2. Insight Information Company ONTARIO POWER SUMMIT Policing the Market: Upholding Conduct & Performance Harry Chandler Director, Market Assessment & Compliance Division Independent Electricity Market Operator June 11, 2002

3. Summary 42nd Day of the Market and all is quiet - so far Market oversight institutions in place and working effectively “Policing” guided by pragmatism and dialogue

4. What Does Policing Mean? Ensuring compliance with the Market Rules Monitoring for inappropriate market conduct and flaws in the Market Rules or in the overall structure of the market - surveillance

5. The Players Ontario Energy Board - broad regulatory powers Competition Bureau - investigations; applications to Competition Tribunal or prosecutions before criminal courts Market Surveillance Panel - monitors, investigates, reports and recommends IMO - makes Market Rules; sanctions, including financial penalties

6. Coordination Among Players Shared jurisdiction in many areas Shared goals: –to facilitate competition in the generation & sale of electricity in Ontario –to facilitate a smooth transition to competition –to work together to avoid duplication See “Joint Statement”

7. International Dimension Energy Intermarket Surveillance Group –membership: all surveillance units in North America, Australia and New Zealand –exchange of information on issues and approaches Bilateral arrangements under development with surveillance units of neighbouring Independent System Operators

8. Market Surveillance Panel Independent arms-length body appointed by and accountable to the Independent Directors of IMO MSP’s mission : “to promote an efficient, competitive and reliable market for the wholesale sale and purchase of electricity and ancillary services in Ontario”

9. Market Surveillance Panel Monitors IMO-administered markets and participant conduct for: –inappropriate or anomalous market conduct including abuse of market power and gaming –flaws in market rules and IMO procedures –flaws in overall structure of marketplace Market Assessment Unit (IMO) monitors under direction of MSP

10. FinanceFinance AuditAudit Market Operation & Forecasts Market Operation & Forecasts MarketServicesMarketServicesInformation, Technology & InfrastructureInformation, Infrastructure Chief Executive Officer Human Resources Corporate & Legal Affairs Corporate & Legal Affairs Market Surveillance Panel IMO Board of Directors Market Assessment and Compliance Division and Compliance Division Market Assessment and Compliance Division and Compliance Division Committee of Independent Directors Market Assessment Unit Compliance & Dispute Resolution Compliance & Dispute Resolution

11. Market Surveillance System Daily monitoring of key market indicators to identify unexpected outcomes for further analysis Review of market conduct in light of watch list of potential gaming or anomalous conduct Review of benchmark models to shed light on market performance from a different perspective Close contact with IMO system control office to identify and understand anomalous conduct or operational problems

12. Compliance with Market Rules Shift from vertically integrated (Ontario Hydro) to market-based electricity sector requires framework of procedures and market participant obligations - the Market Rules. Market Rules establish sanctions, including financial penalties, as incentives for market participants to satisfy their obligations IMO’s Market Assessment & Compliance Division administers sanction regime

13. Non Compliance Levels & Financial Penalties L1 - Partial compliance, self report (< $2,000) L2 - Non compliance, self report ( < $4,000) L3 - Non compliance, non-report follow-up co-operation ( < $6,000) L4 - Non compliance, non-report, failure to respond to IMO ($1,000 - 10,000) *Penalties may exceed recommended range

14. Month of May Results Congestion Management Settlement Credit payments: –averaged $110,000 per day, thus lower than estimated –local market power reviews (in 1st 8 days): reductions totaling $40,000 sought from 3 Market Participants most facilities caught in initial screen saved by cost consistency or because not transmission induced

15. May Results Cont’d Non-Compliant Events: –roughly 350, most related to failed intertie transactions & deviations from dispatch instructions Compliance Sanctions: –contingency arrangements penalties: total $48,000 to 5 market participants –no other penalties Notice of Dispute to Dispute Resolution Panel: –none

16. Non-Compliant Events Deviations from dispatch instructions: –learning for both IMO and market participants –IMO guidelines would be helpful Failed intertie transactions –roughly 100 failed transactions, mainly offtakes to NYISO –exploring why these are occurring –dialogue with market participants & NYISO

17. Intertie Transactions Important component to enhancing competition and assuring supply in Ontario and other markets Rules and procedures should facilitate trade between control areas, but penalize inappropriate practices Commitments in pre-dispatch are expected to be followed except for bona fide and legitimate reasons

18. Intertie Transactions MR7/7.5.8A Market participants shall other than for bona fide and legitimate reasons, schedule energy and operating reserve across an intertie after being accepted in the pre-dispatch market schedule formula penalty and provision for multiplier

19. Summary 42nd Day of the Market and all is quiet - so far Market oversight institutions in place and working effectively “Policing” guided by pragmatism and dialogue

20. Reference Information Market Rules Chapter 3, Sections 3, 5, 6 Chapter 7, Appendix 7.6 Market Manual 2: Market Administration: Part 2.0: Market Administration Overview Part 2.1: Dispute Resolution Part 2.5: Maintaining Surveillance Data and Amending the Data Catalogue Part 2.6:Treatment of Compliance Issues Part 2.7:Treatment of Market Surveillance Issues Part 2.12:Treatment of Local Market Power Part 2.15: Intertie Transaction Non-Compliance Financial Penalty

21. Reference Information cont’d Joint Statement of Competition Bureau, Independent Electricity Market Operator & Ontario Energy Board: Competition Oversight of the Ontario Electricity Marketplace Backgrounder: The Market Surveillance Panel In Ontario’s Electricity Market: Monitoring, Investigating and Reporting See “Market Integrity” on left-hand ribbon of the homepage: www.theIMO.com