Midwest ISO Chicago, IL July 19, 2000 Edward G. Cazalet, Ph.D. Automated Power Exchange (APX)

1. REAL Flow Midwest ISO Chicago, IL July 19, 2000 Edward G. Cazalet, Ph.D. Automated Power Exchange (APX)

2. Real vs. Contract Flows 100 MW Scheduled from Montana to Southern California PNW RTO 40 % InadvertentFlow 60 % Contract PathFlow Flowgates CaISO 40 MW 60 MW Desert Star RTO REAL Flow Task Force

3. Financial vs. Flowgate Rights 100 MW Scheduled from Montana to Southern California PNW RTO 40 % Flow Financial Right 60 % Flow Flowgates CaISO Financial Right 40 MW 60 MW Impacts on other RTO flowgates not considered by financial rights Desert Star RTO REAL Flow Task Force

4. REAL Flow Combines Forward Markets and Real-Time Residual Dispatch • Forward, bilateral, and exchange interconnection-wide markets for energy, transmission flowgates and ancillary services seamlessly transitioning to a set of sub regional residual dispatch procedures near delivery. • Forward markets provide price certainty and allow coordination over the entire interconnection for generation, transmission and buyer decisions. • Residual dispatch procedures allow coordination of frequent, closely coupled decisions with short decision lead times. Focuses the RTO on reliability not markets REAL Flow Task Force

5. Ideal REAL Flow Markets: • Forward bid/ask markets for all electricity products provide price certainty & global physical coordination • RTO or CAO real-time dispatch provides operator control and short-lead time local coordination Forward Markets Dispatch withEx-post Prices Reservoir Operation, Unit Commitment and Physical Scheduling Day-ahead Schedules Required REAL Flow Task Force

6. Integrated Physical & Commercial Model Completely Separate Physical Model in LMP Physical Financial Flowgates PJM FTRs Flow Based Contract Path Fictional Physical Model PathBased Forward Models REAL Flow Task Force

7. REAL Flow Supports Real Markets PHYSICS Power from a defined source moves to a defined sink on predictable physical courses across commercially significant interfaces or flowgates. These power flows are calculated using conventional distribution factors. ECONOMICS Pricing for transmission of the actual flows is refined from years ahead until near real time using e-commerce auctions, continuous bid/ask markets, and bilateral trading. REAL Flow Task Force

8. Regulated TRANSMISSION OWNERS = Cost Neutral Transmission Rights Revenues* + Area Access Charge** = Revenue Requirement * from auction of rights to flow ** revenue requirement net of auction revenues divided by total mWh Market LOADS= Cost Neutral Allocated rights associated with their historical service. Receive revenues from their sale. GENERATORS = Competitive Compete to serve loads with equal access to transmission through rights auctions, secondary markets & hedges. Transmission Revenues Are Neutral REAL Flow Task Force

9. REAL Flow Commercial Products: Simplify and Trade Separately • Energy Flows • Transmission Rights • Ancillary Services Capacityuntil real-time markets become fully developed. REAL Flow Task Force

10. +100 5 5 Hub x to Hub 11 Flow Factors -60 7 B 1 4 6 C +40 Flowgate Bus A B C 100 8 9 1 0.70 0.30 0.30 2 2 0.80 0.20 0.20 5 0.60 -0.6 0.40 3 3 0.90 0.10 0.10 4 0.60 0.40 0.40 A 5 0.60 -0.60 0.40 11 6 0.50 -0.50 0.50 11 +60 7 0.55 -0.55 0.45 4 8 0.20 -0.20 -0.20 -100 9 0.05 -0.05 -0.05 10 10 -0.01 0.01 0.01 11 0.00 0.00 0.00 12 -0.05 0.05 0.05 Flowgate Calculations are Easy $10 / MWh *- .6 = - $6 / MWh $20 / MWh * .4 = $5 / MWh 5 to 11 price $9 - $6 + $5= $8.00 / MWh 12 $15 / MWh * .6= $9.00 / MWh REAL Flow Task Force

11. Locational Pricing • True Flow can be nodal or zonal or both • Hubs easily defined and reconfigured • Locational, hub and/or zonal pricing • Locational Marginal Price is not a “right” market price ; it is a calculation from multi-part bids and other arbitrary assumptions • Locational Market Prices derive from continuous bid / ask markets • Locational Pricing without LMP disadvantages REAL Flow Task Force

12. How REAL Flow Works -- procuring rights to flow • Participants awarded initial allocations or buy the rights to flow in auctions • Auctions occur 3-5 years out, annually, monthly, daily, and hourly • Percentage of total rights auctioned at each interval based on updated information about Operating Security Limits • Secondary market operates continuously • Getting to the nearest hub takes few, if any flowgates REAL Flow Task Force

13. How REAL Flow Works -- scheduling with rights to flow • Qualified scheduling entities submit balanced schedules with corresponding rights to flow • RTOs systems continuously assess the flow-based schedules and status, computing flowgate loadings from net injections • A use or lose mechanism for unscheduled rights to flow maximizes through-put REAL Flow Task Force

14. How REAL Flow Works -- definition of rights to flow • Unidirectional rights to flow over flowgates • Rights are an option to flow • Obligation to flow incurred only if any counterflow rights are sold • Thus anybody can buy through congestion in the forward and real-time markets • RTO buys back in secondary market for derates REAL Flow Task Force

15. RTO Coordination and Seams • Flows in one RTO or among RTOs can impact flows in several RTOs in an interconnection. • Scheduling timelines, transmission and energy product definitions, nomenclature, transmission pricing may differ among RTOs causing seams between RTOs REAL Flow Task Force

16. Continuous Scheduling • Balanced and electronically confirmed transactions managed by market participants and qualified scheduling entities. • RTOs continuously access net injections by facility ( no need for transaction schedules ) • RTOs can compute flowgate loadings from net injections • Eliminates seams timing problems REAL Flow Task Force

17. RTO Organized for REAL Flow A Qualified Scheduling Entity/Coordinator can Trade Transmission Flowgates in Several RTOs. REAL Flow Task Force

18. Transition from Forward Markets to Real Time Dispatch • Start-up and no-load costs internalized in market bids • Day-ahead scheduling deadline • Unused transmission rights revert to RTO with possible recall option • Real time dispatch hand-off hour ahead. • Real-time dispatch by control area with RTO supervision or by RTO. REAL Flow Task Force

19. Using REAL Flow to Improve LMP • Use LMP with single part bids in real-time on moderate sized network. Start-up and no-load costs may not be properly allocated by LMP. • Modify LMP to use Forward Physical Flowgate Markets. LMP FTRs chained across several RTOs do not properly manage parallel flows. Flow gate markets are more transparent than LMP FTRs. REAL Flow Task Force

20. Unbundling Financial Rights • The RTO needs to provide unbundled flowgate rights • The market can bundle flowgates to point-to-point rights • Unbundling point-to-point financial rights into flowgate rights is hard and puts an unnecessary burden on both the RTO and the market REAL Flow Task Force

21. What the market wants… REAL Flow markets provide Reliability - Suppliers, consumers and wires owners only benefit if reliability is enabled and ensured. Forward and real-time information and coordination provides. Price certainty - To know in advance the price of source to sink transmission. Continous Bid/As transmission markets and scheduling with transmission rights provides. Liquidity - Enough buyers and sellers for transmission rights and energy. Incentives to schedule and e-commerce technology provides. REAL Flow Task Force

22. WhatFERC wants…REAL Flow Markets provide • Congestion management that: • is administered by the RTO • provides a robust market of tradable rights • recognizes actual power flows • enables market power mitigation • provides price certainty • is conducive to seams management • is supported by stakeholders! REAL Flow Task Force

23. More of what “The Market” wants… REAL Flow markets provide • Transparency - all market participants able to observe what is happening in the market and that it is conducted in a non-discriminatory manner. Flowgate forward and energy markets and electronic communications provides. • Long term price signals - Transmission owners want to know where expansion is needed. REAL flow pricing information provides. • No RTO intervention or market participation - Forward markets and electronic communications provides. REAL Flow Task Force

24. What Transmission Owners want …is provided • Recovery of revenues • Simple, low cost transition • Simple, low cost operation • Incentives to : invest optimize existing system maximize through put REAL Flow Task Force

25. For the REAL Flow Task Force Presented by Edward G. Cazalet, Ph.D. Automated Power Exchange Santa Clara, CA ed@apx.com 408-517-2100 REAL Flow Task Force