An Introduction to Independent System Operators and Electric Utility Restructuring

1. An Introduction to Independent System OperatorsandElectric Utility Restructuring Richard Dudeck Manager, Merchant Power Development Charles A. King, PE Director, NYISO Market Services LECG ECONOMICS * FINANCE Scott M. Harvey Susan Pope Principal Director

2. Competitive Electricity Market Structure

3. Competitive Structure • The system operator is needed to coordinate the use of the single interconnected transmission grid by a variety of competing generators, loads and traders. • This coordination role includes both congestion management and the provision of ancillary services, all of which pertain to the reliability of the transmission grid. The role of the system operator is central to the successful development of competitive electricity markets.

4. Competitive Structure Role of ISO The role of the ISO as a system operator is defined by the answers to four questions: • Is an ISO needed to balance the transmission grid and maintain reliability in real time? • Should the ISO balance the transmission grid at least cost? • Should restrictions be placed on the opportunity of market participants to provide balancing and congestion management services to the ISO or to use the balancing services and congestion management coordinated by the ISO? • Should balancing services and congestion management coordinated by the ISO be priced by the ISO at incremental cost? All structuring proposals recognize the fundamental need for an ISO to maintain reliability - the differences lie in how the ISO will be allowed to undertake this task.

5. Competitive Structure Role of ISO Should the ISO balance the transmission grid and maintain reliability in real time? • Injections and withdrawals must be balanced in real time. • Transmission congestion often exists, requiring coordination of grid use to maintain reliability through a contingency-constrained dispatch. • Because of loopflow, there is no workable system of decentralized physical property rights capable of reliably coordinating grid use. There is always a system operator; the issue is whether the system operator will be independent.

6. Competitive Structure Role of ISO • Because these balancing costs must be borne by grid users, the costs incurred on their behalf should be no higher than necessary. • The ISO’s balancing of the transmission grid should minimize costs based on the voluntary bids of market participants. Should the ISO balance the transmission grid at least cost?

7. Competitive Structure Role of ISO Should restrictions be placed on the opportunity of market participants to provide balancing and congestion management services to the ISO or to use the balancing and congestion management services coordinated by the ISO? • The principles of non-discriminatory open access and customer choice are inconsistent with restrictions on access to the ISO coordinated spot market. • Artificial restrictions on access to the ISO’s balancing and congestion management services will tend to benefit those with access to balancing services at the expense of other market participants.

8. Competitive Structure Role of ISO • Restrictions on the opportunity of market participants to provide balancing and congestion management services to the ISO appear likely to dramatically increase the amount of balancing services that must be contracted for by the ISO, as has been the case in California. • Restrictions on the opportunity of market participants to provide balancing and congestion management services are inconsistent with least cost operation of the transmission grid.

9. Competitive Structure Role of ISO • Pricing balancing and congestion management services at less than marginal cost would require subsides that would likely grow rapidly under open access, leading to administrative restrictions on the use of the grid. • Pricing balancing and congestion management service above marginal cost would artificially restrict grid use. • The expenditure of ISO resources in order to price discriminate among grid users in the charges for balancing or congestion management services is inconsistent with open access principles. Should the balancing and congestion management services coordinated by the ISO be priced by the ISO at the bid-based incremental cost?

10. Competitive Structure Role of ISO In practice, the role of the ISO tends to fall into one of three models:

11. Concepts to Practical Application On January 27, 1999, the FERC conditionally approved the tariffs and rates of the proposed New York Independent System Operator. “I am very pleased that today’s action moves the New York ISO closer to operational reality . . . Bulk power markets in the Northeast are becoming largely governed and operated by ISOs and the coming efficiencies will benefit all consumers.” (Commission Chairman James J. Hoecker)

14. What Are Power Pools? • An association of Electric Utilities - usually for the purpose of joint operation and planning. • Usually the rights and responsibility of Members are defined in a contract. • Ownership (public or private) is not important.

15. Advantages of Power Pools • Increased reliability through coordination of operation. • Reduced operating costs through exchange of economy energy. • Reduced capital costs through coordinated planning.

16. Increased Reliability Through Coordination • Common reliability criteria • Pool Control Center overseeing the entire Pool grid • Pool Control Center coordinator with neighboring systems • Common operating procedures • Training of Dispatchers

17. Reduced Operating Costs Through Exchange of Economy Energy • Economic Dispatch among Pool members • Economy sales with neighboring systems • Reduced operating reserve

18. Reduced Capital CostsThrough Coordinated Planning • Less Installed Capacity Needed • Larger Units an Option • Coordinated Transmission Planning

19. Executive Committee • Governing Body of Pool • Members are Chief Executive Officers • Determines Policy • Arranges for Administration of Pool

20. How are Pools Organized?

21. Operating Committee • Makes Operating Policy • Members are Senior Executives involved in Operation of Power System • Rules for Emergency Operations • Rules for Operating Reserve • Rules for Voltage Reduction

22. Planning Committee • Prepares the Long Range Plan • Members are Senior Executives Responsible for Planning • Plans for Generating Capacity • Plans for Transmission Lines • Plans for Interconnection with Neighboring Systems

23. Control Center • Place from which Power System is Controlled • Houses Operating Staff • Houses Planning Staff

24. Major Change in Utility Industry in the U.S. • Separation of Generation from Transmission & Distribution • Generation will be dispatched on Bids not Cost

25. The Power Pool is being converted into an Independent System Operator (ISO) which will be responsible for: • System Reliability • Facilitating the Market

26. Difference between Power Pool & ISO • Governance • Bid-based Unit Commitment • Bid-based Dispatch • Market Monitoring

27. How are ISOs Organized?

28. Power Pool & ISO • SAME MISSION • KEEP THE LIGHTS ON! • REDUCE COST! • NEW TWIST • FACILITATE MARKETS!

29. New Electricity Market Structure Proposed in NYPP ISO Filing Independent System Operator (ISO) Bids: prices generation and services available • Operates bulk power system • Administers day-ahead unit commitment for generation • Balances generation and load in real-time • Publishes market prices • Provides for ancillary services • Provides transmission services Statewide Generators Bids: purchase amounts, prices Load Serving Entities Generator and load schedules, bids, services available Transmission Provider Reliability standards and rules DIRECT CUSTOMERS Compliance Data Power Exchanges and other Direct Customers New York State Reliability Council (NYSRC) Generators • Establishes reliability standards and rules • Monitors compliance Load Serving Entities

30. New InstitutionsThe Independent System Operator • The existing NYPP is dissolved. • The NYISO is formed as a not-for-profit NY Corporation under FERC and applicable NYPSC jurisdiction. • Principal Mission: maintain reliability and provide transmission service on a comparable and non-discriminatory basis.

31. What Will the ISO Do? • The ISO will oversee the operation of the Bulk Power System Facilities. • The ISO will establish and operate the LBMP market. • The ISO will administer the open access transmission tariff. • The ISO will develop procedures to implement NYSRC standards & criteria. • The ISO will administer and maintain the OASIS.

32. New InstitutionsThe New York State Reliability Council (NYSRC) • Formed by agreement among the 8 NY Transmission Providers & interested parties. • Principal Mission: Develop reliability rules & criteria for the reliable operation of the NY Bulk Power System. • NYSRC will establish reliability rules, subject to NERC, NRC, NPCC and NYPSC requirements including Local Reliability Rules.

33. What Will the NYSRC Do? • The NYSRC will develop and update reliability rules which are binding on the ISO. • The NYSRC will monitor the ISO’s compliance with the reliability rules. • The NYSRC may seek to assume compliance through a dispute resolution process if necessary. • The NYSRC will establish the statewide Installed Reserve Requirements. • Initial NYSRC Rules submitted to FERC in May ‘97 Supplemental Filing.

34. The Need for the NYSRC • Reliability Rules adopted following '65 Blackout and strengthened following '77 NYC Blackout. • Limited transmission capacity into NYC. • Transmission usage into greater NYC area is constrained most hours. • NERC & NPCC criteria are supplemented to preserve reliability in NY. • TP's will still have fiduciary, contractual and common law duties to maintain reliability!

35. NYISO Supplementary FilingProposed Industry Structure FERC Oversight Monitoring Tariff Modifications NERC/NPCC FERC/ PSC ISO LBMP’s OASIS/ATC Standards Criteria Bills, Payments 10 Member Dispute Resolution Unaffiliated DIRECT CUSTOMERS Board Buyers Muni/Coop Sellers 1 1 1 Bids Monitoring 6 of 10 9 of 13 To Pass Schedules To Pass Reliability 8 2 Installed Rules Capacity Trans. Providers Unaffiliated Contracts NYSRC

37. Direct CustomersAn entity which can interact directly with the ISO • Direct Customers must meet ISO technical and financial requirements and may, • Submit bilateral transaction schedules to the ISO • Submit bids for the ISO's day-ahead and real-time LBMP energy and ancillary service markets • Participate directly in the ISO's settlement process • Direct Customers may aggregate bids and schedules for other Market Participants, subject to the 1 MW minimum requirement.

38. The Proposed Markets • Energy/Transmission Markets • Centralized dispatch, based on LBMP w/day-ahead unit commitment. • Ancillary Service Markets • Cost-based - voltage, black-start. Market based - regulation, reserves, energy imbalance. • Installed Capacity Requirements • LSE's can obtain capacity through self generation, transactions, and centralized market.

41. LBMP Example $70 $40 $35 $50 $20 $30

42. Uncongested System $70 $40 $50 $35 $30 $30 $20 $30

43. Congested System $70 $40 $35 $50 $70 $35 $30 $20

44. Contract Path Vs. Flow Based Contract Path Low Availability Certainty Flow Based High High Low Transmission Price Certainty

45. NYPP Member Companies allocated an agreed-upon portion of the transmission interfaces Called the Total East Allocation procedure For as long as interface flows within limits, allocation ratios not enforced In case of interface flow violation Reduce flows for any member exceeding its allocation If still overload, reduce pro rata all flows No TLR used Curtailment -Today

46. Total East Allocation Procedure to Relieve System Overloads G3 X% Total East G2 Y% Limit = 6500 MW Z% G4 G1 G5 G6

47. Scheduling Vs. Curtailment OH Contract Path NYCA This flow not scheduled with NYISO Actual Flows PJM

48. Curtail non-firm bilateral transactions - apply TLR to unscheduled non-firms - curtail scheduled non-firms at congestion onset If still overloaded, SCD shifts generation If still overloaded, run SRE to economically curtail (based on decremental bid cost) those external firm bilateral transactions in merit order If still overloaded, curtail all remaining firm bilateral transactions pro-rata Proposed Curtailment in the ISO World

49. Energy Service Company [ESCO] • Must be deemed eligible to provide services to retail load by PSC (opinion 97-5) • File completed application with PSC • Meet PSC disclosure requirements • Must meet ISO requirements • Retail Access Team Report • Direct Customer Requirements

50. Retail Customer Choices • Continue to purchase All services from local TP • Purchase energy and ICAP from ESCO, pay wires charge to TP • Purchase energy and ICAP from certified generator, pay wires charges to TP • Become an ESCO and purchase energy from ISO (must meet all ISO Direct Customer requirements, including ICAP) or purchase energy from another wholesale supplier (bilateral or CFD)