USA Electricity Markets Monitoring From OMOI’s Perspective

1. USA Electricity MarketsMonitoring From OMOI’s Perspective George Godding Director, Mgmt. & Comm. Office of Market Oversight and Investigations Brazilian Partnership Conference - Thursday, August 19, 2004

2. Presentation Outline • Background of Energy Market • Electric Sector Overview • FERC • RTOs • NERC • Electricity Market Monitoring • Major Players • OMOI • Oversight Process • Market Power & Mitigation • Surveillance Process • Indices and Reports • Market Monitoring Center 2

3. Brief Background on Electricity Markets and its Regulation and Oversight 3

4. Generation: Capacity (2002) – 914,123 MW Total net generation (2002) – 3,858 billion KWh Coal – 1,933 billion KWh Natural gas – 691 billion KWh Nuclear – 790 billion KWh Petroleum – 94 billion KWh Hydroelectric – 264 billion KWh Other renewable – 86 billion KWh Overview of U.S. Electricity Sector (most recent data available – 2002/03) Generation Capacity Ownership: • Investor-owned utilities – 398,112 MW • Public-owned utilities – 92,696 MW • Cooperatives – 37,825 MW • Federal Power – 70,220 MW • Non-utilities – 315,271 MW Expected Demand Growth: • 3,639 billion KWh (2002) • 3,674 billion KWh (2003) (1%) • 3,718 billion KWh (2004) est. (1.2%) Transmission: • High-Voltage Circuit Miles (230-kV and above) – 158,605 (255,250 km) 4

5. FERC’s Goals • FERC Strategic Plan • Promote a Secure, High-Quality, Environmentally Responsible Infrastructure through Consistent Policies • Foster Nationwide Competitive Energy Markets as a Substitute for Traditional Regulation. • Protect Customers and Market Participants through Vigilant and Fair Oversight of the Transitioning Energy Markets. • Plan Transparency • Plan Stability (minimize market uncertainty) • Open participation in implementation decisions by interested parties 5

6. FERC Organization Chart 6

7. FERC Infrastructure Regulation • Approve Hydro facilities (many others involved) • Approve rate design for generation and transmission (states approve siting – legislation may change for tx) • Approve pipeline siting and transmission rates • OASIS (Open Access Same-time Information System for transmission availability) • FERC set interconnection rate design and rules • FERC & DOE review transmission issues and generation adequacy – bully pulpit (possible legislation) • DOE – SP-15 & Cross Channel Cable • DOE issued July 22, 2004 – Notice of Inquiry on National Interest Electric Transmission Bottlenecks (NIETB) • Publicly identify and designate NIETBs • To classify NIETBs (national security, reliability, risk of cost increases) • How DOE facilitate & monitor mitigation 7

8. Electric Market Planning and Design - RTOs • RTOs – SMD • Centralized dispatch • Resource adequacy • Long-range planning • Day ahead and real-time markets • Locational Marginal Pricing • Transmission rights • Natural Trading Markets • Large as Possible • Recognize Regional Differences 8

9. RTO Map 9

10. Reliability - NERC • Established in 1968 in response to 1965 Northeast Blackout • Non-governmental entity; ten-member Board of Trustees • Voluntary membership with 10 regional reliability councils • Members from all segments of the electric industry • Developed reliability standards and established good utility practices • Developed technical services, tools and databases to enable industry to monitor and evaluate system and equipment reliability, manage grid congestion and facilitate communication • 2003 Blackout • Reevaluate reliability standards • Accelerate adoption of enforceable standards • Develop better real-time tools for operators and reliability coordinators 10

11. NERC Map 11

12. Electricity Market Monitoring 12

13. Market Monitoring – Major Players NERC (Reliability Standards) FERC (Wholesale) Generation Transmission MMUs (Defined RTOs) States (Retail) Distribution Other Federal Agencies 13

14. Guide the evolution and operation of energy markets to ensure effective regulation and protect customers through understanding markets and their regulation, timely identification and remediation of market problems, and assured compliance with Commission rules and regulations. OMOI’s Mission 14

15. OMOI’s Vision • Vigilant oversight and vigorous enforcement of proper market rules ensure dependable, affordable, competitive markets to benefit end use customers and other participants. 15

16. Office of Market Oversight and Investigations (OMOI) – Knowledge/Skillsets Planning Perf. Mgmt. Budgeting Facilitation Speaking Knowledge of industry Partnering • Career Dev. • HR • Recruiting • Contracting • Writing/Editing • Web design • Graphics • Presentation development Division of Management & Communication Director Deputy Director Market Oversight & Assessment Deputy Director Investigations & Enforcement Hotline Market Scanning Public Speaking ADR Phone Response Strategic Analysts Library Science Division of Energy Market Oversight Division of Financial Market Assessment Division of Integrated Market Assessment Division of Information Development Division of Enforcement Division of Operational Investigations Division of Technical Investigations Financial Analysts Accountants Understanding of Investment Derivatives Markets Energy Trading Engineers Economists Broad Industry Experience (Cross-Industry, Scenario, Regulatory Analysis; Market Microstructure Issues) Operations Research Writing/Presentation Skills Policy Analysts Information Analysis Energy Industry Expertise Software Applications (Large databases, Data Analysis, Statistical, Presentations (including Mapping) Web Experience Questionnaire & Survey Design Statistical Analysis • Attorneys • Litigation • Investigation • Knowledge of financial markets • Enforcement • ADR Training • Paralegal Electrical Engineers Pipeline Engineers Economists Deep Industry Expertise Information Analysis Modeling Operations Research Market Design & Operation Forensic Auditors Analytic ability Statistical sampling Documentation Industry experience Investigators Examiners Gas Engineer Electric Engineer Mechanical Engineer Quantitative Economist 16

17. Flow Chart of Oversight Process • OMOI takes advantage of information technology and updated resources for monitoring electric market stresses. Investigations & Audits Push Emergency Emergency Team Market Market Oversight Commission 8:30 AM Discussions In-Depth Study Surveillance Report Oversight Meeting Regular Pull Feedback 17

18. How We Regulate – Market Oversight • Set Rules (open rulemaking process) • Provide Oversight • Conduct Audits • Conduct Investigations • Ensure Compliance • Enforce Rules • Feedback on effectiveness of above 18

19. Surveillance - FERC • Data/Data/Data – direct reporting and 3rd party • Real time • 8:30 meetings • Alerts • Daily information on Intranet – from web scraping • Weekly surveillance meetings • Hot Line and complaints • Building partnerships (see next page) • Analyzing anomalies • Reporting to Commission (anomalies, scheduled briefings, special reports) • Building Reliability Group 19

20. Coordinating Surveillance • RTO Market Monitors (report anomalies to FERC, standard reports, Ex Parte rule, etc.) • States (NARUC, Snapshot Report, etc.) • Other Federal agencies (CFTC, FTC, DOJ, DOE, SEC, etc.) • NERC 20

21. Relationship with Market Monitors • Joint Mission Statement • Clear market monitoring plans • Contact list & monthly conference calls • Triggers for reporting to OMOI • Information access • Coordinating investigations 21

22. Market Power & Mitigation • Market-based rates vs. Cost-based rates • Generation Market Power Screens • Pivotal supplier analysis based on control area’s annual peak supply and demand • Market share analysis applied on a seasonal basis in relation to other’s market share • Behavioral Rules • Not undertake actions that purposefully lead to market manipulation or would be expected to • Specific prohibitions (wash trades, false information, artificial congestion, collusion) 22

23. Market Power & Mitigation (continued) • Code of Conduct • Separate generation from marketing and transmission • Treat affiliates as do non-affiliates • If deal with affiliates (transparent, defined product, standard criteria, independent design & solicitation review) • Mitigation schemes at RTO level • Caps • Bidding controls • AMP – conduct and impact • Cost-based restrictions when congestion (market power & RMR) • Merger approval may require mitigation 23

24. Electric Market Efficiency • Shared objective with States and other Federal agencies • Market-based drives efficiency and “just and reasonable” rates • No specific requirements • Economic and physical withholding • Maintenance • Cost-based if market power & not mitigated • Dispatch studies • Looking for: lowest cost power into the market & to customers 24

25. Indices and Reports Market Monitoring Center 25

26. Indicies and Reports • Alerts • Daily Energy Reports • Market Surveillance Report • Seasonal Assessments • Anomaly Reports • Annual State of the Markets Report • Annual Behavioral Rules Report • MMU Annual Reports • Common Metrics 26

27. Common Market Metrics – MMUs Status of MMU Common Metrics from State of the Market Presentations 27

28. Market Monitoring Center(Information Examples) • Screens from: • Bloomberg, ICE and DOW (data and traders comments) • Friedwire (flows, LMP, nuclears, etc.) • Genscape • PJM 28