June 21, Southwest Power Pool, Inc., Docket No. ER Order No. 755 Compliance Filing

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1 June 21, 2013 The Honorable Kimberly D. Bose Secretary Federal Energy Regulatory Commission 888 First Street, N.E. Washington, D.C Re: Southwest Power Pool, Inc., Docket No. ER Order No. 755 Compliance Filing Dear Secretary Bose: Pursuant to Federal Energy Regulatory Commission ( Commission ) Order No and the Commission s October 18, 2012 and March 21, 2013 orders in Docket No. ER , 2 Southwest Power Pool, Inc. ( SPP ) submits revisions to its Open Access Transmission Tariff 3 to adopt a two-part compensation methodology for Resources that provide Regulation-Up and Regulation-Down Operating Reserve products in the SPP Integrated Marketplace, and to adopt other Tariff language required by Order No SPP requests an effective date of March 1, 2015 for the Tariff revisions proposed in this filing, consistent with the Commission s directive in the March Frequency Regulation Compensation in the Organized Wholesale Power Markets, Order No. 755, III FERC Stats. & Regs., Regs. Preambles 31,324 (2011), reh g denied, Order No. 755-A, 138 FERC 61,123 (2012). Sw. Power Pool, Inc., 141 FERC 61,048 (2012) ( October 2012 Order ), order on reh g, 142 FERC 61,205 (2013) ( March 2013 Order ). Southwest Power Pool, Inc., FERC Electric Tariff, Sixth Revised Volume No. 1 ( Tariff ). For the sake of clarity, in this filing, SPP refers to Tariff provisions applicable to the Integrated Marketplace effective March 1, 2014 that have been accepted by the Commission or are pending before the Commission as the Integrated Marketplace Tariff. Tariff provisions proposed in this filing are referred to as Proposed Tariff.

2 The Honorable Kimberly D. Bose June 21, 2013 Page 2 Order that SPP implement its Order No. 755 compliance no later than one year following [Integrated Marketplace] start-up. 4 I. BACKGROUND A. SPP SPP is a Commission-approved Regional Transmission Organization ( RTO ). It is an Arkansas non-profit corporation with its principal place of business in Little Rock, Arkansas. SPP currently has 72 members serving more than 6 million households in a 370,000 square-mile area. Its members include 14 investor-owned utilities, 11 municipal systems, 13 generation and transmission cooperatives, 4 state agencies, 11 independent power producers, 10 power marketers, and 9 independent transmission companies. As an RTO, SPP administers open access transmission service over approximately 48,930 miles of transmission lines covering portions of Arkansas, Kansas, Louisiana, Missouri, Nebraska, New Mexico, Oklahoma, and Texas, across the facilities of the SPP Transmission Owners, 5 and administers a centralized real-time energy imbalance service market ( EIS Market ). 6 B. Integrated Marketplace Filings and Orders On February 29, 2012, 7 as amended on May 15, 2012, 8 SPP submitted to the Commission proposed revisions to its Tariff to transition from its current real-time EIS Market to the SPP Integrated Marketplace in March The Integrated Marketplace includes Day-Ahead and Real-Time Energy and Operating Reserve Markets and a Transmission Congestion Rights ( TCR ) Market aimed at maximizing the cost-effective utilization of energy Resources and the regional transmission system, as well as March 2013 Order at P 40. See Sw. Power Pool, Inc., 89 FERC 61,084 (1999); Sw. Power Pool, Inc., 86 FERC 61,090 (1999); Sw. Power Pool, Inc., 82 FERC 61,267, order on reh g, 85 FERC 61,031 (1998). Sw. Power Pool, Inc., 118 FERC 61,055 (2007) (accepting SPP s Market Readiness Certification and authorizing a February 1, 2007 start date for the EIS Market). Submission of Tariff Revisions to Implement SPP Integrated Marketplace, Docket No. ER (Feb. 29, 2012) ( Integrated Marketplace Filing ). Amendatory Filing of Tariff Revisions to Implement SPP Integrated Marketplace, Docket No. ER (dated May 15, 2012) ( May 2012 Supplemental Filing ).

3 The Honorable Kimberly D. Bose June 21, 2013 Page 3 consolidation of the 16 separate Balancing Authority Areas currently operating within the SPP footprint into a single Balancing Authority Area operated by SPP. Among the Operating Reserve products offered in the Integrated Marketplace are Regulation-Up 9 and Regulation-Down. 10 The SPP Integrated Marketplace co-optimizes the deployment of Energy and Operating Reserve to achieve lowest-cost Resource utilization in both the Day-Ahead Market and Real-Time Balancing Market ( RTBM ). Through its co-optimization logic, the Integrated Marketplace will co-optimize Energy dispatch and Operating Reserve procurement, resulting in the most efficient and lowest cost utilization of Resources to clear in the Day-Ahead Market and dispatch in the RTBM. 11 The objective of co-optimization is to ensure that Market Participants are indifferent as to whether their Resource is cleared for Energy or Operating Reserve through a rational clearing of the products, considering operational constraints and the least total cost solution. The co-optimization logic incorporates opportunity costs into the setting of the Market Clearing Prices ( MCP ) for Operating Reserve to keep Market Participants indifferent as to the whether the Resource is cleared for Energy or Operating Reserve. 12 SPP s co-optimization logic is similar to the logic employed by other RTOs Regulation-Up is defined as [a]n Operating Reserve product procured by the Transmission Provider from qualified Resources that increase their energy output in response to a Regulation Deployment Instruction from the Transmission Provider. Integrated Marketplace Tariff at Attachment AE 1.1, Definitions R. Resources providing Regulation-Up must be capable of being deployed through automatic generation control equipment to automatically and continuously adjust Resource output to balance supply and demand in near Real-Time and must be able to deploy the full amount of Regulation-Up cleared within the Regulation Response Time, currently set at five minutes. Regulation-Down is defined as [a]n Operating Reserve product procured by the Transmission Provider from qualified Resources that reduce their energy output in response to a Regulation Deployment instruction from the Transmission Provider. Id. at Attachment AE 1.1, Definitions R. Like Regulation-Up, Resources qualified to provide Regulation-Down must be capable of being deployed automatically and continuously through automatic generation control and must be able to deploy the full amount of Regulation-Down cleared within the Regulation Response Time, currently set at five minutes. Integrated Marketplace Filing, Transmittal Letter at 7-9, 13. Id., Exhibit No. SPP-3 (Prepared Direct Testimony of Richard L. Dillon) at 17. Id. at 18.

4 The Honorable Kimberly D. Bose June 21, 2013 Page 4 In its October 2012 Order, the Commission conditionally accepted SPP s Integrated Marketplace, 14 subject to certain compliance filings, the first of which SPP submitted on February 15, Relevant to this filing, the October 2012 Order conditionally accepted SPP s proposed co-optimized procurement, settlement, and cost recovery of Operating Reserve, finding that SPP s proposed co-optimization procurement of Operating Reserve is just and reasonable and consistent with the method accepted in other RTO markets. 16 The Commission noted that, with adoption of the Integrated Marketplace, SPP will be required to comply with Order No. 755, and directed SPP to submit Tariff revisions to comply with Order No. 755 no later than June 30, 2013 to be effective [a]t the time of market start-up. 17 The Commission also directed SPP to submit various revisions to its Operating Reserve provisions, which SPP submitted as part of its February 2013 Compliance Filing 18 that is pending before the Commission. On November 19, 2012, SPP submitted a request for rehearing and clarification of the October 2012 Order, in which SPP requested (among other things) that the Commission grant rehearing of the requirement to implement SPP s Order No. 755 compliance at the time that the Integrated Marketplace commences. 19 SPP stated that it anticipated being able to submit its Order No. 755 compliance proposal by the June 30, 2013 deadline set forth in the October 2012 Order, but that the system changes required to implement the Order No. 755 compliance upon market start would hamper SPP s ability to complete development of other Integrated Marketplace system components, which would threaten the anticipated March 1, 2014 launch of the Integrated Marketplace October 2012 Order at P 2. Submission of Tariff Revisions to Implement SPP Integrated Marketplace, Docket No. ER (Feb. 15, 2013) ( February 2013 Compliance Filing ). October 2012 Order at P 221 (citing Midwest Indep. Transmission Sys. Operator, Inc., 122 FERC 61,172 (2008)). Id. at P 222. See February 2013 Compliance Filing, Transmittal Letter at 22-23, Request of Southwest Power Pool, Inc. for Rehearing and/or Clarification of Commission Order, Docket Nos. ER , et al. (Nov. 19, 2012) ( November 2012 Rehearing Request ). Id. at 6-10.

5 The Honorable Kimberly D. Bose June 21, 2013 Page 5 In the March 2013 Order, the Commission granted SPP s request for rehearing, directing SPP to file its Order No. 755 compliance filing by June 30, 2013 and deferring the implementation until no later than one year following market start-up. 21 C. Order No. 755 On October 20, 2011, the Commission issued Order No. 755 to remedy undue discrimination in the procurement of frequency regulation in the organized wholesale electric markets and ensure that providers of frequency regulation receive just and reasonable and not unduly discriminatory or preferential rates. 22 Finding that current RTO regulation compensation mechanisms fail to acknowledge the inherently greater amount of frequency regulation service provided by faster-ramping resources given that resources are compensated at the same level even when providing different amounts of frequency regulation service, 23 the Commission directed RTOs to modify their tariffs to establish mechanisms to ensure just and reasonable compensation to resources providing regulation service. Specifically, the Commission directed RTOs to develop mechanisms to compensate frequency regulation resources based on the actual services they provide by adopting a two-part payment methodology: (1) a capacity payment that includes the marginal unit s opportunity costs; and (2) a payment for performance that reflects the actual quantity of frequency regulation service provided by a resource when the resource is accurately following the RTO s dispatch signal. 24 The Commission required that the payments be determined by a competitive process, 25 and found that requiring a performance payment based on competitively determined prices that include appropriate opportunity costs will appropriately compensate resources that are asked to do more work and will ensure just and reasonable rates. 26 Order No. 755 gave RTOs the discretion to identify the manner in which to implement the two-part compensation methodology. 27 The Commission also required RTOs to account for frequency regulation resources accuracy in following the RTO s automatic generation control ( AGC ) March 2013 Order at P 40. Order No. 755 at P 1. Id. at PP 2, 64. Id. at PP 3, 77, 197. Id. at PP Id. at PP 67, 99. Id. at P 185.

6 The Honorable Kimberly D. Bose June 21, 2013 Page 6 dispatch signal when determining the performance payment compensation, and directed RTOs to determine the technical specifications for measuring accuracy. 28 Also, noting that the changes required by Order No. 755 represent fundamental changes to the way RTOs and ISOs procure and compensate frequency regulation resources, which may render existing RTO and ISO market power rules insufficient for purposes of addressing market power concerns, 29 the Commission instructed RTOs either to submit tariff provisions for market power mitigation methods appropriate to their redesigned frequency regulation markets or explain how their current mitigation methods are sufficient to address market power concerns in the modified market. 30 The Order No. 755 reforms were imposed on RTOs that have a tariff that provides for the compensation for frequency regulation service. 31 At the time Order No. 755 became effective, SPP did not have such a mechanism in its Tariff. 32 With the implementation of the Integrated Marketplace, SPP will begin procuring and compensating Resources providing Regulation, and therefore will be subject to the requirements of Order No On February 16, 2013, the Commission denied rehearing of Order No D. Stakeholder Process SPP developed the Tariff revisions proposed in this filing through its customary stakeholder process. Specifically, the proposed Tariff revisions were developed and approved by the SPP Market Working Group 34 during meetings held on October 23, 2012, March 12, 2013 and April 23, The SPP Operating Reliability Working Id. at PP 77, 153. Id. at P 136. Id. 18 C.F.R (g)(3). See Order No. 755 at P 205 n.263 ( SPP is not included in the respondents because they currently do not have a frequency regulation compensation mechanism in their tariff. ). Frequency Regulation Compensation in the Organized Wholesale Power Markets, Order No. 755-A, 138 FERC 61,123, at PP (2012). The Market Working Group is responsible for the development and coordination of the changes necessary to support any SPP administered wholesale market(s), including Energy, congestion management, and market monitoring, consistent with direction from the SPP Board of Directors.

7 The Honorable Kimberly D. Bose June 21, 2013 Page 7 Group 35 considered and approved the revisions on March 27, 2013, and the SPP Regional Tariff Working Group 36 considered and approved the revisions on April 5, The Markets and Operations Policy Committee ( MOPC ) 37 approved the revisions on April 16, On April 30, 2013, the SPP Members Committee 38 and Board of Directors approved the revisions proposed in this filing. SPP recognizes that stakeholder approval does not by itself cause a filing to be just and reasonable; however, SPP requests that the Commission extend appropriate deference to the wishes of its stakeholders regarding the revisions proposed in this filing, consistent with Commission precedent Among its other duties, the Operating Reliability Working Group: maintains, coordinates, and implements Criteria related to ensuring the reliable and secure operation of the bulk electric system operated by the members of SPP, consistent with North American Electric Reliability Corporation and Regional Reliability Standards; provides oversight and direction for the SPP Reliability Coordinator function; and provides policy input to the SPP Board of Directors and its committees. The Regional Tariff Working Group is responsible for development, recommendation, overall implementation, and oversight of SPP s Tariff. The Regional Tariff Working Group also advises SPP staff on regulatory and implementation issues not specifically covered by the Tariff or issues where there may be conflicts or differing interpretations of the Tariff. The MOPC consists of a representative officer or employee from each SPP Member and reports to the SPP Board of Directors. Its responsibilities include recommending modifications to the Tariff. See Southwest Power Pool, Inc., Bylaws, First Revised Volume No. 4 ( Bylaws ) 6.1. The Members Committee consists of up to 19 representatives of the Transmission Owning Member and Transmission Using Member sectors of SPP s Membership. This committee provides input to and assists the SPP Board of Directors with the management and direction of the general business of SPP. See id The Commission previously has recognized that provisions approved through the stakeholder processes of RTOs are due deference. See Sw. Power Pool, Inc., 127 FERC 61,283, at P 33 (2009) (noting that the Commission accord[s] an appropriate degree of deference to RTO stakeholder processes ); New England Power Pool, 105 FERC 61,300, at P 34 (2003) (Commission approval of transmission cost allocation proposal based upon an extensive and thorough stakeholder process); Policy Statement Regarding Regional Transmission Groups, FERC Stats. & Regs., Regs. Preambles 30,976, at 30,872 (1993) (the Commission will afford an appropriate degree of deference to the stakeholder approval process). The Commission s deference to RTO stakeholder processes has been upheld by the courts. See Pub. Serv. Comm n of Wis. v. FERC, 545 F.3d 1058, (D.C. Cir. 2008) (noting that the Commission often gives weight to (continued... )

8 The Honorable Kimberly D. Bose June 21, 2013 Page 8 II. COMPLIANCE FILING As discussed above, Order No. 755 requires RTOs to adopt a two-part payment structure for compensation of resources providing frequency regulation, and to base the performance portion of the payment on a resource s accuracy in following AGC dispatch signals. As detailed below, SPP proposes to adopt a two-part bidding and pricing mechanism for Regulation-Up Service and Regulation-Down Service, with the performance portion of the compensation based on a regulation mileage concept similar to that adopted in other RTOs. 40 A. Order No. 755 Compliance Requirements 1. Capacity Payment In Order No. 755, the Commission determined that paying all cleared frequency regulation resources a uniform capacity clearing price that includes the marginal resource s opportunity cost is just and reasonable. 41 The Commission therefore directed RTOs to pay all cleared frequency regulation resources a uniform clearing price that includes the marginal resource s opportunity cost. 42 The uniform clearing price must be market-based, derived from market participant bids for the provision of frequency regulation capacity. 43 The Commission directed RTOs to calculate the marginal resource s cross-product opportunity costs, which reflect the foregone opportunity to participate in the energy and other ancillary services markets, 44 and include these costs in (... continued) RTO proposals that reflect the position of the majority of the RTO s stakeholders) (quoting Am. Elec. Power Serv. Corp. v. Midwest Indep. Transmission Sys. Operator, Inc., 122 FERC 61,083, at P 172 (2008)) See, e.g., Midwest Indep. Transmission Sys. Operator, Inc., 140 FERC 61,224, at PP 7-13 (2012) ( MISO Order ) (summarizing the Midwest Independent Transmission System Operator, Inc. s ( MISO ) mileage-based regulation compensation methodology). Order No. 755 at P 99. Id. at PP 99, 198. Id. The Commission defined cross-product opportunity cost as the revenue a regulation provider loses because it is on stand-by to provide regulation and is not providing energy or another product. Id. at P 80 n.123.

9 The Honorable Kimberly D. Bose June 21, 2013 Page 9 each resource s offer to supply frequency regulation capacity for use when determining the market clearing price and which resources clear. 45 The Commission also required RTOs to allow for inter-temporal opportunity costs 46 to be included in a resource s offer to sell frequency regulation service (with the requirement that costs be verifiable), but left it to the RTO to determine who is responsible (the RTO or the market participant) for calculating such costs Performance Payment In addition to a capacity payment, the Commission mandated that each RTO provide a performance payment to each regulating resource, reflect[ing] the amount of work each resource performs in real-time and the accuracy with which each resource responds to the system operator s dispatch signal. 48 The Commission required that the performance payment be market-based (i.e., based on resource bids that reflect the cost of providing service), 49 and left it to the RTO to propose the details of its methodology including bidding parameters. 50 The Commission directed RTOs to propose the specific technical requirements and required that the market clearing performance price be paid uniformly to all resources cleared during the same settlement period. 51 A resource s performance must be measured based on the absolute amount of regulation up and down that it provides in response to the RTO s dispatch signal Accuracy Measurement In Order No. 755, the Commission found that a resource s frequency regulation compensation should account for the resource s accuracy in following the RTO s AGC Id. at PP 99, 102, 198. The Commission defined inter-temporal opportunity costs as the foregone value when a resource must operate at one time, and therefore must either forego a profit from selling energy at a later time or incur costs due to consuming at a later time. Id. at P 80 n.124. Id. at P 103. Id. at P 199. Id. at PP , 199. Id. at PP 130, 199. Id. at PP Id. at P 133.

10 The Honorable Kimberly D. Bose June 21, 2013 Page 10 dispatch signal, 53 to provide resources with an economic incentive to follow dispatch instructions. 54 Therefore, the Commission required RTOs to account for a resource s accuracy in following AGC dispatch signals in determining the performance payment compensation and to propose the technical specifications for measuring accuracy. 55 The Commission did not mandate any particular method for measuring accuracy, but required that the same accuracy measurement method must apply to all frequency regulation resources Market Power Mitigation In Order No. 755, the Commission noted that, given the additional performance payment requirements of Order No. 755, it is appropriate for RTOs to revisit their market power monitoring and mitigation provisions to ensure that they remain adequate to protect against market power abuse. 57 Accordingly, the Commission directed RTOs either to submit tariff provisions for market power mitigation methods appropriate to redesigned frequency regulation markets or to explain how their current mitigation methods are sufficient to address market power concerns given the changes required by Order No B. SPP Compliance Proposal 1. Overview SPP proposes in this filing to comply with Order No. 755 by establishing a twopart methodology for Regulation-Up and Regulation-Down offers and compensation, with the capacity component of the Offer and price based on SPP s current, Commissionapproved methodology, and a performance component based on a resource s Regulation- Up and Regulation-Down Mileage. Mileage is measured for each five minute dispatch interval and is equal to the sum of the absolute value of movements by a Resource in response to Regulation Deployment instructions provided through AGC every four seconds Id. at PP 151, 200. Id. at P 152. Id. at PP 153, 200. Id. at PP , 200. Id. at P 136. Id.

11 The Honorable Kimberly D. Bose June 21, 2013 Page 11 To offer Regulation products in the Day-Ahead Market or RTBM, a Resource 59 will be required to submit a two-part Offer consisting of: (1) a Regulation-Up or Regulation-Down Offer, in dollars per MW, representing the price at which the Resource has agreed to hold capacity in reserve to provide Regulation-Up or Regulation-Down; and (2) a Regulation-Up or Regulation-Down Mileage Offer, in dollars per MW, representing the price at which the Resource has agreed to sell Expected Regulation Reserve Mileage. The Regulation Mileage Offer is multiplied by a Regulation Mileage Factor, which is determined through a historical system-wide Regulation Deployment analysis that represents the ratio of cleared Regulation Service to the Instructed Regulation Mileage. Given the lack of historical data for Regulation Deployment, the Regulation Mileage Factor for both Regulation-Up and Regulation-Down will initially be set to 1.0, and will be updated periodically as specified in the Market Protocols. The Regulation Mileage Offer (as multiplied by the Mileage Factor) is summed with the Regulation Offer to calculate a combined Regulation Service Offer, which is used in the market clearing engine to determine least-cost commitment and dispatch of Regulation Resources in the Day-Ahead Market and RTBM. The market clearing engine uses the combined Regulation-Up Service Offers and Regulation-Down Service Offers to meet Regulation-Up and Regulation-Down requirements, respectively, and produces Regulation-Up Service MCPs and Regulation- Down Service MCPs. Deployment of Regulation Reserves remains the same as in SPP s Integrated Marketplace Filing approved by the Commission. In the Day-Ahead Market, cleared Resources will be compensated for their cleared Regulation-Up Service or Regulation-Down Service at the applicable Day-Ahead MCP. This represents the same compensation that is applicable in SPP s current Integrated Marketplace design conditionally approved by the Commission. To determine an appropriate performance payment, SPP will charge or credit a Resource in the RTBM by comparing its Actual Regulation Mileage to its Expected Regulation Mileage. Expected Regulation-Up Mileage and Expected Regulation- Down Mileage will be calculated as the amount of Regulation-Up Service MW or Regulation-Down Service MW cleared, multiplied by the Regulation-Up Mileage Factor or Regulation-Down Mileage Factor. SPP also will calculate RTBM Expected Regulation Mileage MCPs (for both Regulation-Up Mileage and Regulation-Down Mileage), which represent the highest of the Regulation Mileage Offers of all Resources economically cleared for each of the Regulation products (Up and Down). In the RTBM settlement, SPP will determine the appropriate charge or credit to the Resource as the sum of: (1) deviations between cleared RTBM Regulation and cleared Day-Ahead Market Regulation; (2) Excess Regulation Mileage; and (3) Unused 59 To offer Regulation-Up and/or Regulation-Down, a Resource must satisfy the requirements in Section of Attachment AE of the SPP Integrated Marketplace Tariff.

12 The Honorable Kimberly D. Bose June 21, 2013 Page 12 Regulation Mileage. Excess Regulation Mileage occurs if the lesser of the Actual Mileage or Instructed Regulation Mileage exceeds the Expected Regulation Mileage, and Unused Regulation Mileage occurs when the lesser of the Actual Regulation Mileage or Instructed Regulation Mileage is less than the Expected Regulation Mileage. In the event of Excess Regulation Mileage, the Resource receives a credit for the excess, and, in the event of Unused Regulation Mileage, the Resource is charged for the unused mileage for which it was compensated. Because Mileage is a concept applicable only in the RTBM (because Regulation Resources are not actually moved in the Day-Ahead Market), such charges and credits do not apply in the Day-Ahead Market. Because settlements in the RTBM are based on Expected Mileage MCPs, SPP proposes to incorporate a Make Whole Payment for Unused Regulation Mileage, which will compensate the Resource for the difference between its Mileage Offer and the settled amount charged at MCP. This Make Whole Payment will ensure that Resources are not penalized for Unused Regulation Mileage when MCP exceeds their Regulation Mileage Offer (i.e., when the Resource s Offer did not set the MCP). The costs of the Make Whole Payment are recovered on a load ratio share basis. The Commission previously has accepted a make whole mechanism to address similar circumstances when a resource is charged for real-time mileage deployment that differs from the expected mileage amount. 60 SPP s proposed two-part Offer and compensation mechanism, with additional charges and credits in real-time to account for the performance component of the compensation, is substantively similar to the mechanism approved by the Commission for frequency regulation compensation in MISO The Commission rejected MISO s proposal to charge undeployed mileage at the resource s offer price rather than MCP, finding that doing so would result in different resources receiving different payments for providing the same amount of service, in violation of Order No See MISO Order at PP nn The Commission directed MISO to charge undeployed mileage the MCP, but permitted MISO to provide make whole compensation to the resource for its payment of MCP that is higher than its mileage offer. Id. at P 36; see also Midwest Indep. Transmission Sys. Operator, Inc., Letter Order, Docket No. ER (Jan. 25, 2013) (accepting MISO s proposed Undeployed Regulating Mileage Revenue Sufficiency Guarantee Credit ); Filing of Midwest Independent Transmission System Operator, Inc., Docket No. ER , 3-4 (Oct. 22, 2012) (describing MISO s proposed Undeployed Regulating Mileage Revenue Sufficiency Guarantee Credit ). See MISO Order at PP 7-13 (describing MISO s Order No. 755 compliance proposal) and 25 (conditionally accepting MISO s proposed two-part payment methodology as a reasonable approach to compensating resources that provide frequency regulation service ).

13 The Honorable Kimberly D. Bose June 21, 2013 Page 13 To ensure that a Resource s accuracy in following AGC dispatch signals is incorporated into its performance compensation as required by Order No. 755, SPP proposes to modify its current Real-Time Regulation Non-Performance Amount charge for Resources that operate outside of their Operating Tolerance by including excess mileage payments and unused mileage charges. If Resources operate outside of their Operating Tolerance, in addition to forfeiting their Regulation-Up or Regulation-Down capability payments, they will also forfeit all mileage-based charges and credits. In addition, SPP proposes to calculate and pay for excess mileage and to calculate and charge for unused mileage using the lesser of the actual mileage or instructed mileage to provide a market incentive for Resources to perform at their instructed mileage. These economic signals provide incentives for Resources to follow AGC dispatch instructions, consistent with the directives of Order No Capacity Payment Compliance As discussed above, Order No. 755 requires that RTOs compensate all cleared frequency regulation resources at a uniform, market-based (i.e., offer-based) capacity clearing price that includes the marginal resource s cross-product opportunity costs as calculated by the RTO and allows for inclusion of inter-temporal opportunity costs. 63 SPP s current compensation methodology for Regulation already complies with this requirement. Specifically, SPP accepts Offers for Regulation-Up and Regulation-Down, which are used to calculate the MCPs that are then used to compensate cleared Resources in both the Day-Ahead Market 64 and RTBM. 65 The co-optimization logic used in both the Day-Ahead Market and RTBM calculate MCPs for Operating Reserve that include lost opportunity costs incurred as a result of Operating Reserve Clearing, 66 thus See Order No. 755 at PP ( [T]he system operator needs to have the confidence that when a dispatch signal is sent, resources will respond to it as directed. This is best accomplished by providing resources with an economic incentive to follow dispatch signals. Therefore, we will require all RTOs and ISOs to account for frequency regulation resources accuracy in following the AGC dispatch signal when determining the performance payment compensation. ). Id. at PP 99, , 198. See Integrated Marketplace Tariff at Attachment AE (setting forth the methodology for calculating the Day-Ahead Regulation Amount based on Day- Ahead MCP). See id. at Attachment AE (setting forth the methodology for calculating the Real-Time Regulation Amount based on Real-Time MCP). See id. at Attachment AE 5.1.2(2)(d) & 6.2.2(5).

14 The Honorable Kimberly D. Bose June 21, 2013 Page 14 complying with the requirement to include RTO-calculated cross-product opportunity costs. Under SPP s current Integrated Marketplace Tariff, the Market Participant can include inter-temporal opportunity costs in its Offers. The SPP Market Monitoring Unit has the ability to review and analyze such Offers for potential market manipulation. Because SPP s current Integrated Marketplace Tariff already permits the inclusion of inter-temporal opportunity costs in Regulation offers, SPP is not proposing any additional changes in this filing. 3. Performance Payment Compliance As discussed above, Order No. 755 mandated that each RTO provide a uniform, market-based performance payment to each regulating resource, reflect[ing] the amount of work each resource performs in real-time and the accuracy with which each resource responds to the system operator s dispatch signal. 67 While the Commission afforded RTOs discretion to design their performance payment, it directed RTOs to propose the specific technical requirements and bidding parameters. 68 The Commission instructed that each resource s performance must be measured based on the absolute amount of regulation up and down it provides in response to the RTO s dispatch signal. 69 SPP proposes several revisions to comply with this requirement. As discussed above, SPP will compensate Resources based on the Expected Regulation-Up Mileage and Expected Regulation-Down Mileage, and then will credit or charge the Resource based on whether there is Excess Regulation-Up/-Down Mileage or Unused Regulation- Up/-Down Mileage in the RTBM. Thus, SPP proposes to adopt the following definitions in Attachment AE of the Tariff: 70 Defined Term Actual Regulation-Down Mileage Definition The sum of the absolute values of actual movements by a Resource with cleared Regulation-Down Service MW in response to Regulation Deployment instructions Order No. 755 at PP , 199. Id. at PP , 199. Id. at P 133. All definitions are included in Section 1.1 of Proposed Attachment AE, except as otherwise indicated.

15 The Honorable Kimberly D. Bose June 21, 2013 Page 15 Defined Term Actual Regulation-Up Mileage Excess Regulation-Down Mileage Excess Regulation-Up Mileage Expected Regulation- Down Mileage Expected Regulation-Up Mileage Instructed Regulation- Down Mileage Instructed Regulation-Up Mileage Definition The sum of the absolute values of actual movements by a Resource with cleared Regulation-Up Service MW in response to Regulation Deployment instructions. The amount by which Actual Regulation-Down Mileage exceeds Expected Regulation-Down Mileage except that, if Actual Regulation-Down Mileage is greater than or equal to Instructed Regulation-Down Mileage multiplied by a factor equal to one minus Regulation-Mileage Operating Tolerance, Excess Regulation-Down Mileage is equal to the amount by which Instructed Regulation-Down Mileage exceeds Expected Regulation-Down Mileage. 71 The amount by which Actual Regulation-Up Mileage exceeds Expected Regulation-Up Mileage except that, if Actual Regulation-Up Mileage is greater than or equal to Instructed Regulation-Up Mileage multiplied by a factor equal to one minus Regulation Mileage Operating Tolerance, Excess Regulation-Up Mileage is equal to the amount by which Instructed Regulation-Up Mileage exceeds Expected Regulation-Up Mileage. 72 The amount of Regulation-Down Service MW cleared multiplied by the Regulation-Down Mileage Factor. The amount of Regulation-Up Service MW cleared multiplied by the Regulation-Up Mileage Factor. The sum of the absolute values of instructed movements to a Resource with cleared Regulation-Down Service through Regulation Deployment instructions. The sum of the absolute values of instructed movements to a Resource with cleared Regulation-Up Service MW through Regulation Deployment instructions See Proposed Tariff at Attachment AE 8.6.2(2)(a)(v). See id. at Attachment AE 8.6.2(1)(a)(v).

16 The Honorable Kimberly D. Bose June 21, 2013 Page 16 Defined Term Regulation-Down Mileage Factor Regulation-Down Mileage Offer Definition A factor determined through historical Regulation Deployment analysis that represents the ratio of cleared Regulation-Down Service MW to the Instructed Regulation- Down Mileage. The Regulation-Down Mileage Factor shall initially be set equal to 1.0 and shall be updated periodically pursuant to the Market Protocols. The price at which a Regulation Qualified Resource or a Regulation-Down Qualified Resource has agreed to sell Expected Regulation-Down Mileage. Regulation-Down Service The provision of Actual Regulation-Down Mileage associated with cleared Regulation-Down Service MW in response to Regulation Deployment instructions. Regulation-Down Service Offer Regulation Mileage Operating Tolerance Regulation-Up Mileage Factor Regulation-Up Mileage Offer Regulation-Up Service The sum of (i) a Resource s Regulation-Down Mileage Offer multiplied by the Regulation-Down Mileage Factor and (ii) that Resource s Regulation-Down Offer. The allowable percentage deviation below a Resource s Instructed Regulation-Up Mileage and/or Instructed Regulation-Down Mileage over the Dispatch Interval where the Resource will settle based upon Instructed Regulation-Up Mileage and/or Instructed Regulation-Down Mileage versus Actual Regulation-Up and/or Actual Regulation-Down Mileage. Such percentage is set at 5%. A factor determined through historical Regulation Deployment analysis that represents the ratio of cleared Regulation-Up Service MW to the Instructed Regulation-Up Mileage. The Regulation-Up Mileage Factor shall initially be set equal to 1.0 and shall be updated periodically pursuant to the Market Protocols. The price at which a Regulation Qualified Resource or a Regulation-Up Qualified Resource has agreed to sell Expected Regulation-Up Mileage. The provision of Actual Regulation-Up Mileage associated with cleared Regulation-Up Service MW in response to Regulation Deployment instructions.

17 The Honorable Kimberly D. Bose June 21, 2013 Page 17 Defined Term Regulation-Up Service Offer Unused Regulation- Down Mileage Unused Regulation-Up Mileage Definition The sum of (i) a Resource s Regulation-Up Mileage Offer multiplied by the Regulation-Up Mileage Factor and (ii) that Resource s Regulation-Up Offer. The amount by which Expected Regulation-Down Mileage exceeds Actual Regulation-Down Mileage except that, if Actual Regulation-Down Mileage is greater than or equal to Instructed Regulation-Down Mileage multiplied by a factor equal to one minus Regulation Mileage Operating Tolerance, then Unused Regulation-Down Mileage is equal to the amount by which Expected Regulation-Down Mileage exceeds Instructed Regulation-Down Mileage. 73 The amount by which Expected Regulation-Up Mileage exceeds Actual Regulation-Up Mileage except that, if Actual Regulation-Up Mileage is greater than or equal to Instructed Regulation-Up Mileage multiplied by a factor equal to one minus Regulation Mileage Operating Tolerance, then Unused Regulation-Up Mileage is equal to the amount by which Expected Regulation-Up Mileage exceeds Instructed Regulation-Up Mileage. 74 The terms Actual Regulation-Up/-Down Mileage and Instructed Regulation-Up/- Down Mileage include the absolute value of all up and down movements, in compliance with the requirement that the performance payment be based on the measurement of the Resource s absolute amount of Regulation-Up and Regulation-Down provided. 75 The adoption of defined terms Regulation-Up Service and Regulation-Down Service incorporate both the capacity and mileage concepts required by Order No See id. at Attachment AE 8.6.2(2)(a)(iv). See id. at Attachment AE 8.6.2(1)(a)(iv). See Order No. 755 at P 133. Adopting these terms requires conforming changes throughout Attachment AE. See Proposed Tariff at Attachment AE 1.1 (Definition of Operating Reserve, Regulation Deployment, and Resource Offer ), , 3.5, 5.1.2, , , 5.1.3, 5.2.2, 6.1.2, , , 6.2.2, , 6.2.3, 6.3, 6.3.1, 6.4.2, , 8.5.2, 8.5.5, 8.5.6, 8.5.9, 8.6.2, 8.6.8, , ,

18 The Honorable Kimberly D. Bose June 21, 2013 Page 18 SPP also proposes to revise the definition of Market Clearing Price to include Regulation-Up Service, Regulation-Down Service, Expected Regulation-Up Mileage, and Expected Regulation-Down Mileage. 77 Additionally, SPP proposes to revise the definitions of Regulation-Down Qualified Resource, Regulation Qualified Resource, and Regulation-Up Qualified Resource to include the Regulation Mileage concept. 78 SPP also proposes to modify the Resource Offer parameters to include Regulation-Up Mileage and Regulation-Down Mileage Offers. 79 To ensure that all Resources providing Regulation are compensated at a uniform, market-based price, SPP has modified the Tariff to require calculation of MCPs for Regulation-Up Service and Regulation-Down Service (which are required in the current Integrated Marketplace design but are being modified to incorporate the Mileage component), and, for the RTBM, MCPs for Expected Regulation-Up Mileage and Expected Regulation-Down Mileage. 80 MCPs for Expected Regulation-Up Mileage and Expected Regulation-Down Mileage are equal to the highest Regulation Mileage Offer of all Resources economically cleared to provide Regulation-Up Service or Regulation- Down Service in a particular dispatch interval, multiplied by the Mileage Factor. 81 As discussed above, a Resource s performance payment is achieved through the existing Real-Time Regulation Service Amount mechanism, as modified by this filing. 82 The component of the RTBM payment or charge attributable to the Resource s Regulation performance payment is calculated based on the extent to which its Actual Regulation-Up Mileage or Regulation-Down Mileage (or corresponding Instructed Mileages) deviates from the Expected Regulation-Up Mileage or Regulation-Down Mileage, resulting in Excess Regulation Mileage or Unused Regulation Mileage. 83 The Unused Regulation-Up Mileage or Unused Regulation-Down Mileage charge is calculated by multiplying the Unused Regulation Mileage by the MCPs for Expected Regulation-Up Mileage or Expected Regulation-Down Mileage. 84 This calculation ensures that a Resource will not be overcompensated for its actual provision of See Proposed Tariff at Attachment AE 1.1 Definitions M. See id. at Attachment AE 1.1 Definitions R. See id. at Attachment AE 4.1(9). See id. at Attachment AE 3.5, 6.2.3, See id. at Attachment AE 8.3.4(3) & (4). See id. at Attachment AE See id. See id. at Attachment AE 8.6.2(1)(a)(iv) & 8.6.2(2)(a)(iv).

19 The Honorable Kimberly D. Bose June 21, 2013 Page 19 Regulation Mileage. Likewise, Excess Regulation Mileage credits (for both Up and Down) are calculated using the MCPs for Expected Regulation Mileage, and are paid to the Resource, ensuring that it is compensated for its full response to AGC dispatch instructions. 85 Additionally, SPP is proposing in this filing to incorporate mechanisms to provide Make Whole Payments to Resources that are charged for Unused Regulation-Up Mileage and Unused Regulation-Down Mileage based at the Expected Regulation-Up Mileage or Expected Regulation-Down Mileage MCP. Unless a Resource s Regulation Mileage Offers happen to set the MCP, charging the Resource for Unused Mileage will result in a loss to the Resource. The Make Whole Payment for Unused Regulation Mileage will compensate the Resource for the difference between its Mileage Offer and the settled amount charged at MCP, 86 which will ensure that Resources are not penalized for Unused Regulation Mileage. Finally, costs associated with compensating Resources providing Regulation-Up Service and Regulation-Down Service (including Regulation Mileage) are allocated based on Load Ratio Share, 87 including costs associated with the Unused Regulation Mileage Make Whole Payments. 88 SPP s proposed performance payment is similar to the method adopted in MISO, 89 in which a Resource is paid for Regulation capacity and an expected amount of Regulation Mileage, and then is credited or charged based on the actual Mileage used in real-time. SPP s proposal complies with the requirements of Order No. 755 to provide uniform, market-based compensation for regulation capacity and actual work performed by a regulation resource based on the accuracy of the resource in responding to AGC dispatch instruction, and therefore is just and reasonable and should be accepted by the Commission See id. at Attachment AE 8.6.2(1)(a)(v) & 8.6.2(2)(a)(v). See id. at Attachment AE & ; see also id. at Attachment AE 8.6.5(4)(b) (stating that an Asset Owner s Reliability Unit Commitment Make Whole Payment Revenue Amount includes the Unused Regulation Make Whole Payments calculated under Sections and of Attachment AE). See, e.g., id. at Attachment AE 8.5.5, 8.5.6, See id. at Attachment AE 8.6.8(1)(a) & (2)(a). See MISO Order at PP 7-13 (describing MISO s two-part payment), 25 (conditionally accepting MISO s proposal), 29 (conditionally accepting MISO s capacity payment), 33 (conditionally accepting MISO s performance payment based on Mileage).

20 The Honorable Kimberly D. Bose June 21, 2013 Page Accuracy Measurement In Order No. 755, the Commission required RTOs to account for a resource s accuracy in following AGC dispatch signals in determining the performance payment compensation and to propose the technical specifications for measuring accuracy. 90 The Commission did not mandate any particular method for measuring accuracy, but required that the same accuracy measurement method must apply to all frequency regulation resources. 91 As discussed above, to ensure Resource accuracy in following AGC dispatch signals, SPP proposes to modify its current Real-Time Regulation Non-Performance Amount charge for Resources that operate outside of their Operating Tolerance by including excess mileage payments and unused mileage charges, 92 and to calculate mileage based on the lesser of actual or instructed mileage, consistent with Order No However, because there could be some latency associated with receiving a Regulation AGC signal via four-second Setpoint Instruction, SPP proposes to adopt a Regulation Mileage Operating Tolerance of five-percent to allow for such latency. For example, if a Resource s instructed mileage was 100 MWs and its actual mileage was 96 MWs, then SPP will use 100 MWs to calculate the Resource s excess mileage or unused mileage. If the Resource s actual mileage was 94 MWs, then SPP would use 94 MWs to calculate the Resource s excess mileage or unused mileage. These revisions will ensure that the performance compensation received by a Resource takes the Resource s accuracy in responding to AGC signals into account, and that the accuracy measurement and payment mechanisms apply equally to all resources. 5. Market Power Mitigation In Order No. 755, the Commission noted that, given the additional performance payment requirements of Order No. 755, it is appropriate for RTOs to revisit their market power monitoring and mitigation provisions to ensure that they remain adequate to protect against market power abuse. 94 Accordingly, the Commission directed RTOs either to submit tariff provisions for market power mitigation methods appropriate to redesigned frequency regulation markets or to explain how their current mitigation Order No. 755 at PP , 200. Id. at PP , 200. See Proposed Tariff at Attachment AE See supra note 62 and accompanying text. Order No. 755 at P 136.

21 The Honorable Kimberly D. Bose June 21, 2013 Page 21 methods are sufficient to address market power concerns given the changes required by Order No SPP proposes several Tariff revisions to address potential market manipulation given the adoption of a two-part compensation method. Specifically, to prevent Market Participants from making artificially low capacity offers with artificially high mileage offers, SPP proposes to require that when a Regulation Offer (Up or Down) is negative, the corresponding Regulation Mileage Offer must equal zero. 96 SPP also proposes to revise the Offer Caps and Floors set forth in Section of Attachment AE to add Regulation-Up Mileage Offer and Regulation-Down Mileage Offer floors of $0/MW, 97 to prevent the submission of negative Regulation Mileage Offers. SPP also proposes to clarify that the existing Regulation Offer Cap of $500/MW applies both to Regulation-Up Service Offers and Regulation-Down Service Offers (which, by definition, include both the Regulation-Up/-Down capacity offer and the Regulation-Up/-Down Mileage Offer). 98 Additionally, SPP proposes to require that, if a Resource is cleared in the Day-Ahead Market for Regulation-Up Service or Regulation-Down Service, the Regulation-Up Mileage Offers and/or Regulation-Down Mileage Offers for the Resource submitted for use in the RTBM must be equal to the same Mileage Offers submitted by the Resource in its cleared Day-Ahead Offers. 99 The Commission accepted similar mitigation measures in MISO s Order No. 755 compliance filing. 100 Additionally, SPP has developed and approved through its stakeholder process 101 protocols for enhanced mitigation of Regulation mileage Offers based on SPP s current mitigated Regulation Offer provisions that are pending in the February 2013 Compliance Filing. 102 Specifically, SPP has adopted definitions of Mitigated Regulation-Down Id. See Proposed Tariff at Attachment AE 4.1(7). See id. at Attachment AE 4.1.1(7) & (8). See id. at Attachment AE 4.1.1(2) & (3). See id. at Attachment AE 4.1(1). MISO Order at P 47. See Southwest Power Pool, Inc., Board of Directors Minutes No. 151, page 134 of 1158 of PDF ( Marketplace Protocol Revision Request No. 102 ) (Apr. 30, 2013), SPP is in the process of incorporating these revisions into the Integrated Marketplace Protocols, which will be posted on the SPP website. See February 2013 Compliance Filing, Transmittal Letter at