1. ERCOT Emergency Interruptible Load Service Customer & Stakeholder Workshops July 2007

2. 2 2 EILS WorkshopJuly 2007 Agenda 1. PRESENTATION –Background: ERCOT Interruptible Loads Emergency Interruptible Load Service –How the program works Who’s eligible? How do you participate? –RFP/Bidding process –What are the risks? –Timeline for the next procurement cycle 2. BREAK 3. DISCUSSION & Q&A

3. 3 3 EILS WorkshopJuly 2007 Workshop Rules 1. Please – ask questions any time! 2. Stop that acronym!

4. ERCOT (Electric Reliability Council of Texas) Background

5. 5 5 EILS WorkshopJuly 2007 ERCOT connections to other grids are limited to direct current (DC) ties, which allow control over flow of electricity North American Interconnected Grids The ERCOT grid: –Covers 75% of Texas land –Serves 85% of Texas load –38,000 miles of transmission lines –>550 generation units –Physical assets are owned by transmission providers and generators, including municipal utilities and cooperatives NORTH AMERICAN ELECTRIC RELIABILITY CORPORATION (NERC) ~625,000 MW 63,259 MW ~168,000 MW

6. 6 6 EILS WorkshopJuly 2007 Electric Grid Operations Grid operations –ERCOT is one of 10 North American independent system operators (ISOs) ISOs serve 67% of U.S. population ERCOT directs traffic on the grid to maintain reliability –‘Air traffic controller’ of the electric supply Coordinates scheduling of power by market participants Analyzes grid conditions continuously in real-time Dispatches generation to ensure power production matches load at all times -- Electricity cannot be stored -- Secures extra generation capacity to meet reliability requirements Coordinates planned outages of generators and transmission lines Relieves transmission system congestion Coordinates emergency actions & recovery Operates markets to meet regional energy & capacity requirements not met thru bilateral arrangements Not pictured: New Brunswick System Operator

7. 7 7 EILS WorkshopJuly 2007 The Old World: Pre-2002 Each utility was vertically integrated, from generation to customer service Integrated electric utility Customer The Old World: Pre-2002

8. 8 8 EILS WorkshopJuly 2007 GenerationT&D (“Wires”) Competitive Production Regulated Open Access End Users REP Competitive Sales REP Retailers The New World: ERCOT Competitive Market Vertically integrated municipally-owned utilities and electric cooperatives comprise about 24% of the customer load in the ERCOT Region. They may opt-in to retail competition.

9. 9 9 EILS WorkshopJuly 2007 The ERCOT Market Qualified Scheduling Entities “QSEs” Load Serving Entities ERCOT Resources (Generators) SellersBuyers Includes REPs, Municipals & Co-ops Balancing Energy Reliability Congestion Management QSEs schedule all power flowing thru ERCOT Region & are the financial entities for the markets ERCOT-operated markets enable QSEs access to energy or capacity not procured bilaterally Private bilateral Contracts ~95% of Market ERCOT is the independent organization assigned to administer the wholesale and retail markets for this power region. ERCOT is a 501(c)(6) nonprofit corporation.

10. 10 EILS WorkshopJuly 2007 Projected Peak Demand (2007-2020) Load Forecast is growing by almost 1400 MW per year (~2 large power plants)

11. 11 EILS WorkshopJuly 2007 12.5% Reserve Margins 2000-2012 Percentage difference between projections for peak demand and available generation/resources Target for reliability: 12.5% Over 80,000 MW of new generation is in planning or under consideration, but not all will be built.

12. 12 EILS WorkshopJuly 2007 ERCOT’s Peak Day (8/17/06) by Fuel Type Coal Nuclear Combined Cycle Gas Turbines Single cycle gas turbines Natural Gas Steam Units Wind DC Tie Generation from private networks not included

13. 13 EILS WorkshopJuly 2007 Operating Reserves on 8/17/06 64,731 MW 63,259 MW 57,376 MW Operating Reserves

14. Interruptible Loads

15. 15 EILS WorkshopJuly 2007 Interruptible Tariffs in the Regulated World Prior to 2001, 3200 MW of customer load (mostly industrials) provided an emergency interruptible safety net Customers’ year-round electric rates were discounted in exchange for this In May 2000, ERCOT deployed interruptible loads four times during emergency conditions –Unseasonably hot weather –Nearly 20% of generation fleet out for planned maintenance –New wave of gas-fired generation had not yet come online

16. 16 EILS WorkshopJuly 2007 Interruptible Load in the New (restructured) Market Loads Acting as a Resource: –Market-based replacement for interruptible tariffs 130 LaaRs now registered & qualified with 1,989 MW of load LaaRs can provide ERCOT Ancillary Services (operating reserves) & receive capacity payments regardless of whether they are actually deployed –Responsive Reserves LaaRs regularly provide 50% of ERCOT Responsive Reserves requirement (1150 MW of 2300 total) Market payment =~$13 per MW per hour –Also eligible to provide: Non-Spin Reserve (30 minutes notice) Regulation Up and Down Service Replacement Reserve Service Ancillary Services markets are run each day for the following day

17. 17 EILS WorkshopJuly 2007 LaaR Participation Growth in LaaR registration in MW

18. 18 EILS WorkshopJuly 2007 LaaR Deployments LaaRs can be deployed in 4 ways: 1.Automatic trip based on Under Frequency Relay settings 2.Verbal dispatch by ERCOT during EECP event (deployed as block) 3.Verbal dispatch by ERCOT during frequency event reportable to NERC (deployed as block) 4.Verbal dispatch by ERCOT to solve a local congestion issue (location-specific) LaaRs have been deployed four times in the past 16 months: –April 17, 2006 Emergency Electric Curtailment Plan (manual) –Oct. 3, 2006 frequency event (manual) –Dec. 22, 2006 frequency event (UFR & manual) –July 2, 2007 frequency event (manual)

19. Emergency Interruptible Load Service

20. 20 EILS WorkshopJuly 2007 A quick review of April 17, 2006 20% of generation fleet (14,000 MW) out of service on planned maintenance ERCOT load forecast missed daily peak by nearly 10% –DFW temperatures exceeded weather forecast by 5 degrees F 100 degrees vs. usual high in low 80s Five major unit trips during peak hours Emergency Electric Curtailment Plan (EECP) initiated –All available generation, private network and maximum DC Tie supply deployed –LaaRs deployed –1,000 MW of firm load shedding (rotating outages) ordered by ERCOT Approx. 2% of load tripped at distribution level over 2 hour period –Public appeal for conservation issued & remained in effect thru 4/18 First time firm load shedding had been ordered since 1989

21. 21 EILS WorkshopJuly 2007 April 17, 2006, 4-5 p.m. Additional resources deployed shortly after 16:00 could have averted the need for firm load shedding 4 Unit Trips Graph represents post- LaaR deployment (instruction issued 15:34) Firm Load Shed instruction issued 16:13 60 Hz

22. 22 EILS WorkshopJuly 2007 Emergency Interruptible Load Service Purpose of EILS: To provide ERCOT Operations with an additional emergency tool to lessen the likelihood of involuntary firm load shedding (a.k.a. rolling blackouts) ‘Another tool for the operator toolbox’

23. 23 EILS WorkshopJuly 2007 Brief history of emergency interruptibles 2005: ERCOT stakeholders evaluate emergency load program as substitute for ancillary service for alternative fuels –Alternate fuels program rejected by stakeholders 2005: PUC includes emergency load response program in its draft rule on resource adequacy –Later removed Sept. 2006: ERCOT proposes EILS program at PUC Demand Response Workshop –Commissioners proposed parallel rulemaking & protocol development April 2007: EILS program approved –PUC approves Substantive Rule § 25.507 –ERCOT Board approves PRR 705

24. 24 EILS WorkshopJuly 2007 Emergency Interruptible Load Service What EILS is: Service provided by loads (customers) willing to interrupt during an electric grid emergency in exchange for a payment Last resort prior to firm load shedding (rotating outages) Deployed ONLY in the late stages of a grid emergency “Controlled interruption of prepared customers vs. uncontrolled interruption of unprepared customers”

25. 25 EILS WorkshopJuly 2007 Emergency Interruptible Load Service When EILS may be needed: Emergencies can occur at any time: –Cold weather months (due to natural gas curtailment & higher forced outages) –Shoulder months (due to unforeseen weather events & large amounts of scheduled maintenance) –Traditional summer peaks –Anytime, as may be caused by: generation outages (scheduled, forced or both) transmission outages beyond likely contingencies extreme weather events multiple simultaneous contingencies EILS may be more likely to be needed in off-peak or shoulder months than during traditional summer peaks

26. 26 EILS WorkshopJuly 2007 Deployment During Emergency Operations Event/ActionTrigger ADVISORY Physical responsive below 3000 MW ALERT: Start Reliability Must Run units, suspend unit testing, deploy Replacement & Non-spin Reserves Physical responsive below 2500 MW Emergency Electric Curtailment Plan Step 1: Dispatch all generation, issue public media appeal, acquire maximum power thru DC Ties Physical responsive below 2300 MW Step 2: Deploy LaaRs Physical responsive below 1750 MW Step 3: Deploy EILS Resources Maintain frequency at 60 Hz Step 4: Instruct transmission owners to shed firm load Frequency below 59.8 hz ERCOT Operators have flexibility to skip Step 3 if frequency is decaying rapidly. In these cases EILS would be deployed immediately after Step 4 to enable faster recovery.

27. 27 EILS WorkshopJuly 2007 Dispatch ERCOT Operations orders an EILS deployment via a phone call to the all-QSE hotline 10-minute deployment period begins when QSEs have received the instruction in this call –QSEs must then contact their committed EILS Resources (clock is ticking) EILS Resources must shed at least 95% of their committed load within 10 minutes of QSEs’ receipt of the instruction

28. 28 EILS WorkshopJuly 2007 Release (Recall) EILS Resources must keep their committed load off until released ERCOT Operations will release EILS Resources after LaaRs have been recalled and generation providing Responsive Reserves has been restored EILS Resources have 10 hours to return to service after release

29. 29 EILS WorkshopJuly 2007 Eligibility: Who can participate? INDIVIDUAL EILS Resources (Loads) Must have: –15-minute interval metering –Capability of interrupting at least 1 MW of load on 10 minutes notice at any time during the committed hours –Representation by a Qualified Scheduling Entity (QSE) with a wide-area network agreement with ERCOT Must have 24/7 operations that can receive the verbal dispatch instruction QSE (not ERCOT) is responsible for notifying the customer

30. 30 EILS WorkshopJuly 2007 Eligibility: Who can participate? AGGREGATED EILS Resources (multiple load sites) Each member of the aggregation must have: –15-minute interval metering –At least 500 kW of peak demand (~big box retail store) Aggregation as a whole must have: –Capability of interrupting at least 1 MW of load on 10 minutes notice at any time during the committed hours –Representation by a Qualified Scheduling Entity (QSE) with a wide-area network agreement with ERCOT Must have 24/7 operations that can receive the verbal dispatch instruction QSE (not ERCOT) is responsible for notifying the customer

31. 31 EILS WorkshopJuly 2007 Financial Relationships ERCOT’s only financial relationship is with the QSE –QSE submits bid –If bid is accepted, QSE is paid by ERCOT Payment to the EILS Resource (customer) is a private contractual issue between the customer and the QSE

32. 32 EILS WorkshopJuly 2007 Contract Periods EILS is procured for 4-month block commitments Participants must have their interruptible load available during all hours of the committed time period over the contract period Time Periods: –BUSINESS HOURS: 8 AM to 8 PM Monday thru Friday Except ERCOT Holidays –NON-BUSINESS HOURS: All other hours Participants may bid to provide the service for either or both time periods –For example, customers with small or limited overnight or weekend operations may choose the Business Hours option

33. 33 EILS WorkshopJuly 2007 Procurement (and history) ERCOT must procure at least 500 MW of EILS –If 500 MW cannot be procured the program is not run April-May 2007 procurement cycle –156 MW of bids received (no program) June-Sept. 2007 procurement cycle –213 MW of bids received (no program) Oct. 2007 – Jan. 2008 procurement cycle –RFP will be issued August 13 (more to come…)

34. 34 EILS WorkshopJuly 2007 Payments EILS Resources are paid to be available -- QSEs will be paid by ERCOT even if EILS is not deployed –‘Capacity payment’ –If deployed, participants do not receive any additional payment from ERCOT PUC Rule sets a Cost Cap on the program of $17 million for the period April 2007 thru Jan. 2008 –ERCOT has flexibility on how to procure the service & stay under the cost cap Bids are submitted prior to the Contract Period & validated by ERCOT –ERCOT may procure between 500 and 1000 MW of EILS Participants are paid as bid if ERCOT accepts their offer –Payments are made ≤70 days after the end of the contract period

35. 35 EILS WorkshopJuly 2007 Bidding Bids are submitted as: –$ per MW per Hour Bidders also must declare ‘Minimum Base Load’ –We do not assume that all load at each EILS Resource is interruptible –Minimum Base Load = load within the EILS Resource (behind the meter) that will not be interrupted as part of the EILS deployment Critical load that you can’t turn off –Used by ERCOT to validate bids & availability factors –May be zero, or may be a fraction of a MW

36. 36 EILS WorkshopJuly 2007 ERCOT Bid Validation ERCOT staff will review the bidder’s usage history over the preceding 12 months, considering: –Amount of load reduction being offered, and –Bidder’s declared minimum base load Review will assess whether the committed load has been available during the usage history period –If the review indicates insufficient availability, ERCOT will work with the QSE to make appropriate modifications to the bid –(No penalty for over-estimating bid) Baseline methodology –ERCOT’s review of the bidder’s usage history also will include a baseline methodology determination (default or alternate) –More to come on this subject

37. 37 EILS WorkshopJuly 2007 Payment Adjustments Payments will be adjusted if the EILS Resource fails to perform in either of two ways: 1.Availability: Load is not online and available for interruption during the contracted hours 2.Performance: Load fails to meet its obligations if ERCOT dispatches EILS in an emergency

38. 38 EILS WorkshopJuly 2007 Availability Factor Committed load must be available for interruption at least 95% of the hours in the contract period, as validated by ERCOT –Availability Factor = percentage of total hours that committed load was available –Calculation (per hour): actual load minus declared Minimum Base Load must be ≥ MW bid quantity –Exempted: Any hours than any step of an EECP is in effect Scheduled Periods of Unavailability –Up to 2% of hours in a Contract Period, with a notice requirement of five Business Days in advance For aggregated EILS Resources, availability factor will be calculated at the aggregate level … individual loads summed over all participants and compared to the bid as above If availability factor drops below 0.95, payment will be reduced If it’s 0.95 or greater, it will be reset to 1.0

39. 39 EILS WorkshopJuly 2007 Performance Factor If there is a deployment event, the EILS Resource must shed at least 95% of committed load within 10 minutes and keep it off until released Performance will be evaluated by ERCOT using 15-minute interval data via the following calculations: –Interval Performance Factor (number between 0 and 1) = ratio of actual to committed load reduction during each 15-minute interval covered by the event –Event Performance Factor = average of the interval performance factors for all intervals of the deployment If the event performance factor drops below 0.95, payment will be reduced If it’s 0.95 or greater, it will be reset to 1.0

40. 40 EILS WorkshopJuly 2007 Performance Factor: Measured thru Baselines ERCOT will establish a baseline for each EILS Resource using: –Industry-standard load modeling software –Historical interval meter data (12+ months) and interval data collected during the contract period –Weather & calendar data The default baseline tells us what the load would have been doing under business-as-usual conditions –IE, in the absence of a deployment The load’s performance factor in an EILS deployment event is calculated by comparing actual load data to the baseline –Interval performance factors are calculated by comparing actual load to the baseline for each 15-minute interval –Event Performance Factor is the average of all interval performance factors

41. 41 EILS WorkshopJuly 2007 Default Baseline Example (3-6 PM customer load curve) Baseline is built using interval meter data from preceding 12+ months and whatever subsequent data is available Calendar & weather information also factored in Indicates what the load would have been doing under ‘business as usual conditions’ in the absence of an EILS deployment instruction 1500160017001800 MW 60 50 40 30 20 10 0 Minimum Base Load

42. 42 EILS WorkshopJuly 2007 Default Baseline Example with EILS Deployment Customer’s EILS commitment is 10 MW EILS deployed at hour 1530 Committed load must be shed by 1540 EILS released at 1615 1500160017001800 10-minute curtailment period Resources have 10 hours following release to return to availability MW 60 50 40 30 20 10 0 Release Deployment instruction 10 MW Load reduction over 35 min. Minimum Base Load

43. 43 EILS WorkshopJuly 2007 Alternate Baseline Some loads do not have enough predictability to allow ERCOT to create a baseline model –For example, fluctuating loads or ‘batch process’ loads –May also include flat industrial loads with very high load factors ERCOT will assign such loads to the Alternate Baseline –Maximum bid amount = average hourly load minus declared Minimum Base Load ERCOT will validate MW bids from these loads if the committed MW are less than or equal to average load minus declared Minimum Base Load To meet availability requirements, EILS Resource’s average hourly load minus its MW bid commitment must exceed its declared Minimum Base Load in 95% of hours In an EILS deployment event, load must shed to its Minimum Base Load and must stay at or below that load level throughout the event –Load is not penalized if not ‘on’ at moment of dispatch

44. 44 EILS WorkshopJuly 2007 Alternate Baseline (Sample) EILS Resource bid is validated at up to 20 MW 0102030405060708090100 % of Hours in Contract Period Load Duration Curve for the EILS Resource based on data analysis during bid validation process MW 60 50 40 30 20 10 0 Declared Minimum Base Load: 4 MW Peak Load: 58 MW Avg. Hourly Load: 24 MW In a deployment event the EILS Resource must shed to declared Minimum Base Load of 4 MW or below 20 MW Maximum Bid

45. 45 EILS WorkshopJuly 2007 Aggregated EILS Resource Performance Baseline models will be established for each load participating in the aggregation All loads within an aggregation must be assigned to the same type of baseline (default or alternate) –If different baselines apply to loads within an aggregation, ERCOT will work with the QSE to split the aggregation into two groups by assigned baseline Load reductions during an event are computed at the individual load level by comparing the actual load to the baseline Performance of an aggregation is determined at the aggregate level For aggregations assigned to the Alternate Baseline, the sum of actual loads will be compared to the sum of the Adjusted Minimum Base Loads for each interval of the event

46. 46 EILS WorkshopJuly 2007 Payment Formula Within 70 days after the end of a contract period, QSEs representing EILS Resources are paid as follows: (Bid amount X MW X Hours) X (Availability Factor) Number between 0 and 1 X (Performance Factor) Number between 0 and 1

47. 47 EILS WorkshopJuly 2007 Payment and Self-Provision Who pays for EILS? –Costs are allocated (uplifted) to QSEs based on their load ratio share during the Contract Period QSEs may ‘self-provide’ EILS –Same as a competitive bid, only without the $ –Relieves the QSE of some or all of its uplifted EILS obligation –Payment to participating load is subject to agreement between the QSE and the load

48. 48 EILS WorkshopJuly 2007 What are the risks? Q: How often will EILS Resources be deployed? A: If ERCOT knew the answer, we might not need the service.

49. 49 EILS WorkshopJuly 2007 Deployment Risks Firm load shedding history –EILS is a tool providing the last layer of insurance before firm load shedding (rotating outages) –Firm load shedding has been ordered by ERCOT twice in the last 18 years: Dec. 22, 1989 –Extreme cold during morning peak –Deployed 500 MW for 30 minutes April 17, 2006 –Extreme heat during afternoon peak –Deployed 1,000 MW for almost 2 hours

50. 50 EILS WorkshopJuly 2007 Deployment Risks (cont.) Much has changed in Texas since 1989: –Since the market was restructured (1996-2001), new generating units must be built by unregulated competitive companies Regulators no longer have control over investment decisions –Since 2002, reserve margins have steadily declined Fewer available generating resources adds to risk ‘Past performance is no guarantee of future results’

51. 51 EILS WorkshopJuly 2007 Other Risks Failure to meet availability or performance obligations is a violation of ERCOT Protocols –EILS Resource and/or its QSE may be subject to suspension from program (in addition to payment reduction) –Subject to review by the Texas Regional Entity of the Electric Reliability Organization (NERC) –Subject to potential administrative penalties by the Public Utility Commission of Texas

52. 52 EILS WorkshopJuly 2007 Some Mitigating Factors Loads are committed for 4 months (not forever) Maximum of 2 deployments (or 8 hours) per Contract Period (Note: If a deployment event is still in effect when the 8 th hour expires, EILS Resources must remain offline until recalled by ERCOT Operations) Scheduled Periods of Unavailability Negative impacts of unexpected downtime can be limited if the QSE notifies ERCOT at any time Early-warning systems notify the market of pending shortfalls in supply –ERCOT warns QSEs of tight conditions well before EILS deployments

53. 53 EILS WorkshopJuly 2007 Timeline October 2007 – January 2008 EILS Procurement Cycle –Aug. 13RFP Issued –Aug. 30Notification of Self-Provision Due –Aug. 31Bids & Self-Arranged Offers Due –Sept. 11Self-Provision adjustments made –Sept. 12Awards Announced –Sept. 13Contracts Issued –Sept. 27Contracts Due at ERCOT –Oct. 1Contract Period Activation

54. 54 EILS WorkshopJuly 2007 EILS Hours Analysis Oct. ’07 thru Jan. ‘08 Contract Period –123 days 2,952 hours –84 Business Days 84 x 12 = 1,008 Business Hours –39 Non-Business Days (39 x 24) + (84 x 12) = 1,944 Non-Business Hours 5 ERCOT Holidays (2 Thanksgiving, 2 Christmas, 1 New Year)

55. 55 EILS WorkshopJuly 2007 References & Additional Information EILS page at ERCOT.com –http://www.ercot.com/services/programs/load/eils/index.htmlhttp://www.ercot.com/services/programs/load/eils/index.html –Includes: Technical Requirements & Scope of Work –Highly recommended RFP from previous Contract Period Bid Form from previous Contract Period Q&A (FAQs) Other supporting documents PUC Substantive Rule § 25.507 –http://www.puc.state.tx.us/rules/subrules/electric/25.507/25.507ei.cfmhttp://www.puc.state.tx.us/rules/subrules/electric/25.507/25.507ei.cfm PRRs 705 (EILS) and 716 (Self-Provision) –http://www.ercot.com/mktrules/issues/prr/700-724/705/index.htmlhttp://www.ercot.com/mktrules/issues/prr/700-724/705/index.html

56. 56 EILS WorkshopJuly 2007 Contacts Questions may be submitted to: –EILS@ercot.comEILS@ercot.com –Answers will be added to the Q&A section if appropriate –Submitters of questions will remain anonymous Demand Side Resources contacts at ERCOT: –Paul Wattles, pwattles@ercot.compwattles@ercot.com –Steve Krein, skrein@ercot.comskrein@ercot.com Market Participants may also contact their Client Services account manager

57. 57 EILS WorkshopJuly 2007 Q&A ON OFF Questions?