1. Objectives and Strategies for ENA Power Groups Notes from the June 1, 2000 Wholesale Markets Meeting

2. 2 Overview Transmission and Market Policy Objectives Description of Alternative Market Models for Congestion Management Policy Objectives by Region

3. 3 Transmission Market Development Objectives  Commercial Objectives:  Liquidity in all markets  “Confidence that we can liquidate our positions”  We want to be the dominate player in the commercial market

4. 4 Transmission Market Development Objectives  Commercial Environment  Multiple market participants (Buyers and Sellers) with access to each other  Freedom for market participants to transact on terms they choose in the bilateral market

5. 5 Transmission Market Development Objectives  Market Structure  Competitive Elements (Maximize)  Monopoly Elements (Minimize)  Transmission  Distribution  Control } Regulated

6. 6 Transmission Market Development Objectives  Enron Market Principles  Unbundle the competitive from the monopoly services  Define the monopoly functions as narrowly as possible and leave all other activities to the market  Provide/guarantee open/non-discriminatory access to all monopoly services  Separate transmission from generation and load  Complete divestiture  Functional/operational unbundling with codes of conduct  Define and allocate transmission rights (“Physical”)  Determination of Capacity  Allocation of rights  Contracts  Scheduling  Curtailment / Interruption

7. 7 Transmission Market Development Objectives  Implementation Objectives: the interface between the competitive and the monopoly elements of the market  Monopoly  Initial definition and allocation of transmission rights  Operation of the transmission system  Competitive  Commodity sales  Market making / merchant function  Market for resale of transmission rights

8. 8 Primary Issue  What is the Natural Monopoly?  At what point does a central entity have to take over?  What is necessary during the transition to mitigate market power?  Interim Power Exchange (PX)  Ancillary Services -- default service

9. 9 Comparison of Transmission Market Models  Locational (Nodal) Marginal Pricing  LMP in PJM  LBMP in New York  Locational (Zonal) Marginal Pricing  Historically, the Enron Model  Flow-based pricing  The APX / Cazalet model

10. 10 Locational (Nodal) Marginal Pricing  Application Areas: PJM and New York with probability in New England  Proposals for Nodal Pricing in: CA; Entergy; ComEd  Principles:  Transmission prices are the difference between the nodal price at the point of injection and the nodal price at the point of withdrawal  Prices calculated for every major node (1600 in PJM; 1200 in NY)  Prices calculated every 5 minutes using “black box” Security Constrained Dispatch Model  Problems  Prices calculated and posted after the fact  Forward market at PJM Western Hub only  FTR’s allocated primarily to load; few available in the auction or in secondary markets

11. 11 Locational (Zonal) Marginal Pricing  Proposals for Zonal Pricing: Modified version in ERCOT; initially proposed by Enron  Principles  Predefine transmission transfer capability between zones  Auction of rights to cross interfaces between zones  All transactions are nominated to System Operator as point of injection, transfer right and point of withdrawal  Problems  Zones may be unstable  Intrazonal congestion may be “gamed”

12. 12 Flow-based Proposals (APX)  Applications: Mountain West ISA  Proposals: Modified version in ERCOT; APX broadly applied in US.  Principles:  Definition of “Commercially Significant Constraints (CSC)/ flowgates”  Calculation of Transmission (Flow) Distribution Factors for point to point flows across each CSC  All schedules are balanced  Problems:  Not yet implemented  Number of CSCs an open issue.

13. 13 June 1 Meeting: Principles and Objectives  Enron’s broad principles remain the same  Transmission operator should run the real-time balancing market with known price algorithms  Need for More Information  All information should be made public -- bids, unit status, transmission status  Government Affairs must urge federal and state regulators to make as much information public as possible

14. 14 June 1 Meeting: Principles and Objectives  A PX, separate from the RTO, should be created in each region where it is needed to address residual and persistent vertical market power that has caused illiquid markets  FERC should require the creation of a PX and mandate participation in the PX until a “critical mass” is achieved for liquidity  Congestion management should be zonal, not nodal  Freedom to transact outside of the PX

15. 15 Application of Principles to Regions  Northeast Overall  Consolidate the three ISOs into one  Resolve the seams issues  Have a single coordinating entity between the three pools  New York  Have zones that make electrical sense  Improve bidding rules  Allow bilateral trading  Allow others than generators and load to bid into the market  Eliminate ICAP

16. 16 Application of Principles to Regions  NEPOOL  Eliminate ICAP  Ancillary Services  Ontario  Resolve the seams issues  Accelerate Ontario Hydro’s divestiture of generation

17. 17 Application of Principles to Regions  Midwest  Support one RTO in the region -- the Midwest ISO – and oppose the AEP Transco/Alliance proposal (extract concessions from Midwest ISO for our support)  Need network transmission within a large RTO  Zonal congestion, not nodal  There must be a transitional PX  AEP should be forced to join the Midwest ISO  MAPP and SPP should be absorbed by the Midwest ISO  RTOs should be up and running by mid-2001

18. 18 Application of Principles to Regions  SPP  Should become part of the Midwest ISO or a SERC RTO  CSW and Entergy should be discouraged from trying to create their own Transcos  Make the seams issues so difficult to overcome that SPP is forced to join the Midwest ISO or a SERC RTO

19. 19 Application of Principles to Regions  Florida  Florida should be forced into the California model  There is currently no liquidity in Florida  There should be a transitional PX that is separate from the RTO  SERC (Southern)  Southern should not be encouraged to form a Transco  Duke may be the soft spot in SERC - we need to reach out to Duke’s trading and generation groups - they are going to want to access other markets and may be supportive of our positions  CP&L should join the SERC RTO

20. 20 Application of Principles to Regions  ERCOT  ERCOT should use the California model  Mandate a transitional PX mechanism (currently only have a bilateral market)  ERCOT is a high-priority market for us  The bigger municipals should have to bid in their units into the transitional PX

21. 21 Application of Principles to Regions  West (not California)  There are 10 important transmission paths – there should be 10 –15 zones  We should advocate few control areas  Get existing transmission contracts released  Work to establish a minimal number of RTOs in the west

22. 22 Application of Principles to Regions  California  Advocate a zonal transmission system with forward transmission release  Minimize interventions  FERC should exercise its jurisdiction over pricing model  We should clearly articulate the couple of problems with the California model and then praise the ISO for everything else it is doing (perception is that we criticize the ISO too much)  ISO is ready to cave on nodal pricing – they need our support – we could agree on no price caps in exchange for generator support on zonal pricing