1 WMS Report To TAC October 2007

2 In Brief One Working Group Report One Working Group Report One Task Force Report One Task Force Report Three Staff reports Three Staff reports

3 Staff Reports Closely Related Elements (CREs) Closely Related Elements (CREs) List approved by WMS List approved by WMS CRR transition Plan CRR transition Plan Endorsed by WMS Endorsed by WMS Continued CRR/CSC/zone transition planning Continued CRR/CSC/zone transition planning

4 Every month from Jan to Nov 08, ERCOT will, as usual, divide the 2008 annual auction TCR/PCR revenues into monthly revenues in the same proportion as ERCOT’s monthly energy forecast (see graph below) and distribute them to QSEs based on their Load Ratio Share (LRS). Every month from Jan to Nov 08, ERCOT will, as usual, divide the 2008 annual auction TCR/PCR revenues into monthly revenues in the same proportion as ERCOT’s monthly energy forecast (see graph below) and distribute them to QSEs based on their Load Ratio Share (LRS). In Dec 08 (when TCRs/PCRs are no longer in effect), ERCOT proposes to refund remaining 2008 TCR/PCR annual auction revenue to TCR/PCR owners based on TCR/PCR purchase allocation % (see formula below). In Dec 08 (when TCRs/PCRs are no longer in effect), ERCOT proposes to refund remaining 2008 TCR/PCR annual auction revenue to TCR/PCR owners based on TCR/PCR purchase allocation % (see formula below). JANFEBMARAPRJUNJULAUGSEPOCTNOVMAYDEC Total $ TCR purchases by TCR Account Holder in 2008 annual auction Total $ TCR/PCR purchases by ALL TCR Account Holders in 2008 annual auction TCR purchase allocation % = Refund to TCR/PCR Owner * = * * Total revenue for 2008 TCR/PCR annual auction Dec load forecast Total load forecast TCR purchase allocation % where *Note: For PCRs, purchase allocation % is based on $ amount paid, not equivalent TCR clearing price

5 Staff Reports Closely Related Elements (CREs) Closely Related Elements (CREs) List approved by WMS List approved by WMS CRR transition Plan CRR transition Plan Endorsed by WMS Endorsed by WMS Continued CRR/CSC/zone transition planning Continued CRR/CSC/zone transition planning

6 Working Group Reports QMWG Attempt to find a solution that will address the Reliability vs Scarcity debate Attempt to find a solution that will address the Reliability vs Scarcity debate

7 Reliability vs Scarcity Pricing Highlights Highlights Current system makes MW of balancing stack unusable due to discount factor. Current system makes MW of balancing stack unusable due to discount factor. ROS initiatives: ROS initiatives: dynamic discount factor dynamic discount factor Unannounced testing on HSL to account for weather differentials Unannounced testing on HSL to account for weather differentials

8 Reliability vs Scarcity Pricing Highlights Highlights Unload some units that are at the top, creating RRS. Redispatch of existing gen can give needed capacity instead of bringing on additional units. Unload some units that are at the top, creating RRS. Redispatch of existing gen can give needed capacity instead of bringing on additional units. PRR730 – no consensus, but need to continue discussion. PRR730 – no consensus, but need to continue discussion.

9 Reliability vs Scarcity Pricing Proposal Proposal Increase amount of RRS procured by 500MW Increase amount of RRS procured by 500MW Retain current 2300 & 2500 MW thresholds Retain current 2300 & 2500 MW thresholds Implement ex-ante Administrative Price Adjustments per flow chart presented by Dan Jones Implement ex-ante Administrative Price Adjustments per flow chart presented by Dan Jones An engineering study is needed for additional LaaR component of RRS. An engineering study is needed for additional LaaR component of RRS.

10 Zonal Congestion? EECP > Step 1 or Step 1 > 30 min? Y Y N N OOM for Short Supply or NSRS Deployed? Y N MCPE = CAP MCPE = SPD MCPE MCPE = Max (SPD MCPE, $150 to $250) Option 2

11 WMS Action WMS directs QMWG to write PRR(s) according to the QMWG proposal to increase amount of RRS procured by 500MW, retain current 2300 & 2500 MW thresholds, and implement ex-ante Administrative Price Adjustments per the flow chart presented by Dan Jones. WMS directs QMWG to write PRR(s) according to the QMWG proposal to increase amount of RRS procured by 500MW, retain current 2300 & 2500 MW thresholds, and implement ex-ante Administrative Price Adjustments per the flow chart presented by Dan Jones.

12 Long-term Solution Task Force Mission of finding alternative solutions to the emergency interruptible service that is required by Public Utility Commission of Texas (PUCT) Substantive Rule § The rule specifically requires the market participants to identify alternatives that are defined as long-term solutions. Any long-term solution must offer ERCOT the ability to avoid shedding firm load by bringing more resources online or curtailing load voluntarily. In this context, the PUCT is interested in the following: Better price signals leading up to an Emergency Electric Curtailment Plan (EECP) event; Bringing more resources (both interruptible load and generation) online through existing ancillary services; and Examining the priorities set by transmission/distribution service providers when shedding firm load. (ROS dealing with this issue)

13 Long-term Solution Task Force 8 Meetings held since April 8 Meetings held since April White Paper Developed and circulated to ROS and WMS White Paper Developed and circulated to ROS and WMS 6 Specific proposals are addressed in the White Paper 6 Specific proposals are addressed in the White Paper PUC Staff has generally adopted proposal 3 (Modification of Current EILS Program) and has published it. PUC Staff has generally adopted proposal 3 (Modification of Current EILS Program) and has published it. Commissioners “willing to wait” to analyze the Long-term solution proposed by Market Participants. Commissioners “willing to wait” to analyze the Long-term solution proposed by Market Participants.

14 LTSTF Proposals 1. Administrative Price Adjustment 2. Zonal Market Administrative Shortage Pricing and Procurement of Additional Reserves 3. Modification of Current EILS Program 4. Procurement of New Ancillary Service (Direct Load Control) 5. Procurement of Additional Reserves 6. Priority Pricing Proposal

15 1) Administrative Price Adjustment PRO’s Sends price signal during period of shortage (Currently little ability to determine need to curtail.) Sends price signal during period of shortage (Currently little ability to determine need to curtail.) May trigger response under existing programs May trigger response under existing programs Applies to both supply and demand Applies to both supply and demand Resolves price suppression related to OOME/C Resolves price suppression related to OOME/C Cons Not market based Not market based May trigger Peaker Net Margin May trigger Peaker Net Margin Significant system changes required Significant system changes required Short duration – therefore limited load response Short duration – therefore limited load response May be costly to market (order of magnitude more than EILS) May be costly to market (order of magnitude more than EILS) These proposals essentially create balancing energy service price floors based on triggers set by ISO Alert and EECP steps. The proposals suggest increasing the price floor as EECP progresses.

16 2) Zonal Market Administrative Shortage Pricing and Procurement of Additional Reserves PRO’s Sends price signal during period of shortage Sends price signal during period of shortage Provides price support to both LaaRs and generation. Provides price support to both LaaRs and generation. Provides for better frequency response Provides for better frequency response Cons May be more expensive than EILS May be more expensive than EILS May trigger Peaker Net Margin May trigger Peaker Net Margin Increasing the RRS hourly obligation to 2,800 MW, 50% allowed to be provided from under-frequency relay type Load Resources. For Intervals where ARRS > 2,500 and ERCOT deploys NSRS: MCPE = SPD MCPE + $50.00; for intervals 2,300<ARRS<2,500 SPD MCPE set to range of $ /MWh ; and for intervals where ARRS<2300 SPD set to CAP.

17 3) Modification of Current EILS Program PRO’s Provides ERCOT the tool it asked for Provides ERCOT the tool it asked for Easy to implement Easy to implement PUC already down the road PUC already down the road No system changes required No system changes required Cons Value of service unknown Value of service unknown Reducing quantity below 500 MW reduces the likelihood of avoiding any firm load shed Reducing quantity below 500 MW reduces the likelihood of avoiding any firm load shed Loads may already be participating in market (switching between demand side programs offers little additional benefits) Loads may already be participating in market (switching between demand side programs offers little additional benefits) Reduce the 500 MW Minimum requirement, Increase the $20 Million annual cost cap to $50 Million, removes the 500 KW/V size requirement.

18 4) Procurement of New Ancillary Service (Direct Load Control) PRO’s Provides real-time known and measureable demand response to ERCOT operations. Provides real-time known and measureable demand response to ERCOT operations. Brings in both small and large loads Brings in both small and large loads May offer performance during frequency disturbances May offer performance during frequency disturbances Cons Technology investment for larger loads Technology investment for larger loads Increased Risk of ERCOT Liability Increased Risk of ERCOT Liability “First of its kind” issues for ISO “First of its kind” issues for ISO Provides capacity payments for loads but not generators Provides capacity payments for loads but not generators Provides known and verifiable Direct Load Control by ERCOT of telemetered loads over 10 MW; provides for aggregation of smaller loads that can be statistically proven to provide response.

19 5) Procurement of Additional Reserves PRO’s No system changes No system changes Provides known benefits to prevent firm load shedding Provides known benefits to prevent firm load shedding Provides price support to both LaaRs and generation. Provides price support to both LaaRs and generation. May provide incentives for long-term resource adequacy May provide incentives for long-term resource adequacy Provides better frequency control performance Provides better frequency control performanceCons May be considerably more expensive than EILS May be considerably more expensive than EILS Requires new Engineering Study (Scope development underway) Requires new Engineering Study (Scope development underway) Completion date of Engineering Study tied to as of yet undefined Project Scope Completion date of Engineering Study tied to as of yet undefined Project Scope This proposal represents a compromise among proponents of the option of procuring additional RRS and/or NSRS. It is designed to increase the amount of operating reserves available to ERCOT by 500MWs through existing Ancillary Services and ensures both Load and Generation Resources have the opportunity to competitively bid against each other to provide the Ancillary Services.

20 6) Priority Pricing Proposal PRO’s Loads would be contractually committed to shed. Loads would be contractually committed to shed. Paid only the predicted value of their interruption Paid only the predicted value of their interruption Can use same performance metrics as EILS Can use same performance metrics as EILS Would be less expensive than the cost of new generation. Would be less expensive than the cost of new generation.Cons May result in distorted prices May result in distorted prices Requires price forecast from ERCOT. Requires price forecast from ERCOT. Requires price forecast before real-time for real- time prices. Requires price forecast before real-time for real- time prices. Nodal pricing will impose challenges to pricing model. Nodal pricing will impose challenges to pricing model. Energy consumers (“loads”) would contractually commit to curtail their purchase of electricity from the grid whenever the wholesale price of electricity reached various levels ($750/MWH, $1000/MWH & $1500/MWH).

21 2) Zonal Market Administrative Shortage Pricing and Procurement of Additional Reserves PRO’s Sends price signal during period of shortage Sends price signal during period of shortage Provides price support to both LaaRs and generation. Provides price support to both LaaRs and generation. Provides for better frequency response Provides for better frequency response Cons May be more expensive than EILS May be more expensive than EILS May trigger Peaker Net Margin May trigger Peaker Net Margin Increasing the RRS hourly obligation to 2,800 MW, 50% allowed to be provided from under-frequency relay type Load Resources. For Intervals where ARRS > 2,500 and ERCOT deploys NSRS: MCPE = SPD MCPE + $50.00; for intervals 2,300<ARRS<2,500 SPD MCPE set to range of $ /MWh ; and for intervals where ARRS<2300 SPD set to CAP.

22 WMS Action WMS accepts the LTSTF White Paper with edits only to the Specific Proposals submitted by the proposers. WMS recognizes that the QSE Managers Working Group is in the process of developing a PRR based on the combination of administrative prices and increased reserves similar to those outlined in the White Paper. WMS believes that the charge given to the QSE Managers Working Group is generally consistent with proposals 1 and 5 in the LTSTF White Paper, and will offer ERCOT the ability to reduce the probability of shedding firm load consistent with the Energy only market by bringing more resources online or curtailing load voluntarily. WMS advises TAC that the combination of improvements and enhancements that have been implemented since April 17, 2006 in combination with the PRRs under development by the QSE Managers Working Group, will constitute a Long-term Solution as contemplated by Substantive Rule

23 Changes in Market since April 17, 2006 Forecasting Model refinements Forecasting Model refinements Terminating Modified Competitive Solution Method Terminating Modified Competitive Solution Method Terminating CSC congestion constraint on BES MCPE Terminating CSC congestion constraint on BES MCPE Revised EECP and Alert process and procedures Revised EECP and Alert process and procedures Raised offer cap Raised offer cap

24 Calculation The value provided by EILS is the avoided cost of the outage prevented: The value provided by EILS is the avoided cost of the outage prevented: Value = Risk of outage * cost of outage = (1 event/15 yr) * ($6000/MWh * 1000MW * 4 hr) = $1.6M/yr

25 WMS Action WMS resolves that EILS as defined in Protocols is inconsistent with the energy only market design established by the Commission and supports the ROS resolution that the program does not provide the reliability tool ERCOT purports. Additional reasons are given below and WMS recommends that the program be discontinued: WMS resolves that EILS as defined in Protocols is inconsistent with the energy only market design established by the Commission and supports the ROS resolution that the program does not provide the reliability tool ERCOT purports. Additional reasons are given below and WMS recommends that the program be discontinued: 1) The cost of the program can potentially far exceed the economic value of lost load. 1) The cost of the program can potentially far exceed the economic value of lost load. 2) While EILS may reduce the amount and duration of firm load interruption, there is a very low probability that EILS will prevent the loss of firm load completely. 2) While EILS may reduce the amount and duration of firm load interruption, there is a very low probability that EILS will prevent the loss of firm load completely. 3) The greater issue for reliability in both the short and long term comes down to the lack of price signals for both load and generation and this is being addressed by the QSE PM group. 3) The greater issue for reliability in both the short and long term comes down to the lack of price signals for both load and generation and this is being addressed by the QSE PM group.

26 WMS Report To TAC October 2007