Building the Energy Markets of Tomorrow . . . Today

The Joint Petition for a Declaratory Order Regarding the Creation of a Northeastern

Regional Transmission Organization (“NERTO”)

AN OVERVIEW

ByJohn P. Buechler

NYISO Executive Regulatory Policy Advisor

AtNPCC General Meeting

September 19, 2002

The 100,000 Foot View

The Petition is the first step towards three goalsCombining ISO-NE and the NYISO into a single Northeastern RTO (“NERTO”)Creating a single NERTO market with a single dispatch.Establishing a “common market” across the NPCC (with compatible market designs)

Originated from an Agreement between the ISOs on January 28, 2002Creating a NERTO would comply with FERC OrderNo. 2000NERTO markets consistent with FERC’s SMD rule

The 100,000 Foot View (cont’d)

These goals would be achieved on different timetables.

The ISOs could be combined quickly Inter-ISO access charges could be eliminated in the near term.A regional planning process can start quicklyA single NERTO market/dispatch would take longer A “common” NPCC-wide market would also take longer

8/02File withFERC

Establish RTO Legal Entity/Tariffs

1/03Approvalby FERC

1Q-2Q/03RTO Entityformed

2002 2003 2005 200620042002 2003 2005 20062004

Develop and Implement Standardized ISO Market Systems1Q/03SMD 1.0 (NE) 1Q/04

SMD 2.0 (NY)

“Single Market, including Single Dispatch” NERTO Tariff in effect

6/30/03“Day One”NERTO Tariff in

place

2Q/04RTO HQ: Consolidate Single Market Software Development

2Q --3Q/03Establish RTO HQ: RTO Mgmt., RTO Svcs. (ATC, ITC, OASIS, Plng., Single Mkt. Design Team), Corp. Svcs.:

RTO HQ:Complete Organization Integration

Develop NERTO Single Market Systems(SMD 2.X)

Finalize SMD 2.X single market, vendor selection & Operating experience with SMD 2.0 (6-12 mos)

6/30/03Begin first NERTO Planning Process;Begin NERTO common interconnection process

1Q/04SMD-based markets implemented in both NE and NY ICAP/TCC “Early wins”

Establish RTO ServicesProvide Single Market Services

4Q/04FERC Approval: NERTO Single Dispatch Tariff

Establish RTO Organization & Facilities

8/02Start process to eliminate

border charges

Establish RTO Oversight

1/03 NERTO Board-

Elect is formed

Joint Oversight NERTO Board (Final)NERTO Board(Transition)

6/30/03 Seat RTO Board; ISO Boards, as currently constituted with existing responsibilities, cease to function

Single MarketTest and Implement

1Q/04File NERTO Single Dispatch Tariff

NERTO Implementation Timeline

What the Petition Asks FERC To Do

The Petition is just the first stepAdditional filings and approvals are needed to create the NERTO, a single NERTO market and a NPCC common marketPetition asks for a “declaration” that its proposals should be pursued furtherIf FERC says “yes” then the ISOs will work with stakeholders to develop the necessary filings

Advantages of Forming NERTO

Larger and better markets, with no trade barriers within NERTO regionMore efficient utilization of available resources through a single dispatchImproved regional operations and reliabilityElimination of “pancaked” rates

First: within NERTO regionLater: with neighboring regions

Improved transmission planning and interconnection practices throughout the NPCC regionA larger and more efficient system operator

NERTO’s Primary Responsibilities and Functions

Administer efficient, co-optimized, electricity and ancillary services markets Provide non-discriminatory “Network Access” transmission service Ensure reliability of the bulk power systemProvide vigilant market power monitoring and mitigationManage congestion using locational marginal pricing (“LMP”)Administer a regional transmission expansion process. One-stop shopping for interconnection service for new generation and merchant transmissionWork with neighboring RTOs to eliminate seams

Transition to a Single NERTO Market

The ISOs’ markets are at different levels of developmentThe ISOs will move towards a single NERTO market in three stages

Stage 1: SMD 1.0 in NE. Multi-settlement; LMP (Early 2003)Stage 2: “SMD 2.0” in NY. “Extra” features of NY market design and greater compatibility with SMD 1.0. (Early 2004)Stage 3: “SMD 2.X” NERTO implements a single market/single dispatch incorporating the best features of SMD 1.0 and SMD 2.0. (2005-2006)

NERTO Market Proposal:Overview

The NERTO market design will be consistent with FERC’s SMD requirements Voluntary, Bid-based, financially binding, multi-settlement markets (Day-Ahead and Real-Time)Co-optimized energy and ancillary services markets Bilateral and self-supply transactions allowedSecurity constrained commitment and dispatchCongestion management based on LMPAuction for financial congestion hedging rights Utilizes the NYISO’s ICAP market designAutomated ex-ante market power mitigationMarginal losses

The NPCC Common Market

The Petition proposes to create a seamless NPCC trading areaThe goal is to harmonize NERTO and Canadian markets -- consistent with sovereignty concernsThe ISOs are willing to modify NERTO market design to facilitate coordination (subject to FERC approval)Market development agreements have been signed with Ontario and New Brunswick Look forward to working with Quebec & Nova Scotia

NPCC Facilitates Achievement of NERTO Goals

Provides a common thread based on its role to ensure regional reliabilityCommon reliability practices support a common market design“Seams” Initiatives

Reserve SharingACE Diversity ExchangeLEER Agreements

Regional Planning InitiativeOSS Users Group

Market Power Monitoring & Mitigation

Both an independent outside market advisor (“IMMU”) and an internal MMU will provide complementary strengths IMMU will evaluate market performance andNERTO’s administration of market rules, and report simultaneously to the Board and FERC MMU will handle real-time monitoring and implement approved mitigation measuresMitigation tools based on NYISO’s conduct/impact bidding screens and “AMP”

NERTO Governance

Independent, non-stakeholder Board. Five initial directors from each ISO plus two new directors and a non-voting CEOStakeholders advise on selection of new directorsBoard has unilateral FPA filings rightsStakeholder and State Regulator Advisory Committees

Independent Transmission Companies (“ITCs”)

Several Northeastern TOs are interested in developing ITCs One or more ITCs may operate within the NERTO region Petition provides a framework for the allocation of certain RTO responsibilities to an ITC within NERTO regionITC may perform functions in the following areas:

Reliability coordinationTransmission rates and tariff administrationCongestion reductionCurtailmentsOperations PlanningDeveloping operating guides, manuals and procedures.

Final details remain to be negotiated

Tariffs and Rates

The “Day One” NERTO tariff will:Incorporate existing ISO and local tariffs into a single documentPreserve existing ISO rate designsEliminate existing inter-ISO border charges (pancaking)Go into effect at the start of NERTO operations

The “Day Two” NERTO tariff will:Incorporate other tariffs within regionInclude a new rate design, to be developed with stakeholdersBe submitted in early 2004Go into effect at the time of the single NERTO market

Questions??