Proposed Treatment of Alternative Capacity Resources for the MISO Module E Tariff Update

1. Proposed Treatment of Alternative Capacity Resources for the MISO Module E Tariff Update Mike Shields DTE Energy November 20, 2007

2. Introductory Concepts • Module E – Resource Adequacy Requirements: • Module E section of MISO intended to define the resource requirements needed to ensure long term reliability • Alternative Capacity Resource Definition: • Defined in MISO tariff as “Behind-the-meter (BTM) generation or Interruptible Load that satisfies the criteria to be counted toward state or Regional Reliability Organization resource adequacy standards” • For this discussion all types of “Interruptible Load programs” are generically referred to as “Demand Response Resources” (DRRs) • Purpose for Module E discussion: • Define minimum standards required for Alternative Capacity Resources to qualify in meeting a Load Serving Entities (LSE) Resource Adequacy requirements (RAR) • Note that other sections of the MISO tariff define how Demand Response Resources can qualify and participate in the: • Ancillary Services Market • Emergency Demand Response Schedule - resources that are utilized by MISO will get either the higher of their offer price or the LMP • MISO’s Day-Ahead and Real-Time Energy markets as price sensitive demand offers • Included in this presentation are the concepts (as of 11/12/07) resulting from discussions within the MISO Demand Response Working Group, the MISO Supply Adequacy Working Group, and the OMS Resource Adequacy Working Group 2

3. Overview of Basic Principles • Load/Capacity Treatment for Resource Adequacy Requirements (RAR) • Alternative Capacity Resources (ACRs) should qualify to receive credit either as a load modifier or as the equivalent of a capacity resource, to be defined by the LSE at the time of registration • ACRs must register their load reduction capability as part of the RAR registration process – are not allowed to only show MISO reduced level of peak load • Designation as Network Resource: • Alternative Capacity Resources MAY be specified to be a Designated Network Resource (DNR) as defined by the MISO tariff, but are not REQUIRED to be a DNR • Even if registered as a DNR, do not have to meet the DNR requirements to “MUST-OFFER” into the MISO Day-Ahead and Real-Time Energy Markets (avoids certain issues with the use of existing “legacy” DRR programs established under State Retail Tariffs) • ACRs that receive RAR credit MUST be available for use during a MISO Energy Emergency, as defined under the MISO Emergency Operating Procedures 3

4. Overview of Basic Principles(continued) • It is important for Module E to define the minimum qualifications for ANY DRR program to receive RAR credit in a non-discriminatory manner • The qualification requirements must be strict enough to ensure that DRRs can be relied upon, but not so strict as to disadvantage DRRs as compared to generation • Minimum requirements defined at high level – much of the detail is to be developed within a MISO Business Practices Manual • “The Transmission Provider shall develop procedures for accrediting, testing, validating, measuring, and verifying all Demand Response Resources” . . . and . . . “shall take into account any applicable State regulatory or other non-jurisdictional entities requirements regarding duration, frequency, and notification processes” for the DRR programs. 4

5. Minimum Requirements for DRRs to get RAR Credit • DRR must be equal to or greater than 100kW (a grouping of smaller resources may qualify in meeting this standard) • The 100kW level is consistent with the size criteria used in other RTOs • Grouping smaller resources together to meet these defined requirements is acceptable • DRR must be available to be scheduled for load reduction with no more than 12 hours advisory notice • MISO unlikely to be able to provide notice/schedule prior to completion of the Day-Ahead and Forward Reliability Assessment Commitment (RAC) model runs • DRR should be able to ramp down to meet targeted load reduction level in no more than 2 hours when provided schedule by Transmission Provider • Once the targeted level of load reduction is achieved, resource must be able to maintain the target level for at least 4 continuous hours • The DRR must be capable of being interrupted at least 5 times during any planning year for which RAR credit is given • For PJM the requirements are currently that the DRR resource be able to maintain the targeted reduction level for at least 6 continuous hours, and must be capable of interrupted at least 10 times during the planning year • MISO agreed to perform an analysis based on the use of MISO wide load shapes to determine if higher values for these criteria might also appropriate for the MISO tariff 5

6. Minimum Requirements for DRRs to get RAR Credit(continued) • A DRR resource receiving RAR credit must be a resource that would have otherwise been on line within the next 24 hour period (exceptions are made for facilities down for periodic maintenance) • This provision is intended to ensure RAR credit is being given to a resource still in normal operation, and not for some facility that has shut down either indefinably or for an extended period of time for economic reasons • Voluntary DRR programs (i.e., programs in which curtailment in an Energy Emergency is an option and not a requirement) will NOT qualify for RAR credit • RAR is intended to improve the overall reliability of the MISO footprint. Voluntary DRR programs may be useful in other aspects of the MISO market, but should not be counted upon from a reliability perspective. Denial of RAR credit does not affect qualification and participation in MISO’s energy and ancillary services markets. 6

7. Minimum Requirements for DRRs to get RAR Credit(continued) • There can only be one entity claiming the DRR RAR credit associated with the load reduction capability of any specific end-use customer • This is analogous to the prohibition on double-counting the same generation resource. This may be of particular concern should third party entities sign up customers already on existing retail interruptible rate programs. This concern could be a major reliability issue in the event that these resources are called upon during an Energy Emergency. • While DRR resources may make price sensitive offers into the MISO Day-Ahead or Real Time Energy markets, to receive RAR credit, these resources must meet all the other requirements specified above, AND must have provisions that allow them to be interrupted during MISO declared Capacity or Energy Emergency regardless of the projected or real time energy market LMPs. • The intent here is to prevent a DRR resource receiving RAR credit from offering in a very high (up to $3500/MWh) offer price to protect that resource from being interrupted • This is of particular concern in the current MISO market environment where DRRs and certain non-dispatchable peaking units are not able to set the market LMPs due to MISO model limitations 7

8. Behind-the-Meter Generation • Two Categories of BTM Generation • BTM generation interconnected under MISO Procedures and Agreements • BTM generation Interconnected under State Regulatory Procedures and Agreements • Primary difference is that in the latter category, BTM generation can only be committed for dispatch by MISO during Energy Emergencies (and thus qualify to receive RAR credit) if allowed by State law and regulations • MISO is to develop procedures to support the commitment and dispatch of BTM generation • If available, BTM Generation receiving RAR credit will be committed by MISO during declared Energy Emergencies prior to the use of operating reserves to meet the energy balance 8

9. Proposed Penalty Provisions for Alternative Capacity Resources • Do not anticipate having the same level of Independent Market Monitor oversight for Alternative Capacity Resources that exists for generating resources • This could be of particular concerns should “physical withholding” or similar types of issues arise during Energy Emergencies for Alternative Capacity Resources that receive RAR credit • Proposed Penalties have two parts • The same financial penalties will occur that will apply under the proposed Emergency Demand Response tariff Schedule – conceptually those load serving entities who had to pay a higher price because an Alternative Capacity Resource does not show up when called upon by MISO will be “kept whole” financially and the incremental cost will be assessed to the deficient resource • MISO will conduct an investigation (with the Load Serving Entity claiming RAR credit) as to the reason the Alternative Capacity Resource was not available, and may disqualify that resource from receiving future RAR credit as appropriate • In the event of a second instance (with at least a 24 hour separation) the resource does not show up when called upon, that resource will automatically be disqualified from receiving future RAR credit • A number of “protections” have been built into the tariff language to avoid penalizing a Alternative Capacity Resource that is unavailable for legitimate reasons. These include: • Resource unavailable for maintenance reasons • Resource previously reduced load for economic or local reliability reasons • Amount of expected load reduction not achieved due to improper temperature-adjusted expectation • Resource unavailable for reasons of force majeure 9

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11. Biography 11