24. Appendix: Ontario’s IMO Functions

25. Ontario Restructuring Policy Development: Committees, White paper, Design Committee 1995-1999 Bill 35 - 1998 Enabling Legislation Government Regulations Companies Institutions Rules Agreements • Many established in past 2 years • Wholesale • Market Rules • Hydro One • IMO • Operating • OPG • Distributors • Retailers • OEB • ESA • OFC • Market • Power • Retail • Licenses • Codes

26. Day 1 Market Statistics • Ontario’s new market has 239 participants • 93 Local Distribution Companies • 89 Industrial Consumers • 19 Generators • 34 Wholesale Buyers/Sellers • 4 Transmitters • 1st 5-min price for electricity was $25.43 MW/hr or 2.54 cents kW/hr • At opening market demand was 14,500 MW

27. Market Prices on Day 1

28. Market Demand on Day 1

29. IMO - Operational Authority • Serves as reliability authority for Ontario • Directs the operations of the IMO-controlled grid - does not physically operate the system • Maintains short-term reliability: • implements interchange scheduling • establishes operating procedures • redispatches generation for Emergencies • approves transmission maintenance schedules • coordinates and approves transmission and generation outages • establishes Emergency Plan

30. IMO - Tariff Administration and Design Transmission Rates • Transmission Owners develop and propose revenue requirements, rate design, and the rate levels necessary to recover the costs of service. • The OEB requires and approves. • Approved rates are billed and settled by the IMO and transferred to the TOs. Market Rules • Market rules (often called RTO tariffs in the U.S.) are developed in a consultative ‘Technical Panel’ of the IMO and approved by IMO Board of Directors. Appeals can be made to the OEB.

31. IMO - Interconnection Requests • IMO conducts system impact studies in coordination with affected TOs. • Evaluation is based on impact on reliability of IMO-controlled grid. • IMO submits approval or disapproval of each connection proposal to the OEB. • System impact study evaluation results are used by the OEB to assess compliance with the Transmission System Code and to assess whether to grant a “leave to construct”.

32. IMO - Real-Time Energy Market • bid-based • security-constrained 5-minute dispatch • single settlement • generators submit single-part bids and perform their own unit commitment • open to dispatchable loads and generators • allows for submission of bilateral contract data for settlement purposes

33. IMO - Real-Time Market for Operating Reserves • 10 minute and 30 minute reserve markets • bid-based • joint co-optimization with energy market • Three other ancillary services (voltage support, black start, AGC) are procured through competitively tendered contracts

34. IMO - Financial Transmission Rights Market • auction FTRs across the interconnections • ability to hedge against changes in locational differences in energy prices between the uniform Ontario price and the prices for each intertie zone

35. IMO - Congestion Management • uniform price for energy across Ontario for each 5 minute interval • Different locational prices across interconnections if congested • generators will be paid if constrained on or off • the IMO will publish 5-minute and hourly prices at each relevant node within Ontario to provide information on congestion within Ontario • Ontario will assess implementation of LMP within Ontario at a later time (18 months)

36. IMO - Market Monitoring • Accountability is with the independent Board members and the Market Surveillance Panel (MSP) • market power mitigation is the shared responsibility of the MSP , the Ontario Energy Board, and the competition Bureau. Joint Statement in place. • unit created at the IMO to support the analysis and investigations