Market Working Group Update Presentation to CAWG March 29, 2011 Jim Sanderson, KCC

Background The MWG has completed market designs for the Integrated Marketplace. The Board of Directors asked Boston Pacific and the Market Monitoring Unit to review the major elements of the Integrated Marketplace proposal. The request was made in anticipation of the Board's upcoming decision at its January2011 meeting on whether to direct SPP to proceed with vendor contracts to implement the proposal. 4

Both Boston Pacific and the MMU have recommended that SPP proceed with implementation of the Integrated Marketplace and both have endorsed SPP’s market designs. From the Boston Pacific Report – “At the outset, we should note that the hard work of the SPP Staff, the Market Working Group, and other stakeholder groups has clearly paid off. The Integrated Marketplace proposal is a comprehensive, intelligent proposal that builds on experience from across the United States.” 5 Boston Pacific and Market Monitoring Unit Review of Integrated Marketplace Protocols

Each does recommend that SPP make some minor changes to the market designs 6 Boston Pacific and Market Monitoring Unit Review of Integrated Marketplace Protocols

Policy Level Responses to Protocols At the January 11 th and 12 th meeting, the MOPC endorsed the SPP Integrated Marketplace Protocols. MOPC asked that SPP staff prepare for a discussion on implementation at the April meeting. 7

Policy Level Responses to Protocols The SPP Board of Directors took action on the Integrated Marketplace at its January 25 th meeting. The Board voted to –(1) table design issues until the April meeting –(2) release project funds ($1.5 million) based on the MOPC endorsement of the Protocols –(3) have the Market Working Group report back to the Board in April after taking consideration of the EMA and MMU reports. 8

Items that EMA and MMU recommend are changed in Protocols Note that I will not go into detail on all of these issues. The discussion would be too complex. Rather, I will highlight issues that might be of interest to the CAWG and RSC: –Issues that might be before the RSC in the future –Issues that involve ensuring that opportunities for gaming markets are eliminated 9

Items that the EMA and MMU recommend are changed in protocols Issues that involve design complexity –Combined Cycle Generation –Five Minute Settlement –Marginal Loss Allocation Other Concerns –Must Offer Requirement –Reserve Zones –Virtual Transactions

Must Offer Requirement The protocols requires Market Participants to offer sufficient resource capacity to cover their forecasted load and reserve requirements. Boston Pacific recommends that must offer be applied to all Designated Resources. Designated Resources get some form of capacity payment in return for their capacity obligation. SPP’s right to call on non-Designated Resource capacity without some form of capacity payment may not meet FERC’s standard for “adequate fixed cost recovery.”

Must Offer Requirement Boston Pacific believes that MWG’s position would allow generators too much discretion in choosing which DNRs to offer Day-Ahead. Boston Pacific also supports RSC consideration of a capacity-type payment for non-DNRs that are called upon to provide reliability services in emergency conditions. SPP staff indicated that MWG may decide to refer this issue to the RSC.

Must Offer Requirement MWG Response – MWG motioned to accept Boston Pacific recommendation that all Designated Resources be required to offer in the Day-Ahead Market. The motion failed with four votes to approve and no abstentions. – MWG motioned to accept Boston Pacific’s recommendation that non-DR be compensated for the capacity services they provide when called upon in an emergency and the RSC spearhead this effort. The motion failed with one approving vote and no abstentions.

Reserve Zones The SPP Market Monitor and Boston Pacific recommend removal of Reserve Zone transfers due to inefficiencies that will result in the market. Inefficiencies arise because the obligation transfer requires some assurance that the reserves, if called on, will be deliverable to the reserve zone where the obligation originated – they may not be. To ensure that reserves are deliverable, the transmission capacity into the reserve zone will be reduced by the amount of the obligation transfer.

Reserve Zones This provision enables a select group of Members, those holding firm transmission rights between reserves zones, to lower the import capacity into a particular area. A lower import capacity increases the likelihood of congestion in the energy market and thus introduces gaming issues.

Reserve Zones MWG Response –After analysis, the MWG decided to remove Reserve Zone transfers from the Integrated Marketplace due to concerns related to market inefficiency and complexity.

Virtual Transactions TCR holders may have an incentive to use virtual bidding to cause day-ahead congestion to increase the value of their TCRs. Current protocols propose to give the MMU the authority to monitor for uneconomic virtual bidding and, if certain thresholds are met, allows SPP to suspend participants from submitting virtual bids and offers for three months.

Virtual Transactions Boston Pacific suggested that it may be worthwhile to develop a specific rule in the Integrated Marketplace Market Protocols that explicitly allows for a claw-back of revenue from this behavior. SPP Staff made it clear that FERC and various RTO market monitors have determined that there is no way to automatically claw-back TCR revenues.

Virtual Transactions MWG expects the MMU to actively monitor Market Participants to determine any manipulative behavior and report any findings to FERC.

Virtual Transactions MWG Response –SPP staff met with Boston Pacific at the end of February and walked through each of the virtual bidding concerns for further understanding. After discussing the issues and explaining the MWG and SPP staff perspective on the items, Boston Pacific provided comments on March 1, 2011 indicating all of their concerns related to virtual bidding were alleviated.

More Information For details on these items, see: –EMA and MMU reports:  BOD meeting materials January 25, 2011 beginning on page 545 –Also, the Market Working Group position papers:  MWG meeting materials March 21, 2011

Upcoming MOPC and BOD meetings in April These groups will need to make final decisions on Integrated Marketplace design issues. SPP is moving to implementation phase.

Integrated Marketplace Schedule The following list represents the current design and implementation schedule: – September 2010: MWG Finalize Baseline Protocols – October 2010: MOPC Approval of Baseline Protocols – January 2011: Board Approval Implementation Budget – April 2011: Market Design – January 2013: Vendor Development (Design & Build) – January 2014: Testing & Market Trials – March 2014: Implementation