1. Pay for Performance Regulation Donald Tretheway Senior Market Design and Policy Specialist January 11, 2012

2. Agenda TimeTopicPresenter 1:00 – 1:15IntroductionChris Kirsten 1:15 – 1:30FERC Order 755Don Tretheway 1:30 – 2:50Changes from Straw ProposalDon Tretheway 2:50 – 3:00Next StepsChris Kirsten Page 2

3. ISO Policy Initiative Stakeholder Process POLICY AND PLAN DEVELOPMENT Issue Paper Board Stakeholder Input We are here Straw Proposal Draft Final Proposal

4. FERC Order 755 ISO compliant –Capacity payment based upon energy opportunity costs of marginal unit –Payment of net energy from providing regulation ISO non-compliant –Market based mileage payment –Accuracy adjustment for mileage payment –Inter-temporal opportunity costs implemented in participant’s bid not by the ISO, but must be verifiable by the ISO Page 4

5. What is mileage and accuracy? Mileage: the absolute change in AGC set points between 4 second intervals Accuracy: comparison of AGC set point to actual telemetry 1.Mileage adjustment for under-response 2.Hourly percentage for response accuracy to AGC set points Page 5

6. Changes from Straw Proposal (1 of 2) Clarified the methodology to set marginal clearing prices for regulation capacity and mileage rate based upon the expected total regulation costs and the historical accuracy of individual resources Modified calculation of the mileage multiplier to an hourly value using historical data from the prior week Changed the interval to calculate accuracy and mileage for individual resources from hourly to 15 minutes Clarified how the ISO will settle incremental RTPD mileage awards and the impacts of these awards on bid cost recovery revenue Page 6

7. Changes from Straw Proposal (2 of 2) Modified how the ISO will measure the minimum performance threshold to reflect a monthly 30 day average of 15 minute interval accuracy measurements Propose to publish a report on pay for performance data to assess mileage multiplier calculation, bid cap, and minimum performance threshold after obtaining one year of actual data Added a mileage bid cap of $50.00 Determined ramp period for regulation certification will be 10 minutes Page 7

8. Mileage Multiplier and Historical Performance Hourly Mileage Multiplier based upon prior week Resource specific historical accuracy –Calculated monthly based upon prior 30 day average 15 minute accuracy –Used for minimum performance threshold and to determine market awards Page 8

9. Determination of Market Clearing Prices A: Determine expected cost B: Divide expected cost by historical accuracy C: Select the highest mileage bid that cleared D: Capacity is highest expected cost less expected mileage Page 9 AB CD

10. Alignment with RT regulation 15 minute award interval Accuracy and mileage determine per 15 minute interval –Same measurement interval for DA and RT awards Mileage rate if both DA and RT regulation award –Weighted price paid for actual miles in 15 minute interval Mileage payments included in BCR revenue –Weighted split if DA and RT regulation award –No accuracy adjustment included Page 10

11. Market performance report 1 year after implementation Using actual mileage and accuracy data to evaluate: –Appropriateness of the minimum performance threshold level –Historical data used to calculate the mileage multiplier used to determine the expected cost of regulation –Level of the mileage bid cap given the change in resource participation under the new compensation mechanism –Other Determine if modifications are needed to refine PFP regulation design Page 11

12. Next Steps Page 12 Please submit comments to PFPRegulation@caiso.comPFPRegulation@caiso.com ItemDate Post Revised Straw ProposalJanuary 4, 2012 Stakeholder Conference CallJanuary 11, 2012 Stakeholder Comments DueJanuary 18, 2012 Post Draft Final ProposalFebruary 8, 2012 Stakeholder Conference CallFebruary 15, 2012 Stakeholder Comments DueFebruary 22, 2012 Board MeetingMarch 22, 2012