1. Office of Market Oversight & Investigations USA Electricity Markets Monitoring From OMOI’s Perspective George Godding Director, Mgmt. & Comm. Office of Market Oversight and Investigations Brazilian Partnership Conference - Thursday, August 19, 2004

2. Office of Market Oversight & Investigations 2 Presentation Outline Background of Energy Market  Electric Sector Overview  FERC  RTOs  NERC Electricity Market Monitoring  Major Players  OMOI  Oversight Process  Market Power & Mitigation  Surveillance Process Indices and Reports Market Monitoring Center

3. Office of Market Oversight & Investigations 3 Brief Background on Electricity Markets and its Regulation and Oversight

4. Office of Market Oversight & Investigations 4 Overview of U.S. Electricity Sector (most recent data available – 2002/03) Generation: Capacity (2002) – 914,123 MW Total net generation (2002) – 3,858 billion KWh Coal – 1,933 billion KWh Natural gas – 691 billion KWh Nuclear – 790 billion KWh Petroleum – 94 billion KWh Hydroelectric – 264 billion KWh Other renewable – 86 billion KWh Generation Capacity Ownership: Investor-owned utilities – 398,112 MW Public-owned utilities – 92,696 MW Cooperatives – 37,825 MW Federal Power – 70,220 MW Non-utilities – 315,271 MW Expected Demand Growth: 3,639 billion KWh (2002) 3,674 billion KWh (2003) (1%) 3,718 billion KWh (2004) est. (1.2%) Transmission: High-Voltage Circuit Miles (230-kV and above) – 158,605 (255,250 km)

5. Office of Market Oversight & Investigations 5 FERC’s Goals FERC Strategic Plan  Promote a Secure, High-Quality, Environmentally Responsible Infrastructure through Consistent Policies  Foster Nationwide Competitive Energy Markets as a Substitute for Traditional Regulation.  Protect Customers and Market Participants through Vigilant and Fair Oversight of the Transitioning Energy Markets. Plan Transparency Plan Stability (minimize market uncertainty) Open participation in implementation decisions by interested parties

6. Office of Market Oversight & Investigations 6 FERC Organization Chart

7. Office of Market Oversight & Investigations 7 FERC Infrastructure Regulation Approve Hydro facilities (many others involved) Approve rate design for generation and transmission (states approve siting – legislation may change for tx) Approve pipeline siting and transmission rates OASIS (Open Access Same-time Information System for transmission availability) FERC set interconnection rate design and rules FERC & DOE review transmission issues and generation adequacy – bully pulpit (possible legislation)  DOE – SP-15 & Cross Channel Cable  DOE issued July 22, 2004 – Notice of Inquiry on National Interest Electric Transmission Bottlenecks (NIETB) Publicly identify and designate NIETBs To classify NIETBs (national security, reliability, risk of cost increases) How DOE facilitate & monitor mitigation

8. Office of Market Oversight & Investigations 8 Electric Market Planning and Design - RTOs RTOs – SMD  Centralized dispatch  Resource adequacy  Long-range planning  Day ahead and real-time markets  Locational Marginal Pricing  Transmission rights Natural Trading Markets Large as Possible Recognize Regional Differences

9. Office of Market Oversight & Investigations 9 RTO Map

10. Office of Market Oversight & Investigations 10 Reliability - NERC Established in 1968 in response to 1965 Northeast Blackout Non-governmental entity; ten-member Board of Trustees Voluntary membership with 10 regional reliability councils Members from all segments of the electric industry Developed reliability standards and established good utility practices Developed technical services, tools and databases to enable industry to monitor and evaluate system and equipment reliability, manage grid congestion and facilitate communication 2003 Blackout  Reevaluate reliability standards  Accelerate adoption of enforceable standards  Develop better real-time tools for operators and reliability coordinators

11. Office of Market Oversight & Investigations 11 NERC Map

12. Office of Market Oversight & Investigations 12 Electricity Market Monitoring

13. Office of Market Oversight & Investigations 13 Market Monitoring – Major Players Transmission Distribution Generation FERC (Wholesale) States (Retail) NERC (Reliability Standards) MMUs (Defined RTOs) Other Federal Agencies

14. Office of Market Oversight & Investigations 14 OMOI’s Mission Guide the evolution and operation of energy markets to ensure effective regulation and protect customers through understanding markets and their regulation, timely identification and remediation of market problems, and assured compliance with Commission rules and regulations.

15. Office of Market Oversight & Investigations 15 OMOI’s Vision Vigilant oversight and vigorous enforcement of proper market rules ensure dependable, affordable, competitive markets to benefit end use customers and other participants.

16. Office of Market Oversight & Investigations 16 Director Division of Management & Communication Division of Management & Communication Planning Perf. Mgmt. Budgeting Facilitation Speaking Knowledge of industry Partnering Career Dev. HR Recruiting Contracting Writing/Editing Web design Graphics Presentation development Deputy Director Market Oversight & Assessment Deputy Director Market Oversight & Assessment Deputy Director Investigations & Enforcement Deputy Director Investigations & Enforcement Hotline Division of Energy Market Oversight Division of Energy Market Oversight Division of Financial Market Assessment Division of Financial Market Assessment Division of Integrated Market Assessment Division of Integrated Market Assessment Public Speaking ADR Phone Response Attorneys Litigation Investigation Knowledge of financial markets Enforcement ADR Training Paralegal Division of Enforcement Division of Enforcement Division of Operational Investigations Division of Operational Investigations Division of Technical Investigations Division of Technical Investigations Forensic Auditors Analytic ability Statistical sampling Documentation Industry experience Investigators Examiners Gas Engineer Electric Engineer Mechanical Engineer Quantitative Economist Electrical Engineers Pipeline Engineers Economists Deep Industry Expertise Information Analysis Modeling Operations Research Market Design & Operation Engineers Economists Broad Industry Experience (Cross-Industry, Scenario, Regulatory Analysis; Market Microstructure Issues) Operations Research Writing/Presentation Skills Policy Analysts Information Analysis Energy Industry Expertise Software Applications (Large databases, Data Analysis, Statistical, Presentations (including Mapping) Web Experience Questionnaire & Survey Design Statistical Analysis Market Scanning Market Scanning Strategic Analysts Library Science Division of Information Development Division of Information Development Financial Analysts Accountants Understanding of Investment Derivatives Markets Energy Trading Office of Market Oversight and Investigations (OMOI) – Knowledge/Skillsets

17. Office of Market Oversight & Investigations 17 Flow Chart of Oversight Process OMOI takes advantage of information technology and updated resources for monitoring electric market stresses. Emergency Team 8:30 AM Discussions Regular Oversight Meeting Surveillance Report In-Depth Study Emergency Commission Feedback Investigations & Audits Market Oversight Market Pull Push

18. Office of Market Oversight & Investigations 18 How We Regulate – Market Oversight Set Rules (open rulemaking process) Provide Oversight Conduct Audits Conduct Investigations Ensure Compliance Enforce Rules Feedback on effectiveness of above

19. Office of Market Oversight & Investigations 19 Surveillance - FERC Data/Data/Data – direct reporting and 3 rd party Real time 8:30 meetings Alerts Daily information on Intranet – from web scraping Weekly surveillance meetings Hot Line and complaints Building partnerships (see next page) Analyzing anomalies Reporting to Commission (anomalies, scheduled briefings, special reports) Building Reliability Group

20. Office of Market Oversight & Investigations 20 Coordinating Surveillance RTO Market Monitors (report anomalies to FERC, standard reports, Ex Parte rule, etc.) States (NARUC, Snapshot Report, etc.) Other Federal agencies (CFTC, FTC, DOJ, DOE, SEC, etc.) NERC

21. Office of Market Oversight & Investigations 21 Relationship with Market Monitors Joint Mission Statement Clear market monitoring plans Contact list & monthly conference calls Triggers for reporting to OMOI Information access Coordinating investigations

22. Office of Market Oversight & Investigations 22 Market Power & Mitigation Market-based rates vs. Cost-based rates Generation Market Power Screens  Pivotal supplier analysis based on control area’s annual peak supply and demand  Market share analysis applied on a seasonal basis in relation to other’s market share Behavioral Rules  Not undertake actions that purposefully lead to market manipulation or would be expected to  Specific prohibitions (wash trades, false information, artificial congestion, collusion)

23. Office of Market Oversight & Investigations 23 Market Power & Mitigation (continued) Code of Conduct  Separate generation from marketing and transmission  Treat affiliates as do non-affiliates  If deal with affiliates (transparent, defined product, standard criteria, independent design & solicitation review) Mitigation schemes at RTO level  Caps  Bidding controls AMP – conduct and impact Cost-based restrictions when congestion (market power & RMR) Merger approval may require mitigation

24. Office of Market Oversight & Investigations 24 Electric Market Efficiency Shared objective with States and other Federal agencies Market-based drives efficiency and “just and reasonable” rates No specific requirements  Economic and physical withholding  Maintenance Cost-based if market power & not mitigated Dispatch studies Looking for: lowest cost power into the market & to customers

25. Office of Market Oversight & Investigations 25 Indices and Reports Market Monitoring Center

26. Office of Market Oversight & Investigations 26 Indicies and Reports Alerts Daily Energy Reports Market Surveillance Report Seasonal Assessments Anomaly Reports Annual State of the Markets Report Annual Behavioral Rules Report MMU Annual Reports Common Metrics

27. Office of Market Oversight & Investigations 27 Common Market Metrics – MMUs Category MetricNYISOPJMISO-NECAISOMISOTotal Energy Market Metrics DA and RT Prices 1 Price Duration Curve 4 All-in Price 4 Volatility Congestion Costs 3 Secondary Market Metrics Capacity Market Volume and Price 2 Load Metrics Load Duration Curve 5 Imports and Exports 5 Offer Sufficiency 2 Generation Metrics Outages and Deratings 5 Generation by Fuel 2 Additional Market Metrics Virtual Transactions 2 Spot Market Activity 1 RSI Duration Curve 4 Reserve Margin OMOI and Market Monitors agreed to add this metric at June 22 MMU meeting. Net Revenue Analysis 4 Total108 97 Status of MMU Common Metrics from State of the Market Presentations

28. Office of Market Oversight & Investigations 28 Market Monitoring Center (Information Examples) Screens from:  Bloomberg, ICE and DOW (data and traders comments)  Friedwire (flows, LMP, nuclears, etc.)  Genscape  PJM