Explanation of Revised Draft Reserves Schedule, Service Schedule D Contact: Arnie Podgorsky Mike Thompson Wright & Talisman PC

Recap: why a Reserves Schedule?  What is an Operating Reserves Schedule?  Would define an operating reserves product.  As previously discussed, and consistent with approach in other regions, would have more stringent damages provisions than Schedules B or C.

Recap: why a Reserves Schedule?  Why not describe product in the confirm and trade Operating Reserves under Schedule C? o To foster ancillary services markets, FERC requires that market-based ancillary services trading by jurisdictional entities occur under market based tariffs that contain a product definition. o Drafting goal is to have sufficient product definition to satisfy FERC and facilitate Members obtaining market-based ancillary services tariff.  Any other reasons? o A separate schedule can have more stringent damages provisions, which may facilitate purchaser’s willingness to rely on the product.

OC Discussion 4/6/09  Generally supportive of continuing development of reserves product.  Consensus favored removal of 125% “penalty” for buyer non-performance included in previous draft’s damages provisions.  Many requested more information about derivation of provision requiring three days’ service without demand charge in event of seller non- performance.

The Proposed Schedule - general  Product: from generation capacity that can respond within applicable NERC etc. criteria.  Purchaser is Regional Reliability Organization, BA or RSG.  Price may have capacity (demand) and energy components

Revisions to Proposed Schedule  Definition for WSPP Agreement o New Definition of “Operating Reserve Service” is modified slightly to clarify that product definition refers to applicable criteria of RROs, rather than of NERC itself.  Section D-3 – Terms of Service o Section D-3.2.1/3.2.2: price cap language is added to conform with FERC rulings; language used here tracks that used in other service schedules. o Section D-3.3: editorial changes only, intended only to clarify the description of the obligation to file confirmations for transactions of more than one year duration. o Section D-3.4: editorial changes to first sentence are intended to clarify that Parties must identify in the Confirmation the RRO, BA, or RSG whose Operating Reserve requirements/criteria their transaction is intended to meet.

Revisions to Proposed Schedule (cont’d)  Section D-4 – Damages o Damages provisions are modified from the previous version of this Schedule to reflect OC discussion. o As this schedule has evolved, the principal damages provisions have come to coincide to a large degree with those of Sections 21.3(a)(1) and (2) of the WSPP Agreement, i.e., to the extent that damages are measured by differences between Contract Price and Replacement Price (including differences in associated transmission charges).

Revisions to Proposed Schedule (cont’d)  Hence, the first sentence of D-4.1, subparagraph (c) of Section D-4.2, and Section D-4.3 are stricken. Thus, damages will be as stated in Section 21.3(a)(1) and (2), with the following additions in the event of Seller’s non- performance: o Seller will forego any capacity charge and any applicable transmission service charge during period of non- performance, and o Seller will be obligated to provide Operating Reserve Service for three business days following the period of non-performance without payment of any capacity charge and applicable transmission service charge.

Revisions to Proposed Schedule (cont’d)  The latter provision is based conceptually on a provision in PJM tariff that obligates a non-performing provider of spinning reserve to provide such reserve, in a quantity equivalent to the quantity it failed to provide when required, for three days.

Revisions to Proposed Schedule (cont’d)  Section D-4.4 is stricken based on OC discussion, which revealed a strong consensus against the idea of imposing a penalty in the event a Purchaser called on capacity under this Operating Reserve Service schedule for a purpose other than meeting a reserve obligation.

Let’s Discuss  Reactions to the modified provisions we have discussed.  Product definition