Framework for Support of the CAISO as the Western RTO

[June 1, 2000 - Draft]

This document outlines the terms under which various stakeholders believe the California ISO could become the preferred alternative for an RTO encompassing, at a minimum, the Desert Southwest and California.

[Note: at this time, this document is a discussion draft to which no party has committed its support.  The intent, however, is that a final draft might become the basis for a memorandum of understanding between signatories.]
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1.  Market Structure

For the Desert Southwest region, the ISO will implement the decentralized commercial model for transmission access and operations, as outlined in Appendix A.  The model, which generally follows along the lines of the model that has been developed in the Desert STAR process, is intended to incite the development of and reliance upon markets rather than the use of centralized decision-making processes operated by the ISO.

2.  ISO Governance 

The ISO will be governed by an independent board supported by stakeholder committees that are not dominated by individual interest group(s):

•	No domination at any level by regional interests (either California or Desert Southwest).

•	No “oversight” that is influenced by political bodies from individual states.

Independence from individual groups of market participants is required at all levels, including advisory committees to the Board, planning committees, operating committees.

3.  ISO Corporate Culture

The ISO governing documents will include strong incentives to encourage customer-responsiveness, penalize autocratic behavior, and keep ISO costs to the minimum necessary to enable the ISO to perform its duties.

ISO management and leadership will be focused on customer needs, rather than internal needs:

•	Staffing, of both key management positions and other positions, will be balanced between utility operations and market orientation.

•	Operations staff will not be responsible for ISO policy.   

ISO corporate culture will be focused on customer satisfaction:

•	Grid reliability is a binding constraint that must be achieved - but it is not an objective to be maximized to the detriment of other objectives (including cost, adherence to the Tariff, and non-interference with the commercial market).

Internal incentives will promote respect for markets and customers:

•	Staff performance will be evaluated based on customer satisfaction.

•	Incentives will include a pervasive systems of rewards and penalties (salaries, performance reviews, performance awards...) that focus on markets and customers.

•	ISO customers will be allowed to participate in performance reviews of key management employees and in responses to customer grievances (“civilian review board” concept).

4.  ISO Roles in the Western Marketplace

Recognizing that checks and balances are required on the roles of every participant – including ISOs and Transcos - in the marketplace, the ISO’s role will be focused on its duties as a independent system operator.  Other functions are recognized to be the duties of the Western Interconnection Organization (WIO) as that organization comes into existence.

The ISO will be subject to penalties for not complying with its tariff, as would be the case for other FERC-jurisdictional entities.

Operations

•	The role of the ISO in the marketplace will be expressly limited to just those areas necessary for secure management of the grid.

•	The ISO’s focus will be on operations, not on developing market rules.  The ISO will operate the grid, but not make the rules for the grid.  The WIO, rather than ISOs or Transcos, will ultimately define the rules for the both the commercial marketplace and those aspects of grid operations which would affect the commercial marketplace.

•	The ISO will not “operate” markets.  It will be a participant in those markets, as needed to accomplish its system reliability objectives, and will tailor its operating rules to enable the markets to operate with a minimum of distortion.

Planning

The WIO, rather than the ISO, will be responsible for the rules and processes for grid planning, system expansion and generation interconnection

•	The ISO will actively participate in the WIO’s grid planning, system expansion and generation interconnection processes, but will not make decisions or have the authority to order or deny construction.

•	However, the ISO will have the authority to submit FPA Section 211 requests against transmission owners, leaving ultimate decision-making authority with FERC.

Market Monitoring

The ISO’s market monitoring duties will be limited to data gathering.  The ISO will not be involved in investigations or penalties.  The ISO will not be involved in market redesign.  

•	Investigations and penalties will be the duties of regulatory agencies. 

•	“Market redesign” will become the responsibility of the WIO. 

Independent Transmission Companies

The ISO will take no positions and institute no rules that would impede the possible evolution of participating transmission owners from becoming part of a FERC-accepted independent transmission company.   

5.  ISO Rates and Charges

Transmission Access Charges

•	Must not result in any inter-regional cost shifting

•	Must not result in any cost-shifting to new transmission-owning participants in the ISO (license-plate rates)

•	Must not result in any cost shifting among customers of Southwest transmission owners.

Wheeling Charges

•	There will be no wheeling charges within the expanded ISO grid (the transmission facilities of the participating Desert Southwest and California transmission owners).

•	Any other wheeling charges will be discountable by ISO.  

•	Ultimately, charges for wheeling to the grids of other RTOs will be eliminated through reciprocity agreements with other RTOs.

Total Cost

•	The total cost of the ISO (including Grid Management Charges) must be considerably less than the cost of the alternative (Desert STAR).

Appendix A:  Outline of Decentralized Market Structure

1.	Scheduling and Dispatch

a)	Grid users will be responsible for bringing balanced schedules of injections, withdrawals, transmission rights and ancillary services to scheduling processes.  

b)	The ISO will implement the “Scheduling Coordinator” model that is described in both the California ISO Tariff and the Desert STAR working documents.  All Scheduling Coordinators will be treated identically, regardless of whether they schedule for unbundled loads or bundled loads.

c)	The ISO will implement a simplified commercial model for transmission access.  This model will rely on either the zonal model generally described in the Desert STAR working documents or the flowgate model currently under consideration in the Pacific Northwest.  

d)	This commercial model will be released to market participants.

e)	The ISO will release 100% of available (zone-to-zone or flowgate) transmission rights to grid users through long-term and mid-term auctions.  These rights (Firm Transmission Rights, or FTRs) will be physical scheduling rights rather than “financial rights,” as generally described in the Desert STAR working documents, “options” to schedule rather than “obligations,” and will be continuously tradable in secondary markets external to the ISO.

f)	The ISO will facilitate the development of external-to-the-ISO secondary markets (“transmission exchanges”) as the primary mechanism for transmission rights management after the rights are released to the market.  After the initial release of rights to the marketplace described in (d), transmission users will acquire transmission rights and counterflow rights through these exchanges.  The ISO will not operate centralized congestion management models.

g)	Transmission users will submit transmission rights as part of their balanced schedules, and the ISO will only accept those schedules that have the required transmission rights.

h)	Transmission losses requirements will be determined and published ex ante. 

i)	Ancillary services requirements will be determined and published ex ante.

j)	Transmission users will acquire ancillary services through external-to-the-ISO ancillary services exchanges and self-integrate transmission rights with ancillary services by acquiring the appropriate transmission rights.  

k)	The ISO will not operate its own ancillary services procurement “markets.”  The ISO will procure any residual ancillary services that are needed (either as “provider of last resort” or due to changes in system ancillary services requirements) through the ancillary services exchanges and transmission exchanges described above.

l)	Transmission users will be permitted to schedule energy and ancillary services using a day-ahead scheduling process, and by updating their schedules through a continuously operating post-day-ahead scheduling process and through real-time changes to their schedules, as generally described in the Desert STAR working documents.

m)	The ISO will use a single ten-minute clearing price for all (both instructed and uninstructed) deviations.  

n)	The ISO will permit after-the-fact energy imbalance trading (i.e., a real-time bilateral energy trading market) if the market rules include penalties for significant imbalances or deviations.

o)	The ISO’s roles in the forward marketplace will generally be limited to:

•	Validating and accepting balanced schedules

•	Procuring residual ancillary services using the transmission exchanges and ancillary services exchanges (rather than through a ISO-operated ancillary services “market”)

•	Managing any residual transmission congestion (both inter-zonal  intra-zonal) through a congestion management process which relies primarily on voluntarily-provided incremental/decremental bids.

p)	The ISO will manage the real-time operation of the Desert Southwest grid by accepting control area operator authority from those transmission owners who wish to turn such control over to the ISO, and through a system of hierarchical control between the ISO and those control area operators which do not turn over their control are operations duties to the ISO.  Under this system:

•	The ISO will manage Area Control Error on a grid-wide basis and the dispatch of ancillary services for the Desert Southwest grid.  

•	No potentially-discriminatory duties or functions which would create market inefficiencies will be left in the hands of vertically-integrated control area operators within the ISO.

2.	“Reliability Must-Run” (RMR) Generation

•	For predictable long-term congestion and voltage support problems, the ISO will rely on: (i) incentive payments whose magnitude is determined through a process that is coordinated with the long-term grid planning process, and (ii) bid caps/floors that are fully-compensatory, resource-specific, location-specific, and tied to the cost of expansion (transmission, generation or demand-side) alternatives.

•	For sporadic congestion problems, the ISO will rely on bids caps/floors that are fully-compensatory, resource-specific, location-specific, and tied to the cost of expansion (transmission, generation or demand-side) alternatives.  

•	The ISO Tariff will also alleviate market power in the pre-dispatch environment through the use of “must-offer” recourse contracts available to all SCs.

3.	Existing Contracts

•	The ISO will honor Existing Contracts.  To ensure that rights under Existing Contracts are neither diminshed nor expanded, the ISO will play an active role in publishing all existing contracts rights and scheduling rules, facilitating open discussion and understanding of the claims of the parties to the contracts, and managing day-to-day access.

•	No special “conversion incentives” will be offered to Existing Contracts rights-holders where such incentives would harm the interests of other market participants or distort competitive neutrality.

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