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SPP.org 1

SPP Today and Tomorrow

Missouri Public Service Commission

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“SPP 101”

SPP.org 3

Our Beginning

• Founded 1941 with 11 members

Utilities pooled resources to keep Arkansas aluminum plant powered for critical defense

• Maintained after WWII for reliability and coordination

SPP.org 4

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SPP at a Glance• Incorporated in Arkansas as a 501(c)(6)

non-profit corporation

• FERC - Federal Energy Regulatory CommissionRegulated public utility

Regional Transmission Organization

• NERC - North American Electric Reliability Corporation

SPP.org 55

Reliability CorporationFounding member

Regional Entity

Operating Region

• 54 Members in nine states:

Arkansas

Kansas

Louisiana

Mississippi

Missouri

Nebraska

New Mexico

Oklahoma

Texas

SPP.org 6

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SPP Members

SPP.org 7

• 370,000 square miles service

Operating Region

miles service territory

• 47,000 miles transmission lines:

69 kV – 13,649 miles115 kV – 9,171 miles

SPP.org 88

115 kV 9,171 miles138 kV – 9,294 miles161 kV – 4,550 miles230 kV – 3,531 miles345 kV – 6,620 miles500 kV – 106 miles

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Independent System Operator (ISO) /Regional Transmission Organization (RTO) Map

SPP.org 9

3 Interconnections / 8 NERC Regions

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SPP Mission

Helping our members work together to k th li ht t d d i thkeep the lights on – today and in the future.

SPP.org 11

The SPP Difference

• Relationship - Basedp

• Member - Driven

• Independence Through Diversity

• Evolutionary vs. Revolutionary

SPP.org 12

• Reliability and Economics Inseparable

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SPP Milestones1968: NERC Regional Council

1980: Telecommunications network

1991: Operating reserve sharing

1994: Incorporated as non-profit

1997: Security coordination

1998: Tariff administration

2001: Regional scheduling

SPP.org 13

2004: FERC-approved Regional Transmission Organization

2006: Contract Services

2007: Launched EIS market, NERC Regional Entity

2009: Nebraska utilities integrated as full members

Growth in Responsibilities

SPP.org 14

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SPP Expenses: 2001-2009

SPP.org 15* 2009 Operating Expenses reflect approved budgeted amount$/Mwh based on 12 CP Method

How does SPP impact you?

• Transmission typically represents 10% of residential customer’s billof residential customer s bill

• SPP cost = 30¢ of $100 residential bill

• 2005 independent analysis by Charles River Associates:

$500,000 cost-benefit study

SPP.org 16

$500,000 cost benefit study

On behalf of state regulatory commissions

270% ROI for SPP services over the next 10 years

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SPP at a Glance

• Little Rock based

• 400+ employees

• $114M operating budget (2009)

• 24 x 7 operation

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p

• Full redundancy and backup site

IT Facts• Update 65,000+ data points every 10-30 seconds

• Operations model solves 20 000 x 20 000 matrixOperations model solves 20,000 x 20,000 matrix every 2 minutes (6 minutes for contingencies)

• 425 servers

• 300 Terabytes of data storage

• Systems availability goal of 99.98%

SPP.org 18

• Fully redundant Internet and Wide Area Networks with maintained 100% availability

• Operate two data centers

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Did You Know?• SPP’s 63,000 megawatts capacity resources

would power over 50 million homes. p

• In 2008, SPP members completed98 transmission projects totaling $325 million.

• SPP’s transmission owners spend over $600 million annually to operate their electric transmission facilities

SPP.org 19

electric transmission facilities.

• 47,000 miles of transmission lines in SPP’s footprint would circle the earth- almost twice!

Facilitation – Helping our members work together

SPP.org 2020

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Regional State Committee

• Retail Regulatory commissioners – Arkansas, Kansas, Missouri, Nebraska, New Mexico, , , , ,Oklahoma, Texas

Louisiana maintains active observer status

• FunctionsCost allocation

Ensure adequate supply

SPP.org 21

Ensure adequate supply

Market cost/benefit analyses

Reliability Coordination

• Monitor grid 24 x 365

As “Air Traffic Controllers,” our operators comply with…

• Anticipate problems

• Take preemptive action

• Coordinate regional response

SPP.org 22

• Independent …over 1,300 pages of reliability standards and criteria.

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• Provides one-stop shoppingf f t i i li

Transmission ServiceAs “Sales Agents,” we administer …

for use of transmission lines

• Consistent rates, terms, conditions

• Regional focus

I d d t

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• Independent

• Process > 12,000 transactions/month

…a 1,621 page transmission tariff on behalf of our

members and customers.

Market Operation SPP’s Energy Market is like the “NYSE”…

• Monitors resource / load balance

…and follows over 200 pages of market protocols

load balance

• Ensures economic dispatchwhile meeting system reliability

• Provides settlement data

SPP.org 24

market protocols.

• First year of spot market provided >$100 million in benefits to members

Annual $80 million expectation

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Compliance Enforcement and Standards Setting

• Enforce compliance with federal NERCEnforce compliance with federal NERC reliability standards

• Create regional reliability standards with stakeholder input

• Provide training and education to users, o ners and operators of b lk po er grid

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owners, and operators of bulk power grid

SPP Training

• World class regional restoration drills

• NERC certifications

• Train-the-trainer workshops

• 2008 training program awarded 12,116 continuing education hours

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continuing education hours

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SPP.org 27

Transmission Planning

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Current System

SPP.org 29

Projects Constructed 2005-2008

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Projects with Construction Commitments

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Balanced Portfolio

• Economic transmission upgrades (cost) to lower generation production costs (benefit)lower generation production costs (benefit)

• Must balance costs and benefits in each zone

• Transmission expansion costs shared regionally (load ratio share)

SPP.org 3232

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SPP.org 3333

Extra High Voltage Study

• Looks to 2026 and beyond

• Suggests overlaying SPP footprint with 500 - 765 kV transmission

• Enhances access to all types of generation, including rene ables

SPP.org 34

renewables

• Long-range plan for short-term decisions

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SPP.org 35

Wind Development

• Kansas, Oklahoma, Texas Panhandle, New Mexico NebraskaNew Mexico, Nebraska -wind “Saudi Arabia”

50,000 – 100,000+ MW potential

More wind than SPP’s uses during peak

• 3,000 + MW wind in-service

SPP.org 36

Over 51,000 MW in generation interconnection queue

Generation Interconnection Task Force working to improve process

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Advantages of harvesting “better” SPP wind

• Many high density wind zones are located in the western section of the SPP system

• Advantage of harvesting these wind zones over the “next best” wind resources is significant

30% capacity margin vs. 45% capacity margin

50% more installed wind turbines required for the same wind potential in the 30% vs. 45% scenarios

SPP.org 37

p

• Potential savings of harvesting more effective wind over lower capacity wind in the footprint: Up to $10B

Challenges with Wind Development• Intermittent

M t b l t d ith t tMust be supplemented with constant sources

• Wind in remote areas

Expensive new transmission needed

• “Not in my backyard” siting issues

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• Seams agreements

• Renewable Electricity Standards (RES)

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SPP.org 3939

SPP.org 4040

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SPP.org

SPP.org

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Missouri RESSections 393.1020 - 393.1040• The act creates the Green Power Initiative. Electric companies shall make good-faith

efforts toward meeting the following renewable energy targets:

4% f t t l t il l t i l f t i bl t h l i• 4% of total retail electric sales come from certain renewable energy technologies by 2012;

• 8% of total retail electric sales come from certain renewable energy technologies by 2015; and

• 11% of total retail electric sales come from certain renewable energy technologies by 2020.

Electricity generation from renewable sources prior to August 28, 2007 may be counted toward the targets, provided they continue to be used.

• The act directs the Public Service Commission (PSC) to develop standards for measuring electric companies' progress in meeting the targets. The standards must protect against adverse economic impacts on the companies and reliability of service, as well as consider environmental compliance costs and technical feasibility The PSC shall also develop a

SPP.org

environmental compliance costs and technical feasibility. The PSC shall also develop a weighted scale that gives more credit to renewable energy technologies the PSC determines to be in the public's best interest.

• The act establishes reporting requirements until 2022. Electric companies are required to report every two years on their progress toward meeting the targets. The PSC is required to report every two years on the progress made by electric companies and give recommendations for legislative action. The director of the Department of Economic Development shall report every two years on the impact of this progress on the state economy and the director of the Department of Natural Resources shall report every two years on the environmental impact of this progress.

• This data was obtained from the US Department of Energy

http://apps1.eere.energy.gov/states/maps/renewable_portfolio_states.cfm

SPP.org

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The Synergistic Planning Project

New, Proactive Efforts to Improve Transmission Planning and Cost Allocation for the SPP RegionPlanning and Cost Allocation for the SPP Region

Overview

• SPP’s current transmission planning processes

• Synergistic Planning Project:

Integrated Transmission Planning

Priority Projects

Cost Allocation and Cost/Benefit Analysis

SPP.org 4646

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Where Are We Now?

SPP.org 4747

Existing processes - transmission needed to:

• Reliability Assessment: Maintain reliability for next 10 years

• Aggregate Transmission Service Study: Meet current requests for transmission service

• Generation Interconnection: Connect new resources to grid

• Balanced Portfolio: Provide more benefits than costs per zone

SPP.org 4848

• Extra High Voltage (EHV) Overlay: Meet needs 20+ years

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Balanced Portfolio

• Economic transmission upgrades (cost) to lower generation production costs (benefit)lower generation production costs (benefit)

• Must balance costs and benefits in each zone

• Transmission expansion costs shared regionally (load ratio share)

SPP.org 4949

SPP.org 50

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Extra High Voltage Study

• Looks to 2026 and beyond

• Suggests overlaying SPP footprint with 500 - 765 kV transmission

• Enhances access to all types of generation, including rene ables

SPP.org 51

renewables

• Long-range plan for short-term decisions

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Wind Development

• Kansas, Oklahoma, Texas Panhandle, New Mexico NebraskaNew Mexico, Nebraska -wind “Saudi Arabia”

50,000 – 100,000+ MW potential

More wind than SPP’s uses during peak

• 3,000 + MW wind in-service

SPP.org 52

Over 51,000 MW in generation interconnection queue

Generation Interconnection Task Force working to improve process

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Why do we need to change?

• Address gaps and conflicts between processes

• Simplify multiple cost allocation methods

• Position SPP to respond to the national focus on improving electric infrastructure

• Develop holistic, long-range view

SPP.org 5353

• Be proactive rather than reactive to building and paying for infrastructure

• Capitalize on the region’s wind resources

New planning process will:

• Consolidate:

Reliability Assessment

Balanced Portfolio

EHV Overlay

• Generation Interconnection and Aggregate Studies:

SPP.org 5454

Remain separate

Simplified

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Synergistic Planning Project Team (SPPT)

• SPP recommended formation of SPPT to:

Look for opportunities to improve transmission planning and cost allocation

Think creatively – unencumbered by Tariff or other limitations

SPP.org 5555

Synergistic Planning Project Team Members

• Paul Suskie; Chairman, Arkansas Public Service Commission

• Barry Smitherman; Chairman, Public Utility Commission of y yTexas

• Kelly Harrison; Vice President – Transmission Operations and Environmental, Westar Energy

• Ricky Bittle; Vice President - Planning, Rates and Dispatching, Arkansas Electric Cooperative Corporation

• Rob Janssen; President and General Manager Dogwood Energy

SPP.org 5656

• Rob Janssen; President and General Manager, Dogwood Energy

• Ric Abel; Managing Director, Prudential Capital Group

• Carl Monroe; Executive Vice President and COO, SPP

• Mark Rossi; Accenture, facilitation and administration

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Components of SPPT Report

• Integrated Transmission Plan

• Priority Projects

• Cost Allocation

SPP.org 5757

Integrated Transmission Planning

SPP.org 5858

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What is Integrated Transmission Planning?• ITP: New effort to develop proactive regional

transmission planning principles p g p p

• Goal: Build robust grid to meet near- and long-term needs

• Horizons: 20, 10, and 4 year

• Focus: Regional, integrated with local

SPP.org 5959

g , g

• Update: Every three years

• Resulting in: Comprehensive list of needed projects for SPP region over next 20 years

What is Integrated Transmission Planning?• Major Objectives: Design transmission backbone to

connect load to the most reasonable generation alternatives

Improve connections between SPP’s east and west regions

Make transmission an enabler rather than constraint

Strengthen ties to Eastern and Western Interconnections

• Underlying Value: Reliability and Economics are

SPP.org 6060

• Underlying Value: Reliability and Economics are inseparable

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SPP is asking state regulators to:

• Participate in development of ITP and new cost allocation mechanisms that meet regional needs;allocation mechanisms that meet regional needs; ESWG and CAWG

• After ITP and cost allocation are approved by SPP’s Regional State Committee, Board of Directors, and FERC, we will return for further discussion of project details, costs, and benefits

SPP.org 6161

• SPP and its members will ultimately seek rate recovery for ITP projects

Priority Projects

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Priority Projects

• Near-term opportunities while transitioning to ITP

• “Readily apparent” projects that continue to appear in current planning processes

• Relieve grid congestion

• Improve access to transmission service

• Improve transfers between SPP’s East and West regions

SPP.org 636363

• Improve transfers between SPP s East and West regions

• Economic projects up to 765 kV; across SPP region

What criteria were used to select candidate Priority Projects?

Criteria 5 points 4 points 3 points 2 points 1 point

Congestion Relief (C)$170K -$100K $99K - $50K

$49K –$20K $19 - $8K $7K - $0K

Transmission Service Request Impact (T)

300 – 100 MWI value

99 – 50MWI value

49 – 19MWI value

18 – 10MWI value

9 – 0MWI value

Generation Interconnection Impact (G)

1600 – 1300MWI value

1299 – 1000MWI value

999 – 700MWI value

699 – 400MWI value

399 – 0MWI value

SPP.org 6464

Economic Benefit (E) Above 1.2 1.19 – 0.9 0.89 – 0.65 0.64 – 0.4 0.39 - 0

West - East Transfer (W) 765kV 500kV 345kV 230kV Under 230kV

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Priority Projects to be Analyzed 1. Hitchland – Woodward District EHV (765kV/Run at 345 kV)

2. Spearville – Comanche - Medicine Lodge – Wichita (765kV/Run at 345 kV)p g ( )

3. Comanche or Medicine Lodge – Woodward District EHV (765kV/Run at 345 kV)

4. Woodward District EHV – Elk City – LES - Seminole (765kV/Run at 345 kV)

5. Wichita – Wolf Creek (765 kV)

6. Woodward District EHV – Woodring (345 kV)

7. Valliant – NW Texarkana (345 kV)

SPP.org 6565

7. Valliant NW Texarkana (345 kV)

8. Stateline – Potter – Roosevelt – Tuco (345 kV)

9. Nebraska City – Stranger Creek or (11) Cooper – Maryville – Sibley (345 kV)

10. Riverside Station – Tulsa Power Station (Add Reactor) (138 kV)

SPP.org 66

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Wind Siting for Priority ProjectsBase Case (5%) 10% Case 20% Case

State Installed Nameplate Wind Capacity (GW) State Installed Nameplate

Wind Capacity (GW) State Installed Nameplate Wind Capacity (GW)

• The Priority Projects have defined several levels of wind penetration to

KS 1.05 KS 1.24 KS 2.64

MO 0.00 MO 0.00 MO 0.10

NE 0.18 NE 0.57 NE 0.74

NM 0.20 NM 0.15 NM 0.21

OK 0.85 OK 0.48 OK 1.75

TX 0.71 TX 1.41 TX 1.39

Total 3.00 Total 6.84 Total 13.67

SPP.org

The Priority Projects have defined several levels of wind penetration to be studied in the SPP footprint.

• For each level (Base Case (5%), 10% and 20% Energy Penetration), a set of generators was included in the studies.

• Wind generators are based upon IA status or position in GI queue.

SPP.org

Figure 1 – Base Case (5%) Wind Location Map

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SPP.org

Figure 2 – 10% Case Wind Location Map

SPP.org

Figure 3 – 20 % Case Wind Location Map

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Priority Projects next steps

• Extensive analysis being performed

• Stakeholder involvement and review at each phase

• Projects with Benefit to Cost analysis ≥ 1 recommended for Board approval in October

• Cost allocation methodology for Priority Projects is to be determined

SPP.org 71717171

is to be determined

Cost Allocation

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Who pays for transmission now?

Type Reliability Economic

Purpose Keep lights on Reduce congestion with benefit/cost ≥ 1

Also Called Base Plan Funding Balanced Portfolio

Funded By Region - 33% Shared regionally

SPP.org 7373

Funded By Region 33% Impacted zone- 67%

Shared regionally(postage stamp)

Voltage All 345 kV+

Implemented 2005 2009

What is being considered for the future?Initial, high-level rate design proposal

• Highway/Byway rate design

• Highway rate considerations include assessments of access and usage charges

• Byway rate design – under discussion

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Next Steps

• RSC’s Cost Allocation Working Group (CAWG) is meeting every two weeks to present ameeting every two weeks to present a recommendation to RSC October 26

• Initial cost allocation policy-level concepts developed by CAWG are being converted to tangible, illustrative member impacts

B i i ith CAWG A t 26 ti

SPP.org 7575

Beginning with CAWG August 26 meeting

• CAWG will focus on Highway in August and Byway in September

Cost/benefit analysis to be performed

• 40-year horizon20 ear resid al impacts capt red20-year residual impacts captured

• Identify cost/benefit of each scenario by zone/stateScenarios include load sensitivities, wind levels, fuel/carbon prices, etc.

• Quantify benefits from:

SPP.org 7676

Avoided projects

Reduction in emissions, operating reserves, congestion, etc.

Interconnection and deliverability improvements

• Assess impact on typical residential customer

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How would “highway” impact customers?

• Regional EHV “highway” cost: ~ $6-7 billion (there will be additional underlying costs for the supporting infrastructure)

• Customer impact: Benefits expected to exceed cost

Example – SPP’s analysis found that for 7 Balanced Portfolio projects that cost $700 million, average residential customer would:

Pay 88¢ on $100 monthly utility bill (less than 1% of bill)

SPP.org 7777

Gain $1.66 in benefits

Cost/Benefits vary by zone

How would “highway” impact customers?

• Customer savings come from:

Greater grid efficiency (reduced congestion / lower line losses)

Improved access to broad range of generation options

Increased competition in SPP wholesale market

Higher reliability

SPP.org 7878

State-by-state, zone-by-zone, and/or customer impacts are yet to be determined

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Cost Recovery From Retail Load

• The revenue requirements associated with Base Plan Upgrades and Approved Balanced Portfolios are allocated to benefiting loads pursuant to the costallocated to benefiting loads pursuant to the cost allocation and recovery plan specified in SPP’s Tariff (Sec. 40 – 42)

SPP bills Schedule 11 charges to Transmission Customers (TCs) and Transmission Owners (TOs) who serve those loads to recover those costs

These charges are paid by these LSEs and the cost is recorded in their books as a transmission expense

SPP.org 79

their books as a transmission expense

Cost Recovery From Retail Load, Cont.

• This arrangement anticipates that each LSE would, in turn, recover such costs from the loads they serve

The LSE would seek recovery of an appropriate share of that booked expense from retail load subject to state jurisdiction

Once state regulators find that such cost should be included in retail rates, as a component of the transmission-related revenue requirement, the LSE would recover such cost from the benefiting retail load by billing such load pursuant to its retail rates

SPP.org 80

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Illinois Commerce Commission vs. FERC7th Circuit Decision: August 6, 2009

• PJM Cost Allocation for facilities that operate at p500kV and above

• Court of Appeals found that FERC did not present “even the roughest estimate of benefits” to the objecting utilities

• Court of Appeals did not say that regionalization

SPP.org 81818181

• Court of Appeals did not say that regionalization of costs was impermissible and remanded the case

FERC Options

• Seek a rehearing before the full court

• Appeal to the U.S. Supreme Court

• Reenforce and reissue the decision

• Hold further paper or hearing procedures

• Attempt to have the parties settle the case

SPP.org 82828282

• Render a new decision eliminating regionalization of costs

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Impact on SPP

• Decision only directly applies to PJM

• Decision doesn’t undo any existing SPP Tariff provisions

• Decision does not establish a new policy for future cost allocation, but it does affect the factual support needed

SPP.org 83838383

SPP Mission

Helping our members work together to k th li ht t d d i thkeep the lights on – today and in the future.

SPP.org 8484

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Evolution of Regional Coordination• 1941 – Interconnection of utilities

1997 R li bilit C di ti• 1997 – Reliability Coordination

“Air traffic controller”

• 1998 – Regional Tariff Administration

“Sales agent”

• 2004 Regional Planning

SPP.org 85

• 2004 – Regional Planning

“Multi-state compacts”

• 2007 – Real-Time Market

“Stock exchange”85

Regional Benefits

• Systematically optimizing the economies of scale and diversity to improve reliability andscale and diversity to improve reliability and efficiencies

• More opportunities?

YES!

Load and generation balancing (additional real-time)

SPP.org 86

g g ( )

Regional generation commitment (day-ahead)

Proactive transmission expansion (5-25 years)

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Load and Generation Balancing

• “Regulation Market” (ancillary services)

Benefits from diversity of resources

1. Fuel type differences

2. Speed of resource movement

3. Use more efficient resource

4. Demand response

SPP.org 87

Competitive pricing

1. Manage renewable intermittency

2. Encourage more players to reduce price

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Regional Generation Commitment Optimizes

• Economies of scaleFewer resources on-line needed to meet reliable electricity delivery

Resources are able to run more efficiently

• Competitive pricingEncourage other resources, demand response, etc.

SPP.org 88

g p

• CHALLENGESHow to reduce risk to load of allowing SPP market to make decisions about regional generation commitment? Congestion hedging

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Future Markets and Challenges

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What kind of markets does SPP have now?• Transmission: Participants buy and sell use of

regional transmission lines that are owned by different parties

• Energy Imbalance Service (EIS): Participants buy and sell wholesale electricity in real-time

Market uses least expensive energy from regional resources to serve demand (load) first

SPP.org 909090

Sometimes it’s cheaper for a market participant to purchase power from another provider than to generate

SPP monitors resource/load balance to ensure system reliability

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“Manufacturing”, “transportation”, and “delivery” must occur instantaneously

SPP.org 9191

Utilities have several “manufacturing” options to serve retail customers

3rd Party Purchases/

R t il

Utility

Purchases/SalesSelf Supply

SPP.org 9292

Retail CustomersSPP

Facilitated EIS Market

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Timing of arrangements differs

3rd Party P h /

Daily

Purchases/Sales

Self Supply

R t il

UtilityAnnual Monthly DailyH l

SPP.org 9393

Retail CustomersSPP

Facilitated EIS Market

Hourly

RealReal--timetime

When “transportation” is limited, some “manufacturing” options are also limited

Third Party

PurchaseUtility A

X

SPP.org 9494

Utility A

SPP Spot MarketCongestion

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What is congestion?• Desired electricity flows exceed physical capability

C ti d b• Congestion caused by:

Not enough transmission in certain areas, often due to load growth

Line and generator maintenance outages

Unplanned outages such as storms or trees on lines

SPP.org 959595

Too much generation is pushed to the grid in a particular location

• Results in the inability to use least-cost electricity to meet demand

500 kV

345 kV

Congestion prevents access to lower-cost generation

230 kV161 kV138 kV115 kV69 kV

SPP.org 969696

June 2008

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500 kV

345 kV

230 kV

Congestion changes all the time

161 kV138 kV115 kV69 kV

SPP.org 9797

June 2009

Why develop new markets?• SPP conducts complex cost-benefit studies

before beginning any new market developmentg g y p

Under Regional State Committee oversight

2005 Charles River and Associates (CRA) analysis of the EIS market:

Estimated benefit of $86 million for first year

Actual benefit of $103 million for first year

SPP.org 9898

$ y

• New markets will bring estimated average additional benefits of $100 million

According to 2009 Ventyx analysis

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How do new markets benefit participants?• Currently, each market participant decides to start

its own generation to meet its own needs

Generation choices are limited

Market participants may incur costs that could be reduced

For instance, if a high-cost generator is turned on but kept at minimum, this costs the utility money

• New Day Ahead market will decide which

SPP.org 999999

generation to start to meet regional needs, reducing overall costs

Generation choices optimized for the entire region

What needs to change to claim the additional $100 million benefits?

• Today: Each market participant decides what ti th ill th t d b d th igeneration they will run the next day based on their

knowledge of their system

• Future: SPP determines what generating units should run the next day for maximum cost-effectiveness, based on knowledge of resources available for entire region

SPP.org 100100

available for entire region

• Result: Regional commitment of generation responsible for bulk of projected additional $100 million benefits

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Today, utilities make generation choices based on limited knowledge of other available resources

XXXX

Utility A

Third Party

Purchase

X

SPP.org 101101

XUtility A

SPP EIS MarketX

Future market will choose generation based on knowledge of all regional options SPP

Market

Third Party

X X

Utilit A

SPP.org 102

Purchase

XUtility A

Other Utilities

102

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What issues will Day Ahead market address?

• Set next day’s electricity prices for participating loadload

Currently, prices are set in real-time based on the generation participants have decided to start

• Day Ahead market will select and start the cheapest generation to meet regional needs

SPP.org 103103

• Prices will be set for the next day and in real-time based on a more efficient selection of generation

Day Ahead market increases “manufacturing” options

3rd Party P h /

UtilityAnnual Monthly Daily

Daily

Purchases/Sales

Self Supply

SPP.org 104104

SPP Facilitated Day Ahead

MarketDailyReal-timeSPP

Facilitated EIS Market

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Day Ahead market continues to use Locational Marginal Prices (LMP)

• Price for energy (LMP) will vary by location

Price for energy is the least-cost megawatt, while considering congestion

Called Locational Imbalance Price (LIP) in today’s EIS market

• Congestion causes locational prices to vary

SPP.org 105

With no limitations, the cheapest generator could deliver the next megawatt to ANYWHERE on the grid

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Day Ahead market bring benefits, but there are challenges to mitigating risks…

• To claim the additional $100 million in benefits, $ ,generation start-up must be optimized for entire region

• For generation owners to allow their resources to be optimized for the region rather than their own needs, they need assurance they will be protected f th t i t f k t d i i

SPP.org 106106

from the cost impacts of market decisions

• Protection against the cost of congestion is needed to provide assurance

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What is a congestion hedge?

• Protects market participants from exposure to high energy prices due to congestionhigh energy prices due to congestion

• Reimburses the cost of congestion for market participants that had reserved the right to use the transmission grid

• If the hedge is perfect, participant will incur no dditi l t d t ti

SPP.org 107107107

additional cost due to congestion

How does hedging work in current market?

• Market consists of expensive and less expensive generationgeneration

• If a utility has inexpensive generation, it can schedule in advance to use 100% of its own generation to serve its own customers

Schedule protects utility from higher cost of purchased power

Utility then does not have to buy power to meet demand

SPP.org 108108108

Utility then does not have to buy power to meet demand

This advance scheduling is a hedge against market electricity prices and congestion costs

If market prices were higher than the utility’s due to congestion, the hedge was financially beneficial

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How Should We Hedge Against Congestion?

SPP.org 109109

Who was involved in the congestion hedge recommendation?

• Congestion Hedge Task Force (CHTF) representatives include:

State regulatory staff

Load-serving members

Transmission owning members

Power marketers

SPP.org 110

Power marketers

Merchant generators

SPP Staff

Industry consultants

110

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What is the CHTF’s goal?

• Create hedge against congestion that allows market participant to offer resources into the p pregional commitment and Day Ahead market with reasonable assurance that they will derive a benefit

• Not to create a deep, liquid financial rights market

SPP.org 111111

Wide range of initial positions at the CHTF

• Some believed the outcome had to be a physical hedge

• Some believed the outcome had to be a financial hedge

• Most were somewhere in between

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• All meeting participants displayed an open mind and shared a desire to learn, understand, and then make the best decision

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What was the CHTF decision process?

• Thorough, reasoned approach

• Analyzed numerous complex examples

Engaging in these discussions and extensive “what-ifs” provided the most learning

• Reviewed the decisions of other RTOs

Asked questions like:

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• Asked questions like:

How would your company evaluate a recommendation?

What would the ultimate impact be to rate payers?

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Reviewed Other RTOs

Midwest ISO

PJM

ISO New England

New York ISO

California ISO (future market design)

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California ISO (future market design)

ERCOT Nodal Market

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CHTF determined there were three types of congestion hedges

• Pro-rata

Congestion costs are returned to market participants through some static formula

• Transactional

Congestion costs are returned to market participants based on their scheduled use of transmission grid

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• Independent

Financial instrument that functions as “insurance policy” that pays market participants back if they incur congestion costs

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Worked through many detailed examplesConstrained Day Ahead and Real-time with Energy Transaction

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Pros and Cons -Compared traits of Transactional vs. Independent

• Comparability to self-commitment decision

• Does each mechanism:

• Minimize the need for uplift

• Hedge period (hourly, daily, monthly, yearly)

• Tradability of rights

• Transparency of results

• Is native load any worse off

promote full use of the transmission system?

increase ability to trade bilaterally?

support trading hubs?

allow a participant to place a value on the right?

i h d li f N ti

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Is native load any worse off financially?

• How complex?

• What system changes?

require scheduling of NativeLoad?

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CHTF Developed Consensus

• Pro rata – eliminated quickly

• Could make Transactional or Independent work• Could make Transactional or Independent work

Became a question of weighing pros and cons

• Some stated a preference for Transactional (physical)

That is the business we are in

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• Most stated that their choice was not overwhelming in either direction, but preferred Independent (financial)

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Primary Reasons Given for Independent

• Majority were in favor of independent financial transmission hedge mechanismtransmission hedge mechanism

Removes requirement to manage native load schedules

Provides more flexibility for trading and reconfiguring the hedges

Better supports the establishment and use of trading hubs within SPP

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Independent hedge summary

• Congestion credit based on price difference between locationsbetween locations

Does not require scheduling

Hedge is known in advance

• DrawbacksAdds another layer of complexity to market participation

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Feasibility is assessed much farther in the future, increasing the likelihood that the operating day will be different

New – fear of the unknown

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Summary of CHTF recommendation

• Utilize a financial mechanism to hedge against transmission congestion coststransmission congestion costs

• Transmission Service still required to be purchased per SPP Tariff requirements

• Transmission service should be the basis for determining an initial allocation of the financial rights

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gOnly parties that own firm transmission rights will be allocated financial rights

ONLY rights that the holder CHOOSES to NOT accept will be available in an auction

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Other RTOs offer similar hedging, but SPP’s mechanism differs:

• SPP’s Regional State Committee will decide hedging allocation methodology

SPP’s Market Working Group is recommending allocation based on firm transmission reservations

• Market participants may elect to retain, rather than auction, a congestion hedge

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• Only Transmission Customers may participate in congestion hedge activity

This important decision requires RSC consideration

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How will hedging work in future markets?

• Participant doesn’t have to schedule generation in advance to get value of the congestion hedgein advance to get value of the congestion hedge

• As energy prices diverge because of congestion, hedge value adjusts an equal amount to provide offsetting value to holder

• Reservations entitle holder to congestion hedge req est on ann al basis

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request on annual basis

Hedge applies to every hour of the year

Example of future market congestion hedge• Utility A can tell SPP, “For the next year, I want 20% of

Generator A to serve a particular load”Thi i t f h d i t ti tThis is a request for a hedge against congestion costs

• For the coming year, SPP may only grant 15% of Generator A to the utility’s load as an annual hedge due to projected physical congestion

Other more expensive generation may have to be used

• Each month SPP will review upcoming month and

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• Each month, SPP will review upcoming month and determine whether an additional 5% can be granted

• For each operating day, the utility will receive credit for congestion costs (price differences) related to the granted hedges

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Challenges are different, but not new

• Today we all deal with the possibility of losing a critical resource during peak timesg p

May not be able to find replacement power

May not be able to get transmission service

Price exposure can be significant!

• But, utilities have always had to deal with these issues

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issues

• We are familiar with these risks

• We are unfamiliar with the financial hedge risks

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Next Steps

• Additional education will be provided to Markets and Operations Policy Committee in Octoberand Operations Policy Committee in October

• Discussion with Regional State Committee in October

• Board of Directors scheduled to vote on proposed market design in January 2010

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• SPP is available for detailed educational working sessions with commissioners and staff

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Regional Benefits

• Helping our members work together to keep the lights on…today and in the futurelights on…today and in the future

• Systematically optimizing the economies of scale and diversity to improve reliability and efficiencies

• More opportunities?

YES!

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Load and generation balancing (additional real-time)

Regional generation commitment (day-ahead)

Proactive transmission expansion (5-25 years)

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