1. Ancillary Services Market, Day-Ahead Load Response and Special Case Nodal Pricing Implementation Vamsi Chadalavada FERC Technical Conference March 4, 2005

2. 2 Primary considerations in delivering market enhancements –To implement identified market enhancements as early as possible –To balance the urgent and competing stakeholder priorities –To minimize overall implementation costs –To maximize the compelling synergies across multiple market enhancements

3. 3 Primary considerations in delivering market enhancements –To minimize further delays downstream in various other important initiatives identified by the ISO and stakeholders –This presentation focuses on Ancillary Services Market, Day-Ahead Load Response and Special Case Nodal Pricing

4. 4 Ancillary Services Market high level scope –Regulation market redesign –External transactions setting price –Day-ahead re-offer period changes –Reserve markets Forward reserve market Real-time joint optimization of energy and reserves –Direct demand participation in reserve and real-time energy markets

5. 5 Day-ahead Load Response high level scope –Designed for demand resources that can offer load reductions concurrent with the day-ahead wholesale electricity market –The Day-Ahead Load Response Program contributes to greater market efficiency by allowing the demand resource to specify the wholesale electricity price at which it is willing to curtail load –The demand resource has greater control over its load reduction because it knows a day in advance when and for how long its load reduction will be scheduled

6. 6 Special Case Nodal Pricing high level scope –Permit qualifying customers to settle at nodal prices –Allows for either a dispatchable or non-dispatchable option –Special Case Nodal Pricing will better integrate demand response directly into wholesale markets

7. 7 Original planned implementation sequence –ISO proposed Day-Ahead Load Response (sequential methodology) scheduled for implementation in June 2005 –Ancillary Services Market scheduled for implementation in October 2005 –Special Case Nodal Pricing scheduled for implementation in October 2005

8. 8 Rationale for original planned implementation sequence –Implement market enhancements as early as possible –Comply with commission directives –Leverage the significant synergies across multiple elements such as the Reserve market design, direct demand participation in the reserve and real-time energy markets, dispatchable special case nodal pricing –Address the dependencies for certain market enhancements –Recognize the benefits of a system release methodology

9. 9 Identified synergies that result in efficiency gains –Many of the elements of the proposed enhancements primarily involve modifications in exactly the same software systems and business processes Scheduling, Pricing and Dispatch Functions Unit Dispatch System Settlements and Financial Systems Security Constrained Reliability Assessment Electronic Dispatch Data Modeling User Interface and Web Publishing Systems Archiving, Performance Monitoring and Analysis Systems

10. 10 Infrastructure dependency –A fundamental improvement is the introduction of a generic asset class called asset related demand (ARD) that is integrated in a similar manner as supply across all Software systems Databases Markets and Business processes –Field improvements required in the area of modeling and metering

11. 11 Requirement for certain market enhancements –Asset Related Demand is needed for the implementation of Direct demand participation in reserves and real-time energy market Dispatchable Special Case Nodal Pricing Integrated Day-Ahead Load Response –This infrastructure improvement is part of the Ancillary Services Market project –Therefore, it is not feasible to implement these market enhancements until the infrastructure improvement is in place

12. 12 Benefits of a software system release methodology –Package functionality into a single software system release Significant efficiency gains in terms of software development, testing and training Significant savings in development costs –Multiple releases (or a release for each market enhancement) create the need for additional system infrastructure and human resources thereby driving costs and more importantly, delaying the delivery of market enhancements

13. 13 An illustration of the benefits of release methodology Ancillary Services Market* as one release Ancillary Services Market* as three releases ScheduleFall 2005Fall 2007 Budget$15M$27-$31M *Identical Functionality

14. 14 Why do most market enhancements take so long? Large ProjectsMedium Projects Stakeholder process and Regulatory approval 12-15 months5-9 months Project Implementation15-18 months9 months Total Duration27-33 months14-18 months Examples of large projects include Ancillary Services Market, Hourly bidding; Examples of medium projects include Regulation market design; Pricing for external nodes

15. 15 Why is the project Implementation phase so long? Large ProjectsMedium Projects Functional Design10 weeks6 weeks Development24 weeks10 weeks Internal Controls, Audits8 weeks4 weeks Testing*16 weeks10 weeks Training**10 weeks6 weeks Total68 weeks36 weeks * unit test, integration test and business end-user test ** 6 shifts of control operators, forecast office and market administration, business owners and support personnel; assumes 6 weeks of overlap with testing

16. 16 Stakeholder Feedback –Stakeholder feedback regarding original proposal and schedule Correlation between Ancillary Services Market and LICAP; Complexity of the Ancillary Services Market design Heavy demand on time due to LICAP and RTO Detailed market impact analysis High pace of market design enhancements

17. 17 Stakeholder Process Improvements –Based on stakeholder feedback, the ISO will Work with NEPOOL in implementing a design sheet (decision tree) approach Publish a series of white papers and examples during the conceptual design Provide a market impact analysis as part of the market design proposal Vote on the conceptual design, prior to voting on the detailed design

18. 18 Stakeholder Process Improvements –The ISO and NEPOOL have adopted this revised format for further discussion on the Ancillary Services Market –The ISO believes that this revised format has resulted in significant progress being made –The ISO believes that this experience will help build a strong foundation for discussions on future market enhancements

19. 19 Revised Implementation Sequence –The ISO evaluated and presented alternate proposals for the implementation of Ancillary Services Market, Special Case Nodal Pricing and Day-ahead Load Response

20. 20 Revised Implementation Sequence –Approved by ~96% at the February NEPOOL Participants committee Implement Ancillary Services Market as two phases Phase 1 scheduled for implementation in October 2005 (filing by March 2005 and approval by May 2005) will include Regulation market redesign, Day-ahead re-offer period changes and External transactions setting price Phase 2 scheduled for implementation no earlier than June 2006 (filing by Sept. 2005 and approval by Nov. 2005) will include the Reserve market design, Direct demand participation in reserve and real-time energy markets and Special Case Nodal Pricing

21. 21 Revised Implementation Sequence –Approved by ~77% at the February NEPOOL Participants committee Implement the ISO proposed Sequential Day- Ahead Load response program for June 1 2005 and replace it with the Integrated Day-Ahead load Response program following the implementation of Ancillary Services Market

22. 22 Revised implementation sequence considerations FERC decisions on market design proposals and revised implementation sequence Outcome of the LICAP hearings

23. 23 Conclusion The ISO is striving to achieve the optimal balance between responsiveness and efficiency (human resource allocations and monetary expenditures) It is the ISOs twin mission to ensure reliability and fair and efficient wholesale markets The ISO looks forward to working with its stakeholders in implementing these identified market enhancements