SPP Today and Tomorrow Missouri Public Service Commission 1 SPP - - PDF document

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SPP.org 1

SPP Today and Tomorrow

Missouri Public Service Commission

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“SPP 101”

SPP.org 3

Our Beginning

• Founded 1941 with 11 members
• Utilities pooled resources to keep

Arkansas aluminum plant powered for critical defense

• Maintained after WWII for

reliability and coordination

SPP.org 4

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SPP at a Glance

• Incorporated in Arkansas as a 501(c)(6)

non-profit corporation

• FERC - Federal Energy Regulatory Commission
• Regulated public utility
• Regional Transmission Organization
• NERC - North American Electric

Reliability Corporation

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Reliability Corporation

• Founding member
• Regional Entity

Operating Region

• 54 Members in nine states:

Arkansas Kansas Louisiana Mississippi Missouri Nebraska New Mexico Oklahoma Texas

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SPP Members

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• 370,000 square

miles service

Operating Region

miles service territory

• 47,000 miles

transmission lines:

69 kV – 13,649 miles 115 kV – 9,171 miles

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115 kV 9,171 miles 138 kV – 9,294 miles 161 kV – 4,550 miles 230 kV – 3,531 miles 345 kV – 6,620 miles 500 kV – 106 miles

5 Independent System Operator (ISO) / Regional Transmission Organization (RTO) Map

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3 Interconnections / 8 NERC Regions

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SPP Mission

Helping our members work together to k th li ht t d d i th keep the lights on – today and in the future.

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The SPP Difference

• Relationship - Based

p

• Member - Driven
• Independence Through Diversity
• Evolutionary vs. Revolutionary

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• Reliability and Economics Inseparable

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SPP Milestones

1968: NERC Regional Council 1980: Telecommunications network 1991: Operating reserve sharing 1994: Incorporated as non-profit 1997: Security coordination 1998: Tariff administration 2001: Regional scheduling

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2004: FERC-approved Regional Transmission Organization 2006: Contract Services 2007: Launched EIS market, NERC Regional Entity 2009: Nebraska utilities integrated as full members

Grow th in Responsibilities

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SPP Expenses: 2001-2009

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* 2009 Operating Expenses reflect approved budgeted amount $/Mwh based on 12 CP Method

How does SPP impact you?

• Transmission typically represents 10%
• f residential customer’s bill
• f residential customer s bill
• SPP cost = 30¢ of $100 residential bill
• 2005 independent analysis by Charles River

Associates:

• $500,000 cost-benefit study

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• $500,000 cost benefit study
• On behalf of state regulatory commissions
• 270% ROI for SPP services over the next 10 years

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SPP at a Glance

• Little Rock based
• 400+ employees
• $114M operating budget

(2009)

• 24 x 7 operation

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p

• Full redundancy and

backup site

IT Facts

• Update 65,000+ data points every 10-30 seconds
• Operations model solves 20 000 x 20 000 matrix

Operations model solves 20,000 x 20,000 matrix every 2 minutes (6 minutes for contingencies)

• 425 servers
• 300 Terabytes of data storage
• Systems availability goal of 99.98%

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• Fully redundant Internet and Wide Area Networks

with maintained 100% availability

• Operate two data centers

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Did You Know ?

• SPP’s 63,000 megawatts capacity resources

would power over 50 million homes. p

• In 2008, SPP members completed

98 transmission projects totaling $325 million.

• SPP’s transmission owners spend over

$600 million annually to operate their electric transmission facilities

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electric transmission facilities.

• 47,000 miles of transmission lines

in SPP’s footprint would circle the earth

• almost twice!

Facilitation – Helping our members w ork together

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Regional State Committee

• Retail Regulatory commissioners – Arkansas,

Kansas, Missouri, Nebraska, New Mexico, , , , , Oklahoma, Texas

Louisiana maintains active observer status

• Functions

Cost allocation Ensure adequate supply

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Ensure adequate supply Market cost/benefit analyses

Reliability Coordination

• Monitor grid 24 x 365

As “Air Traffic Controllers,”

• ur operators comply with…
• Anticipate problems
• Take preemptive action
• Coordinate regional response

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• Independent

…over 1,300 pages of reliability standards and criteria.

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• Provides one-stop shopping

f f t i i li

Transmission Service

As “Sales Agents,” we administer …

for use of transmission lines

• Consistent rates, terms,

conditions

• Regional focus

I d d t

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• Independent
• Process > 12,000

transactions/month

…a 1,621 page transmission tariff on behalf of our members and customers.

Market Operation

SPP’s Energy Market is like the “NYSE”…

• Monitors resource /

load balance

…and follows over 200 pages of market protocols

load balance

• Ensures economic dispatch

while meeting system reliability

• Provides settlement data

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market protocols.

• First year of spot market provided

>$100 million in benefits to members

• Annual $80 million expectation

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Compliance Enforcement and Standards Setting

• Enforce compliance with federal NERC

Enforce compliance with federal NERC reliability standards

• Create regional reliability standards

with stakeholder input

• Provide training and education to users,
• ners and operators of b lk po er grid

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• wners, and operators of bulk power grid

SPP Training

• World class regional restoration drills
• NERC certifications
• Train-the-trainer workshops
• 2008 training program

awarded 12,116 continuing education hours

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continuing education hours

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SPP.org 27

Transmission Planning

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Current System

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Projects Constructed 2005-2008

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Projects w ith Construction Commitments

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Balanced Portfolio

• Economic transmission upgrades (cost) to

lower generation production costs (benefit) lower generation production costs (benefit)

• Must balance costs and benefits in each zone
• Transmission expansion costs shared

regionally (load ratio share)

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Extra High Voltage Study

• Looks to 2026 and beyond
• Suggests overlaying SPP

footprint with 500 - 765 kV transmission

• Enhances access to all types
• f generation, including

rene ables

SPP.org 34

renewables

• Long-range plan for

short-term decisions

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SPP.org 35

Wind Development

• Kansas, Oklahoma, Texas Panhandle,

New Mexico Nebraska New Mexico, Nebraska - wind “Saudi Arabia”

• 50,000 – 100,000+ MW potential
• More wind than SPP’s uses during peak
• 3,000 + MW wind in-service

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• Over 51,000 MW in generation interconnection queue
• Generation Interconnection Task Force working to

improve process

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Advantages of harvesting “better” SPP w ind

• Many high density wind zones are located in the

western section of the SPP system

• Advantage of harvesting these wind zones over

the “next best” wind resources is significant

• 30% capacity margin vs. 45% capacity margin
• 50% more installed wind turbines required for the same

wind potential in the 30% vs. 45% scenarios

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p

• Potential savings of harvesting more effective

wind over lower capacity wind in the footprint: Up to $10B

Challenges w ith Wind Development

• Intermittent
• M

t b l t d ith t t

• Must be supplemented with constant

sources

• Wind in remote areas
• Expensive new transmission needed
• “Not in my backyard” siting issues

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• Seams agreements
• Renewable Electricity Standards (RES)

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SPP.org 39 39 SPP.org 40 40

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SPP.org SPP.org

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Missouri RES

Sections 393.1020 - 393.1040

• The act creates the Green Power Initiative. Electric companies shall make good-faith

efforts toward meeting the following renewable energy targets:

• 4%

f t t l t il l t i l f t i bl t h l i

• 4% of total retail electric sales come from certain renewable energy technologies

by 2012;

• 8% of total retail electric sales come from certain renewable energy technologies

by 2015; and

• 11% of total retail electric sales come from certain renewable energy technologies

by 2020.

• Electricity generation from renewable sources prior to August 28, 2007 may be

counted toward the targets, provided they continue to be used.

• The act directs the Public Service Commission (PSC) to develop standards for measuring

electric companies' progress in meeting the targets. The standards must protect against adverse economic impacts on the companies and reliability of service, as well as consider environmental compliance costs and technical feasibility The PSC shall also develop a

SPP.org

environmental compliance costs and technical feasibility. The PSC shall also develop a weighted scale that gives more credit to renewable energy technologies the PSC determines to be in the public's best interest.

• The act establishes reporting requirements until 2022. Electric companies are required to

report every two years on their progress toward meeting the targets. The PSC is required to report every two years on the progress made by electric companies and give recommendations for legislative action. The director of the Department of Economic Development shall report every two years on the impact of this progress on the state economy and the director of the Department of Natural Resources shall report every two years on the environmental impact of this progress.

• This data was obtained from the US

Department of Energy

http://apps1.eere.energy.gov/states/maps/renew able_portfolio_states.cfm SPP.org

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The Synergistic Planning Project

New, Proactive Efforts to Improve Transmission Planning and Cost Allocation for the SPP Region Planning and Cost Allocation for the SPP Region

Overview

• SPP’s current transmission planning processes
• Synergistic Planning Project:
• Integrated Transmission Planning
• Priority Projects
• Cost Allocation and Cost/Benefit Analysis

SPP.org 46 46

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Where Are We Now ?

SPP.org 47 47

Existing processes - transmission needed to:

• Reliability Assessment: Maintain reliability for next 10 years
• Aggregate Transmission Service Study: Meet current

requests for transmission service

• Generation Interconnection: Connect new resources to grid
• Balanced Portfolio: Provide more benefits than costs per

zone

SPP.org 48 48

• Extra High Voltage (EHV) Overlay: Meet needs 20+ years

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Balanced Portfolio

• Economic transmission upgrades (cost) to

lower generation production costs (benefit) lower generation production costs (benefit)

• Must balance costs and benefits in each zone
• Transmission expansion costs shared

regionally (load ratio share)

SPP.org 49 49 SPP.org 50

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Extra High Voltage Study

• Looks to 2026 and beyond
• Suggests overlaying SPP

footprint with 500 - 765 kV transmission

• Enhances access to all types
• f generation, including

rene ables

SPP.org 51

renewables

• Long-range plan for

short-term decisions

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Wind Development

• Kansas, Oklahoma, Texas Panhandle,

New Mexico Nebraska New Mexico, Nebraska - wind “Saudi Arabia”

• 50,000 – 100,000+ MW potential
• More wind than SPP’s uses during peak
• 3,000 + MW wind in-service

SPP.org 52

• Over 51,000 MW in generation interconnection queue
• Generation Interconnection Task Force working to

improve process

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Why do w e need to change?

• Address gaps and conflicts between processes
• Simplify multiple cost allocation methods
• Position SPP to respond to the national focus
• n improving electric infrastructure
• Develop holistic, long-range view

SPP.org 53 53

• Be proactive rather than reactive to building and

paying for infrastructure

• Capitalize on the region’s wind resources

New planning process w ill:

• Consolidate:
• Reliability Assessment
• Balanced Portfolio
• EHV Overlay
• Generation Interconnection and Aggregate Studies:

SPP.org 54 54

• Remain separate
• Simplified

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Synergistic Planning Project Team (SPPT)

• SPP recommended formation of SPPT to:
• Look for opportunities to improve transmission

planning and cost allocation

• Think creatively – unencumbered by Tariff or other

limitations

SPP.org 55 55

Synergistic Planning Project Team Members

• Paul Suskie; Chairman, Arkansas Public Service Commission
• Barry Smitherman; Chairman, Public Utility Commission of

y y Texas

• Kelly Harrison; Vice President – Transmission Operations and

Environmental, Westar Energy

• Ricky Bittle; Vice President - Planning, Rates and Dispatching,

Arkansas Electric Cooperative Corporation

• Rob Janssen; President and General Manager Dogwood Energy

SPP.org 56 56

• Rob Janssen; President and General Manager, Dogwood Energy
• Ric Abel; Managing Director, Prudential Capital Group
• Carl Monroe; Executive Vice President and COO, SPP
• Mark Rossi; Accenture, facilitation and administration

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Components of SPPT Report

• Integrated Transmission Plan
• Priority Projects
• Cost Allocation

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Integrated Transmission Planning

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What is Integrated Transmission Planning?

• ITP: New effort to develop proactive regional

transmission planning principles p g p p

• Goal: Build robust grid to meet near- and long-

term needs

• Horizons: 20, 10, and 4 year
• Focus: Regional, integrated with local

SPP.org 59 59

g , g

• Update: Every three years
• Resulting in: Comprehensive list of needed

projects for SPP region over next 20 years

What is Integrated Transmission Planning?

• Major Objectives: Design transmission backbone to

connect load to the most reasonable generation alternatives

• Improve connections between SPP’s east and west regions
• Make transmission an enabler rather than constraint
• Strengthen ties to Eastern and Western Interconnections
• Underlying Value: Reliability and Economics are

SPP.org 60 60

• Underlying Value: Reliability and Economics are

inseparable

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SPP is asking state regulators to:

• Participate in development of ITP and new cost

allocation mechanisms that meet regional needs; allocation mechanisms that meet regional needs; ESWG and CAWG

• After ITP and cost allocation are approved by SPP’s

Regional State Committee, Board of Directors, and FERC, we will return for further discussion of project details, costs, and benefits

SPP.org 61 61

• SPP and its members will ultimately seek rate

recovery for ITP projects

Priority Projects

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Priority Projects

• Near-term opportunities while transitioning to ITP
• “Readily apparent” projects that continue to appear in

current planning processes

• Relieve grid congestion
• Improve access to transmission service
• Improve transfers between SPP’s East and West regions

SPP.org 63 63 63

• Improve transfers between SPP s East and West regions
• Economic projects up to 765 kV; across SPP region

What criteria w ere used to select candidate Priority Projects?

Criteria

5 points 4 points 3 points 2 points 1 point

Congestion Relief (C)

$170K - $100K $99K - $50K $49K – $20K $19 - $8K $7K - $0K

Transmission Service Request Impact (T)

300 – 100 MWI value 99 – 50 MWI value 49 – 19 MWI value 18 – 10 MWI value 9 – 0 MWI value

Generation Interconnection Impact (G)

1600 – 1300 MWI value 1299 – 1000 MWI value 999 – 700 MWI value 699 – 400 MWI value 399 – 0 MWI value SPP.org 64 64

Economic Benefit (E)

Above 1.2 1.19 – 0.9 0.89 – 0.65 0.64 – 0.4 0.39 - 0

West - East Transfer (W)

765kV 500kV 345kV 230kV Under 230kV

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Priority Projects to be Analyzed

1. Hitchland – Woodward District EHV (765kV/Run at 345 kV) 2. Spearville – Comanche - Medicine Lodge – Wichita (765kV/Run at 345 kV) p g ( ) 3. Comanche or Medicine Lodge – Woodward District EHV (765kV/Run at 345 kV) 4. Woodward District EHV – Elk City – LES - Seminole (765kV/Run at 345 kV) 5. Wichita – Wolf Creek (765 kV) 6. Woodward District EHV – Woodring (345 kV) 7. Valliant – NW Texarkana (345 kV)

SPP.org 65 65

7. Valliant NW Texarkana (345 kV) 8. Stateline – Potter – Roosevelt – Tuco (345 kV) 9. Nebraska City – Stranger Creek or (11) Cooper – Maryville – Sibley (345 kV)

• 10. Riverside Station – Tulsa Power Station (Add Reactor) (138 kV)

SPP.org 66

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Wind Siting for Priority Projects

Base Case (5%) 10% Case 20% Case

State Installed Nameplate Wind Capacity (GW) State Installed Nameplate Wind Capacity (GW) State Installed Nameplate Wind Capacity (GW)

• The Priority Projects have defined several levels of wind penetration to

KS 1.05 KS 1.24 KS 2.64 MO 0.00 MO 0.00 MO 0.10 NE 0.18 NE 0.57 NE 0.74 NM 0.20 NM 0.15 NM 0.21 OK 0.85 OK 0.48 OK 1.75 TX 0.71 TX 1.41 TX 1.39 Total 3.00 Total 6.84 Total 13.67

SPP.org

The Priority Projects have defined several levels of wind penetration to be studied in the SPP footprint.

• For each level (Base Case (5%), 10% and 20% Energy Penetration), a

set of generators was included in the studies.

• Wind generators are based upon IA status or position in GI queue.

SPP.org

Figure 1 – Base Case (5%) Wind Location Map

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SPP.org

Figure 2 – 10% Case Wind Location Map

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Figure 3 – 20 % Case Wind Location Map

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Priority Projects next steps

• Extensive analysis being performed
• Stakeholder involvement and review at each phase
• Projects with Benefit to Cost analysis ≥ 1

recommended for Board approval in October

• Cost allocation methodology for Priority Projects

is to be determined

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is to be determined

Cost Allocation

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Who pays for transmission now ?

Type

Reliability Economic

Purpose Keep lights on Reduce congestion with benefit/cost ≥ 1 Also Called Base Plan Funding Balanced Portfolio Funded By Region - 33% Shared regionally

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Funded By Region 33% Impacted zone- 67% Shared regionally (postage stamp) Voltage All 345 kV+ Implemented 2005 2009

What is being considered for the future?

Initial, high-level rate design proposal

• Highway/Byway rate design
• Highway rate considerations include

assessments of access and usage charges

• Byway rate design – under discussion

SPP.org 74 74

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Next Steps

• RSC’s Cost Allocation Working Group (CAWG) is

meeting every two weeks to present a meeting every two weeks to present a recommendation to RSC October 26

• Initial cost allocation policy-level concepts

developed by CAWG are being converted to tangible, illustrative member impacts

• B

i i ith CAWG A t 26 ti

SPP.org 75 75

• Beginning with CAWG August 26 meeting
• CAWG will focus on Highway in August and

Byway in September

Cost/benefit analysis to be performed

• 40-year horizon
• 20

ear resid al impacts capt red

• 20-year residual impacts captured
• Identify cost/benefit of each scenario by zone/state
• Scenarios include load sensitivities, wind levels, fuel/carbon

prices, etc.

• Quantify benefits from:

SPP.org 76 76

• Avoided projects
• Reduction in emissions, operating reserves, congestion, etc.
• Interconnection and deliverability improvements
• Assess impact on typical residential customer

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How w ould “highw ay” impact customers?

• Regional EHV “highway” cost: ~ $6-7 billion

(there will be additional underlying costs for the supporting infrastructure)

• Customer impact: Benefits expected to exceed cost
• Example – SPP’s analysis found that for 7 Balanced Portfolio

projects that cost $700 million, average residential customer would:

• Pay 88¢ on $100 monthly utility bill (less than 1% of bill)

SPP.org 77 77

• Gain $1.66 in benefits
• Cost/Benefits vary by zone

How w ould “highw ay” impact customers?

• Customer savings come from:
• Greater grid efficiency (reduced congestion / lower line

losses)

• Improved access to broad range of generation options
• Increased competition in SPP wholesale market
• Higher reliability

SPP.org 78 78

• State-by-state, zone-by-zone, and/or customer impacts are

yet to be determined

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Cost Recovery From Retail Load

• The revenue requirements associated with Base Plan

Upgrades and Approved Balanced Portfolios are allocated to benefiting loads pursuant to the cost allocated to benefiting loads pursuant to the cost allocation and recovery plan specified in SPP’s Tariff (Sec. 40 – 42)

• SPP bills Schedule 11 charges to Transmission Customers (TCs)

and Transmission Owners (TOs) who serve those loads to recover those costs

• These charges are paid by these LSEs and the cost is recorded in

their books as a transmission expense

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their books as a transmission expense

Cost Recovery From Retail Load, Cont.

• This arrangement anticipates that each LSE would, in

turn, recover such costs from the loads they serve

• The LSE would seek recovery of an appropriate share of that booked

expense from retail load subject to state jurisdiction

• Once state regulators find that such cost should be included in retail

rates, as a component of the transmission-related revenue requirement, the LSE would recover such cost from the benefiting retail load by billing such load pursuant to its retail rates

SPP.org 80

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Illinois Commerce Commission vs. FERC 7th Circuit Decision: August 6, 2009

• PJM Cost Allocation for facilities that operate at

p 500kV and above

• Court of Appeals found that FERC did not

present “even the roughest estimate of benefits” to the objecting utilities

• Court of Appeals did not say that regionalization

SPP.org 81 81 81 81

• Court of Appeals did not say that regionalization
• f costs was impermissible and remanded the

case

FERC Options

• Seek a rehearing before the full court
• Appeal to the U.S. Supreme Court
• Reenforce and reissue the decision
• Hold further paper or hearing procedures
• Attempt to have the parties settle the case

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• Render a new decision eliminating regionalization
• f costs

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Impact on SPP

• Decision only directly applies to PJM
• Decision doesn’t undo any existing SPP Tariff

provisions

• Decision does not establish a new policy for

future cost allocation, but it does affect the factual support needed

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SPP Mission

Helping our members work together to k th li ht t d d i th keep the lights on – today and in the future.

SPP.org 84 84

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Evolution of Regional Coordination

• 1941 – Interconnection of utilities

1997 R li bilit C di ti

• 1997 – Reliability Coordination
• “Air traffic controller”
• 1998 – Regional Tariff Administration
• “Sales agent”
• 2004

Regional Planning

SPP.org 85

• 2004 – Regional Planning
• “Multi-state compacts”
• 2007 – Real-Time Market
• “Stock exchange”

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Regional Benefits

• Systematically optimizing the economies of

scale and diversity to improve reliability and scale and diversity to improve reliability and efficiencies

• More opportunities?

YES!

• Load and generation balancing (additional real-time)

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g g ( )

• Regional generation commitment (day-ahead)
• Proactive transmission expansion (5-25 years)

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Load and Generation Balancing

• “Regulation Market” (ancillary services)
• Benefits from diversity of resources

1. Fuel type differences 2. Speed of resource movement 3. Use more efficient resource 4. Demand response

SPP.org 87

• Competitive pricing

1. Manage renewable intermittency 2. Encourage more players to reduce price

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Regional Generation Commitment Optimizes

• Economies of scale
• Fewer resources on-line needed to meet reliable

electricity delivery

• Resources are able to run more efficiently
• Competitive pricing
• Encourage other resources, demand response, etc.

SPP.org 88

g p

• CHALLENGES
• How to reduce risk to load of allowing SPP market to

make decisions about regional generation commitment? Congestion hedging

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Future Markets and Challenges

SPP.org 89 89

What kind of markets does SPP have now ?

• Transmission: Participants buy and sell use of

regional transmission lines that are owned by different parties

• Energy Imbalance Service (EIS): Participants buy

and sell wholesale electricity in real-time

• Market uses least expensive energy from regional resources

to serve demand (load) first

SPP.org 90 90 90

• Sometimes it’s cheaper for a market participant to purchase

power from another provider than to generate

• SPP monitors resource/load balance to ensure system

reliability

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“Manufacturing”, “transportation”, and “delivery” must occur instantaneously

SPP.org 91 91

Utilities have several “manufacturing”

• ptions to serve retail customers

3rd Party Purchases/ R t il

Utility

Purchases/ Sales Self Supply

SPP.org 92 92

Retail Customers SPP Facilitated EIS Market

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Timing of arrangements differs

3rd Party P h /

Daily

Purchases/ Sales Self Supply R t il

Utility

Annual Monthly Daily H l

SPP.org 93 93

Retail Customers SPP Facilitated EIS Market

Hourly Real Real-

• time

time

When “transportation” is limited, some “manufacturing” options are also limited

Third Party Purchase

Utility A

X

SPP.org 94 94

Utility A SPP Spot Market Congestion

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What is congestion?

• Desired electricity flows exceed physical capability

C ti d b

• Congestion caused by:
• Not enough transmission in certain areas, often due to load

growth

• Line and generator maintenance outages
• Unplanned outages such as storms or trees on lines

SPP.org 95 95 95

• Too much generation is pushed to the grid in a particular

location

• Results in the inability to use least-cost electricity to

meet demand

500 kV 345 kV

Congestion prevents access to low er-cost generation

230 kV 161 kV 138 kV 115 kV 69 kV

SPP.org 96 96 96

June 2008

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500 kV 345 kV 230 kV

Congestion changes all the time

161 kV 138 kV 115 kV 69 kV

SPP.org 97 97

June 2009

Why develop new markets?

• SPP conducts complex cost-benefit studies

before beginning any new market development g g y p

• Under Regional State Committee oversight
• 2005 Charles River and Associates (CRA) analysis of

the EIS market:

• Estimated benefit of $86 million for first year
• Actual benefit of $103 million for first year

SPP.org 98 98

$ y

• New markets will bring estimated average

additional benefits of $100 million

• According to 2009 Ventyx analysis

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How do new markets benefit participants?

• Currently, each market participant decides to start

its own generation to meet its own needs

• Generation choices are limited
• Market participants may incur costs that could be reduced
• For instance, if a high-cost generator is turned on but kept at

minimum, this costs the utility money

• New Day Ahead market will decide which

SPP.org 99 99 99

generation to start to meet regional needs, reducing overall costs

• Generation choices optimized for the entire region

What needs to change to claim the additional $100 million benefits?

• Today: Each market participant decides what

ti th ill th t d b d th i generation they will run the next day based on their knowledge of their system

• Future: SPP determines what generating units

should run the next day for maximum cost- effectiveness, based on knowledge of resources available for entire region

SPP.org 100 100

available for entire region

• Result: Regional commitment of generation

responsible for bulk of projected additional $100 million benefits

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Today, utilities make generation choices based on limited know ledge of other available resources

X X X X

Utility A

Third Party Purchase

X

SPP.org 101 101

X

Utility A SPP EIS Market

X

Future market w ill choose generation based on know ledge of all regional options

SPP Market

Third Party

X X

Utilit A

SPP.org 102

Purchase

X

Utility A Other Utilities

102

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What issues w ill Day Ahead market address?

• Set next day’s electricity prices for participating

load load

• Currently, prices are set in real-time based on the

generation participants have decided to start

• Day Ahead market will select and start the

cheapest generation to meet regional needs

SPP.org 103 103

• Prices will be set for the next day and in real-time

based on a more efficient selection of generation

Day Ahead market increases “manufacturing”

• ptions

3rd Party P h /

Utility

Annual Monthly Daily Daily

Purchases/ Sales Self Supply

SPP.org 104 104

SPP Facilitated Day Ahead Market

Daily Real-time

SPP Facilitated EIS Market

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Day Ahead market continues to use Locational Marginal Prices (LMP)

• Price for energy (LMP) will vary by location
• Price for energy is the least-cost megawatt, while

considering congestion

• Called Locational Imbalance Price (LIP) in today’s EIS

market

• Congestion causes locational prices to vary

SPP.org 105

• With no limitations, the cheapest generator could

deliver the next megawatt to ANYWHERE on the grid

105

Day Ahead market bring benefits, but there are challenges to mitigating risks…

• To claim the additional $100 million in benefits,

$ , generation start-up must be optimized for entire region

• For generation owners to allow their resources to

be optimized for the region rather than their own needs, they need assurance they will be protected f th t i t f k t d i i

SPP.org 106 106

from the cost impacts of market decisions

• Protection against the cost of congestion is

needed to provide assurance

106

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What is a congestion hedge?

• Protects market participants from exposure to

high energy prices due to congestion high energy prices due to congestion

• Reimburses the cost of congestion for market

participants that had reserved the right to use the transmission grid

• If the hedge is perfect, participant will incur no

dditi l t d t ti

SPP.org 107 107 107

additional cost due to congestion

How does hedging w ork in current market?

• Market consists of expensive and less expensive

generation generation

• If a utility has inexpensive generation, it can

schedule in advance to use 100% of its own generation to serve its own customers

• Schedule protects utility from higher cost of purchased power
• Utility then does not have to buy power to meet demand

SPP.org 108 108 108

• Utility then does not have to buy power to meet demand
• This advance scheduling is a hedge against market electricity

prices and congestion costs

• If market prices were higher than the utility’s due to congestion,

the hedge was financially beneficial

55

How Should We Hedge Against Congestion?

SPP.org 109 109

Who w as involved in the congestion hedge recommendation?

• Congestion Hedge Task Force (CHTF)

representatives include:

• State regulatory staff
• Load-serving members
• Transmission owning members
• Power marketers

SPP.org 110

• Power marketers
• Merchant generators
• SPP Staff
• Industry consultants

110

56

What is the CHTF’s goal?

• Create hedge against congestion that allows

market participant to offer resources into the p p regional commitment and Day Ahead market with reasonable assurance that they will derive a benefit

• Not to create a deep, liquid financial rights

market

SPP.org 111 111

Wide range of initial positions at the CHTF

• Some believed the outcome had to be a

physical hedge

• Some believed the outcome had to be a

financial hedge

• Most were somewhere in between

SPP.org 112

• All meeting participants displayed an open

mind and shared a desire to learn, understand, and then make the best decision

112

57

What w as the CHTF decision process?

• Thorough, reasoned approach
• Analyzed numerous complex examples
• Engaging in these discussions and extensive “what-ifs”

provided the most learning

• Reviewed the decisions of other RTOs

Asked questions like:

SPP.org 113

• Asked questions like:
• How would your company evaluate a recommendation?
• What would the ultimate impact be to rate payers?

113

Review ed Other RTOs

Midwest ISO PJM ISO New England New York ISO California ISO (future market design)

SPP.org 114

California ISO (future market design) ERCOT Nodal Market

114

58

CHTF determined there w ere three types

• f congestion hedges
• Pro-rata
• Congestion costs are returned to market participants

through some static formula

• Transactional
• Congestion costs are returned to market participants

based on their scheduled use of transmission grid

SPP.org 115

• Independent
• Financial instrument that functions as “insurance policy”

that pays market participants back if they incur congestion costs

115

Worked through many detailed examples

Constrained Day Ahead and Real-time with Energy Transaction

SPP.org 116 116

59

Pros and Cons -

Compared traits of Transactional vs. Independent

• Comparability to self-

commitment decision

• Does each mechanism:
• Minimize the need for uplift
• Hedge period (hourly, daily,

monthly, yearly)

• Tradability of rights
• Transparency of results
• Is native load any worse off
• promote full use of the

transmission system?

• increase ability to trade

bilaterally?

• support trading hubs?
• allow a participant to place

a value on the right?

• i

h d li f N ti

SPP.org 117

Is native load any worse off financially?

• How complex?
• What system changes?
• require scheduling of Native

Load?

117

CHTF Developed Consensus

• Pro rata – eliminated quickly
• Could make Transactional or Independent work
• Could make Transactional or Independent work

Became a question of weighing pros and cons

• Some stated a preference for Transactional

(physical)

That is the business we are in

SPP.org 118

• Most stated that their choice was not
• verwhelming in either direction, but preferred

Independent (financial)

118

60

Primary Reasons Given for Independent

• Majority were in favor of independent financial

transmission hedge mechanism transmission hedge mechanism

Removes requirement to manage native load schedules Provides more flexibility for trading and reconfiguring the hedges Better supports the establishment and use of trading hubs within SPP

SPP.org 119 119

Independent hedge summary

• Congestion credit based on price difference

between locations between locations

Does not require scheduling Hedge is known in advance

• Drawbacks

Adds another layer of complexity to market participation

SPP.org 120

Feasibility is assessed much farther in the future, increasing the likelihood that the operating day will be different New – fear of the unknown

120

61

Summary of CHTF recommendation

• Utilize a financial mechanism to hedge against

transmission congestion costs transmission congestion costs

• Transmission Service still required to be

purchased per SPP Tariff requirements

• Transmission service should be the basis for

determining an initial allocation of the financial rights

SPP.org 121

g

• Only parties that own firm transmission rights will be

allocated financial rights

• ONLY rights that the holder CHOOSES to NOT accept will

be available in an auction

121

Other RTOs offer similar hedging, but SPP’s mechanism differs:

• SPP’s Regional State Committee will decide

hedging allocation methodology

• SPP’s Market Working Group is recommending

allocation based on firm transmission reservations

• Market participants may elect to retain, rather

than auction, a congestion hedge

SPP.org 122 122

• Only Transmission Customers may participate

in congestion hedge activity

• This important decision requires RSC consideration

122

62

How w ill hedging w ork in future markets?

• Participant doesn’t have to schedule generation

in advance to get value of the congestion hedge in advance to get value of the congestion hedge

• As energy prices diverge because of congestion,

hedge value adjusts an equal amount to provide

• ffsetting value to holder
• Reservations entitle holder to congestion hedge

req est on ann al basis

SPP.org 123 123 123

request on annual basis

• Hedge applies to every hour of the year

Example of future market congestion hedge

• Utility A can tell SPP, “For the next year, I want 20% of

Generator A to serve a particular load”

• Thi

i t f h d i t ti t

• This is a request for a hedge against congestion costs
• For the coming year, SPP may only grant 15% of

Generator A to the utility’s load as an annual hedge due to projected physical congestion

• Other more expensive generation may have to be used
• Each month SPP will review upcoming month and

SPP.org 124 124 124

• Each month, SPP will review upcoming month and

determine whether an additional 5% can be granted

• For each operating day, the utility will receive credit for

congestion costs (price differences) related to the granted hedges

63

Challenges are different, but not new

• Today we all deal with the possibility of losing a

critical resource during peak times g p

• May not be able to find replacement power
• May not be able to get transmission service
• Price exposure can be significant!
• But, utilities have always had to deal with these

issues

SPP.org 125

issues

• We are familiar with these risks
• We are unfamiliar with the financial hedge risks

125

Next Steps

• Additional education will be provided to Markets

and Operations Policy Committee in October and Operations Policy Committee in October

• Discussion with Regional State Committee in

October

• Board of Directors scheduled to vote on

proposed market design in January 2010

SPP.org 126 126

• SPP is available for detailed educational working

sessions with commissioners and staff

126

64

Regional Benefits

• Helping our members work together to keep the

lights on…today and in the future lights on…today and in the future

• Systematically optimizing the economies of scale

and diversity to improve reliability and efficiencies

• More opportunities?

YES!

SPP.org 127

• Load and generation balancing (additional real-time)
• Regional generation commitment (day-ahead)
• Proactive transmission expansion (5-25 years)

127