February 25, 1998

The Honorable David P. Boergers
Acting Secretary
Federal Energy Regulatory Commission
888 First Street, N.E.
Washington, D.C. 20426

Re:	Pacific Gas and Electric Company, San Diego Gas & Electric Company and Southern California Edison Company, Docket Nos. EC96-19-___ and ER96-1663-___

Amendment No. 2 to the ISO Operating Agreement and Tariff, including the ISO Protocols

Scheduling Through Scheduling Coordinators

Dear Secretary Boergers:

Pursuant to Section 205 of the Federal Power Act (“FPA”), 16 U.S.C. §824d, the California Independent System Operator Corporation (“ISO”) respectfully submits the second of four contemplated amendments (“Amendment No. 2”) to the ISO Operating Agreement and Tariff (“ISO Tariff”), including the ISO Protocols.  Amendment No. 2 amends the ISO Tariff to create a new definition for the “ISO Control Area,” distinct from the “ISO Controlled Grid” and from any other “Control Area.”  It also makes certain consequential changes to various provisions in the ISO Tariff and ISO Protocols.
Amendment No. 2 clarifies what has from inception been a fundamental design requirement – that all parties operating within the “ISO Control Area” schedule with the ISO solely through the contractual framework and operational requirements of a Scheduling Coordinator.  This obligation will exist for all parties presently scheduling transactions into, out of, within, or through the Control Area, or across transmission facilities forming part of the ISO Controlled Grid by virtue of Entitlements but located outside the ISO Control Area.  All such transactions are ones for which the ISO will be responsible, including transactions pursuant to Existing Contracts.  Consequently, the ISO requests that Amendment No. 2 be accepted and made effective as of the ISO Operations Date and, as noted below, respectfully requests a waiver of the 60-day notice requirement.
Included with this submittal are:
•	the proposed Amendment No. 2 (providing only the revised excerpts from the ISO Tariff, including the ISO Protocols, blacklined to indicate changes) (Exhibit A); and
•	a notice suitable for publication in the Federal Register (hard copy (Exhibit B) and diskette).

I.	NOTICES
The following individuals should be placed on the Commission’s Official Service List for this submittal:
N. Beth Emery				         Fiona Woolf
Vice President and General Counsel		         Linda C. Ray
The California Independent System		         Bridget E.R. Shahan
  Operator Corporation		         Cameron McKenna LLP
151 Blue Ravine Road		         2000 Pennsylvania Ave., N.W.
Folsom, California  95630		         Suite 8550
Tele: 916-351-2334		         Washington, D.C. 20006
Fax:  916-351-2350		         Tele:  202-466-0060
			         Fax:   202-466-0077

II.	BACKGROUND
The ISO and the stakeholders have been engaged in an extraordinary level of effort to prepare for the ISO Operations Date.  As the Commission is aware, the ISO continues testing and preparing to initiate operations no later than March 31, 1998.  In addition, the ISO continues to confer with stakeholders over problems identified and anticipated for the start of ISO Operations.  Amendment No. 2 reflects the results of one aspect of these discussions.
The changes proposed in Amendment No. 2 involve clarifying language that reflects the intent of the ISO Tariff from inception.  Therefore, the ISO respectfully requests waiver of the filing requirements under Part 35 of the Commission’s rules.
Amendment No. 2 reflects changes to the ISO Tariff that the ISO has posted on its “Home Page” (“the ISO Tariff Compliance Posting”)  as required by the Commission's October 30 Order.  Pursuant to the Commission’s December 17 Order, the ISO must make a compliance filing of the ISO Tariff no later than 60 days after the ISO Operations Date.  It is the ISO Tariff Compliance Posting, not the Tariff filed with the Commission  August 15, 1997, against which the ISO has black-lined the changes filed today.
III.	THE NATURE OF AMENDMENT NO. 2

The ISO is filing amendments to a number of sections of the ISO Tariff, including the ISO Protocols and the pro forma Scheduling Coordinator Agreement, to clarify the distinction between the “ISO Controlled Grid” and the “ISO Control Area.”  These terms are not interchangeable, yet they are not precisely distinguished in the ISO Tariff.  In some instances, the terms are either not applied appropriately or are ambiguous as to applicability.  The ISO therefore proposes the addition of new defined terms in the ISO Tariff – “ISO Control Area” and “Existing Control Agreement” – along with certain consequential amendments to the ISO Tariff, including the ISO Protocols and pro forma Scheduling Coordinator Agreement.
These amendments are designed to eliminate any ambiguities and misunderstandings that may presently exist within the ISO Tariff and ISO Protocols as to the meaning and applicability of the terms “ISO Controlled Grid” and “ISO Control Area.”  This amendment will resolve several areas of misunderstanding regarding the obligations of Scheduling Coordinators with respect to schedules for transactions into, out of, within, or through the ISO Control Area, or across transmission facilities forming part of the ISO Controlled Grid by virtue of Entitlements but located outside the ISO Control Area.
A.	Definition of "ISO Control Area"

The ISO Tariff presently includes a generic definition for “Control Area” and it also, of course, contains a definition for “ISO.”  The problem arises when these two terms are used together to refer to the “ISO Control Area,” as an “implicitly defined” term.
The ISO Control Area is unlike any other Control Area in the North American Electric Reliability Council (“NERC”), in terms of the relationships that will exist between Scheduling Coordinators, the ISO, and other Control Areas.  The design of the California forward markets for Energy and Ancillary Services, and the reliable operation of the ISO Control Area in real-time, is founded on the premise that Generation and Demand within the ISO Control Area, as well as all interties with neighboring Control Areas, are to be scheduled and/or bid with the ISO through Scheduling Coordinators.
There is a further complication.  The ISO Tariff repeatedly uses the term “ISO Controlled Grid,” even in instances where the “ISO Control Area” is intended.  The ISO Controlled Grid is a subset of the actual systems that are under ISO control as the Control Area operator, and for which the ISO has reliability responsibilities pursuant to the NERC and WSCC requirements.  There are numerous entities – such as municipal utilities – which own transmission facilities within the ISO Control Area but have not yet indicated an intention to become parties to the Transmission Control Agreement.  The ISO’s responsibilities as Control Area operator, including arranging the provision of Regulation, Operating Reserves, Replacement Reserves, and other Reliability services, will inevitably extend to these entities.
Moreover, long established scheduling practices dictate that all interchange schedules between Control Areas must be submitted to and coordinated by the operators of the Control Areas (both inside and outside of California).  All Scheduling Coordinators will, therefore, require the assistance of the California ISO to schedule the use of interchange transmission capacity into, out of, or through the ISO Control Area.  Without a Scheduling Coordinator to submit the scheduled uses of transmission capacity into, out of, or through the ISO Control Area, whether across the ISO Controlled Grid (including transmission facilities forming part of the ISO Controlled Grid by virtue of Entitlements), or other facilities owned by others within the ISO Control Area, the power simply cannot be scheduled with the ISO and will not flow in accordance with NERC and WSCC accepted scheduling practices.
In other words, the implicit definition of “ISO Control Area” in the ISO Tariff does not reflect the unique features of the California structure.  To meet these concerns, the ISO proposes to add a new definition to the ISO Tariff for “ISO Control Area,” as follows:
The ISO electric power system (initially comprising the electric power systems previously operated as Control Areas by PG&E, SCE, and SDG&E, including, but not limited to, the facilities and Entitlements which represent the ISO Controlled Grid), for which the ISO has reliability responsibilities pursuant to NERC and WSCC requirements.  The ISO’s AGC scheme applies to this system, in order to:
i)	match, at all times, the power output of Scheduling Coordinators’ Generating Units within the ISO electric power system, plus the Energy imported by Scheduling Coordinators from entities located beyond the ISO’s points of interchange with adjoining Control Areas, minus Energy exported by Scheduling Coordinators to entities located beyond the ISO’s points of interchange with adjoining Control Areas, with Scheduling Coordinators’ Demand within the ISO electric power system;

ii)	maintain scheduled interchange with other Control Areas, within the limits of Good Utility Practice;

iii)	maintain the frequency of the ISO electric power system within reasonable limits in accordance with Good Utility Practice; and

iv)	provide sufficient generating capacity to maintain Operating Reserves in accordance with Good Utility Practice.

This proposed definition reflects the fact that the ISO Control Area encompasses all of the electric power system facilities within the electrical boundaries defined by the points of interchange with adjoining Control Areas, including, as a subset, those facilities and Entitlements that have been transferred to the control of the ISO as “ISO Controlled Grid” facilities.  It clarifies the important distinction between the “ISO Control Area” and the “ISO Controlled Grid.”  As the operator of the ISO Control Area, the ISO will be responsible for maintaining the safe and reliable operation of the electric power system that extends beyond the subset of ISO Controlled Grid facilities and Entitlements.
B.	Consequential Amendments

As noted above, the lack of an explicit definition for “ISO Control Area” and the incorrect use of “ISO Controlled Grid” when the references should have been to the “ISO Control Area,” has led to certain ambiguities in the ISO Tariff.  The ISO therefore proposes a number of consequential amendments to the ISO Tariff with respect to the usage of the new term “ISO Control Area” and the term “ISO Controlled Grid.”  The proposed amendments, as set out in the attached document, should serve to convey, more properly, the sense of several important concepts presently set forth in the ISO Tariff and at the heart of the ISO’s system structure.
1.	Compensation for Control Area Services

A significant consequential amendment is found in Section 8.3 of the ISO Tariff, relating to liability for the ISO’s Grid Management Charge (“GMC”).  The ISO respectfully submits that this clarification is at the heart of the protests the ISO expects to this filing.  By utilizing the new term “ISO Control Area” as well as “ISO Controlled Grid” in Section 8.3, it will be clear that the GMC is payable by all of the parties that benefit from the ISO’s exercise of its responsibilities as the operator of the ISO Control Area.  These responsibilities include the safe and reliable operation of the entire ISO Control Area, not just supporting the scheduling and/or bidding of Energy and Ancillary Services of all Scheduling Coordinators.
Such responsibilities, and the associated costs borne by the ISO, derive not only from the ISO's control of a subset of facilities and Entitlements transferred to it by Participating Transmission Owners (the “ISO Controlled Grid”) but, more broadly, from Scheduling Coordinators’ scheduling activities within and beyond the ISO Control Area, including scheduling activities pursuant to Existing Control Agreements, Existing Operating Agreements and Existing Contracts.  Control Area services result in costs to the ISO and significant benefits to users – benefits that will be enhanced by the consolidation of the three utilities’ Control Areas into a single Control Area covering virtually the entire state of California.
For example, one of the ISO’s primary responsibilities in operating the ISO Control Area is to ensure an adequate supply of Operating Reserves.  As the largest Control Area to be operating in the WSCC, the consequences of not adequately identifying, and having available, the necessary supply of Operating Reserves at all times can adversely affect the reliable operation of both the ISO Control Area and adjoining Control Areas throughout the WSCC.
Operating Reserves can either be self-provided or purchased from the ISO through its Ancillary Services auction.  In accordance with the ISO Tariff, and consistent with the ISO’s role as the ISO Control Area operator, all Ancillary Services, whether self-provided or purchased from the ISO, must be identified for, and available to, the ISO as resources that can be called upon in real-time to meet ISO Control Area requirements.  As such, any and all Ancillary Services necessary to satisfy minimum operating reliability criteria will be processed and evaluated by ISO personnel via the ISO’s telecommunications and computing infrastructure.  Since the ISO does not own generation, it must rely wholly on the reserves that are self-provided or acquired via the auction process.
Costs for Ancillary Services purchased from the ISO auction are included in the statement sent to the Scheduling Coordinator.  Without a requirement that all Schedules be submitted in the requisite form through a Scheduling Coordinator, the ISO would not have the information it needs to perform its Control Area operator responsibilities nor the necessary contractual relationship by which to charge for Ancillary Services.  Specifically, unless an entity acts through a Scheduling Coordinator, should such an entity fail to self-provide Ancillary Services or supply its share of Imbalance Energy, there would be no mechanism to capture those uses in the billing and settlement system, nor a contract path by which to seek payment.  Simply put – the ISO is not structured to deal with any entity other than through a Scheduling Coordinator with whom it has a contractual relationship, lines of communication, and mechanisms to bill and collect payment for use of services.
2.	Existing Control Agreements

As mentioned above, the Control Areas now operated by the Participating Transmission Owners include transmission facilities owned by third parties who are not currently proposing to transfer Operational Control of those facilities to the ISO and thereby become Participating Transmission Owners themselves.  The Participating Transmission Owners act as Control Area operators in relation to these facilities under various contractual arrangements.  In order to ensure that the ISO is able to fulfill its function as the Control Area operator for the new combined ISO Control Area, it is necessary that the scheduling and other Control Area functions currently exercised by the Participating Transmission Owners in respect of third parties’ facilities is transferred to the ISO.
A new definition of “Existing Control Agreement” has been added to the Tariff to describe these arrangements between Participating Transmission Owners and third party owners of transmission facilities in their Control Areas.  Under a new Section 3.3 of the Tariff, a Participating Transmission Owner that is a party to an Existing Control Agreement would be obliged to schedule (unless otherwise scheduled) all Energy and Ancillary Services on such transmission facilities with the ISO.  Under Section 3.3 of the Tariff the ISO may also request the Participating Transmission Owner to exercise its rights under the agreement as directed by the ISO to enable the ISO to fulfill its functions as Control Area operator.  To allow the Existing Control Agreement to be implemented, the ISO proposes to amend the ISO Tariff with several new provisions with a commitment which is similar in spirit to the ISO’s obligations to honor Existing Contracts brought by Participating Transmission Owners.
3.	Amendment to Pro-Forma Agreement

A few minor amendments are also needed to the pro forma Scheduling Coordinator Agreement set out in Appendix B of the Tariff consequent on the amendments to the body of the Tariff.  These involve changing references to “ISO Controlled Grid” to read “ISO Control Area.”  These changes clarify that the scheduling of all Energy and Ancillary Services in the ISO Control Area is subject to the provisions of the ISO Tariff and Protocols.

IV.	MOTION TO ACCEPT FOR FILING AND TO CONSOLIDATE WITH THE GRID MANAGEMENT CHARGE PROCEEDING
The ISO expects this filing to be protested by a number of parties, but as noted above, respectfully submits that the heart of the issue is applicability of the GMC.  There is simply no way for the ISO to operate without parties communicating Schedules to the ISO in the form required of Scheduling Coordinators.  For that reason, the ISO respectfully requests that the amendment be accepted and permitted to go into effect on the ISO Operations Date, with the sole issue of the applicability of the GMC to Energy not touching the ISO Controlled Grid to be set for hearing and consolidated with the hearing in the ISO’s GMC proceeding.
The need for these clarifying amendments became apparent as the result of discussions with Pacific Gas and Electric Co. (“PG&E”) and the Transmission Agency of Northern California (“TANC”).  PG&E is currently the Control Area Operator with responsibility for scheduling the use of the California-Oregon Transmission Project (“COTP”) including TANC’s ownership interest in the COTP.  On the ISO Operations Date, PG&E will no longer be a Control Area operator.  Rather, the ISO will perform those functions in support of PG&E’s continuing obligations under an Existing Control Agreement (i.e., the “Coordinated Operations Agreement”).  The ISO staff requested that the parties designate a Scheduling Coordinator to provide schedules to the ISO as part of the ISO’s role in providing Control Area functions currently handled by PG&E with respect to the COTP.
Both PG&E and TANC have taken the position with ISO staff that the COTP arrangement is not an “Existing Contract” under the ISO Tariff because it involves the furnishing by PG&E of Control Area operator functions, rather than transmission of energy over PG&E-owned transmission lines.  As a result, both parties maintain that the ISO is required to accept schedules from TANC members, even if submitted in a form and manner different from the design of the ISO’s computer systems, and that the ISO may not require TANC members or any other COTP participants to use a Scheduling Coordinator.  PG&E also denies any obligation to serve as TANC’s Scheduling Coordinator for the COTP Energy that does not flow on the ISO Controlled Grid.  Both parties point to language in the ISO Tariff to support their interpretation that the “Coordinated Operations Agreement” is not an Existing Contract.  The ISO response to PG&E and TANC has been clear and consistent.  The ISO has never interpreted the term “Existing Contract” so narrowly but is seeking to clarify the definition by adding the new defined term “Existing Control Agreement.”
The ISO’s system design has from inception required a Scheduling Coordinator to Schedule all Energy and Ancillary Services in the ISO Control Area, whether or not the ISO Controlled Grid is used.  The ISO Governing Board was briefed on this issue and on the efforts to resolve the dispute at teleconference meetings on December 22 and 29 and at the regularly scheduled meeting on January 21.
The implications are significant.  Because all interchange schedules between Control Areas (such as scheduling the use of COTP) must be submitted to and coordinated by the operators of the Control Areas (both inside and outside of California), any entity, including those with rights to schedule the use of COTP, will require the assistance of the California ISO to schedule the use of interchange transmission capacity into, out of, and through the ISO Control Area.  Without an entity agreeing to communicate under the conditions applicable to a Scheduling Coordinator (using ISO templates and operating requirements), the ISO will be unable to allow the COTP participant Energy to flow into California.  Moreover, the ISO must have a contractual relationship on which to base charges for Imbalance Energy and Ancillary Services.  Without one, a COTP participant would be able to under-schedule intentionally, shifting costs to Scheduling Coordinators and their customers.  This is why the ISO has insisted that COTP participant Energy and Ancillary Services be scheduled through a Scheduling Coordinator.
As noted above, the ISO respectfully submits that the primary dispute is not whether it has a right to require a Scheduling Coordinator for COTP or other entities’ Energy and Ancillary Services.  Rather, this dispute is fundamentally an economic one.  Specifically, by requiring COTP Energy and Ancillary Services to be scheduled through a Scheduling Coordinator, the Scheduling Coordinator for COTP will trigger a Grid Management Charge.  To the extent PG&E is concerned that it would be unable to flow the GMC through to TANC or its members, one could assume it would seek to avoid being the Scheduling Coordinator.  To the extent TANC or any of its members believes it is entitled to Control Area services from PG&E under the Coordinated Operations Agreement, one could assume it would be unwilling to assume independent cost responsibilities to the ISO.
The obligations of PG&E to TANC and vice versa is not a matter the ISO can determine.  The reliance by PG&E and TANC on the use of the term “ISO Controlled Grid” as somehow indicating an intent by the ISO to limit the need for Scheduling Coordinators to those wheeling power over the lines transferred to the ISO’s Operational Control reflects a misunderstanding of the nature of the ISO Control Area, the GMC, and the cost of the services it reflects.
The GMC is not a charge for transmission access, transmission service, wheeling, Congestion, or Ancillary Services.  Instead, the GMC reflects the ISO's costs of administering these functions in support of all scheduling and bidding of Energy and Ancillary Services into, out of, within, or through the ISO Control Area or across transmission facilities forming part of the ISO Controlled Grid by virtue of Entitlements, but located outside the ISO Control Area, including transactions pursuant to Existing Contracts, Existing Operating Agreements, and Existing Control Agreements (i.e., the ISO’s start-up and development costs and the costs of ongoing operation and maintenance, including financing costs).
Whether or not it touches the ISO Controlled Grid, Schedules and bids for Energy and Ancillary Services into, out of, within, or through the ISO Control Area or across transmission facilities forming part of the ISO Controlled Grid by virtue of Entitlements but located outside the ISO Control Area, including transactions pursuant to Existing Contracts, Existing Operating Agreements, and Existing Control Agreements requires management by the Control Area operator – which will be the ISO.  Therefore, irrespective of whether the ISO Controlled Grid is relied upon in either the scheduling or bidding of Energy or Ancillary Services, and whether scheduled within, into, or out of the ISO Control Area, the ISO’s infrastructure is necessarily relied upon in the broader context of ISO Control Area operations.  Accordingly, all parties in the ISO Control Area that benefit from these operations should be liable for their respective portions of the GMC, in accordance with the decision of the ISO Governing Board.
The ISO Governing Board voted 14 to 7 at its January 21 regularly-scheduled meeting to direct the filing of an amendment to clarify its intent in establishing the ISO structure – that all Schedules handled by the ISO for Energy and Ancillary Services scheduled into, within, out of, or through the ISO Control Area, or across transmission facilities forming part of the ISO Controlled Grid by virtue of Entitlements, but located outside the ISO Control Area, be scheduled with the ISO solely through a Scheduling Coordinator.
Contemplating protests from affected parties, the ISO Board also agreed that ISO staff should seek consolidation of the issue of applicability of the GMC with the ISO’s Grid Management Charge proceeding, Docket No. ER98-211-000.  The issue of whether and to what extent the ISO Grid Management Charge is to apply to Existing Contract volumes is already set for hearing in that proceeding.  This submittal is inextricably intertwined with the issues already set for hearing in that docket.  The ISO recognizes that this may cause some burden upon some of the stakeholders wishing to contest Amendment No. 2, but this burden would be minor, in that the hearing schedule established for the Grid Management Charge has been set so that little activity takes place until after the ISO Operations Date.  Moreover, all of the parties likely to protest this filing are already parties in that proceeding.
V.	REQUEST FOR WAIVER OF THE 60-DAY FILING REQUIREMENT
Pursuant to Section 35.11 of the Commission’s regulations, the ISO respectfully moves for waiver of the 60-day notice requirement to allow Amendment No. 2 to go into effect as of ISO Operations Date.  Good cause exists for the Commission to grant the ISO a waiver of the 60-day notice requirement.  Amendment No. 2 is merely a clarification of language in the ISO Tariff to conform to the ISO system design, which requires that the ISO communicate with and through Scheduling Coordinators.  The ISO is aware that these changes may be controversial as described more fully above.  The ISO respectfully submits, however, that the primary controversy is not over whether the ISO requires communications to be through a Scheduling Coordinator, but rather whether the Energy Scheduled should result in a Grid Management Charge and, perhaps, whether the Existing Contract holders should pay the ISO’s rates for non-self-provided Ancillary Services and Imbalance Energy.
Allowing this amendment to become effective, with any charges subject to refund, provides ample protection to any party protesting this amendment.  Moreover, the interested parties have already sought clarification that the issue of applicability of the Grid Management Charge to Energy scheduled in the ISO Control Area should be litigated in the Grid Management Charge Case.
The ISO is making this filing at the earliest practicable date.  As noted above, this issue first arose in mid-December, and the ISO has been working diligently, but unsuccessfully, to reach a settlement with affected parties.  The ISO staff required Board action to make this filing, which it obtained at the first regularly-scheduled Board meeting after the issue first arose – January 21.  The staff has worked diligently since then to complete a review of the ISO Tariff to identify and make the necessary changes.  As the number of changed pages attached demonstrates, the pervasiveness of the changes – albeit for implementation of a simple concept – required substantial and careful review.
The ISO will, concurrently with this filing, take steps to ensure that all parties are quickly informed of this Amendment No. 2 by posting it on the ISO’s “Home Page” and faxing to all parties on the service list a notice that the filing may be obtained from the Web site if a party wishes to review it in advance of receiving its service copy.

VI.	CONCLUSION
Wherefore, for the foregoing reasons, the California Independent System Operator Corporation respectfully requests that the Commission waive the 60-day notice requirement, accept Amendment No. 2 to the ISO Operating Agreement and Tariff, including the ISO Protocols, for filing and allow it to become effective as of the ISO Operations Date, and set any disputed matters for hearing in the ISO’s Grid Management Charge proceeding, Docket No. ER98-211-000.

Respectfully submitted,

_____________________
Linda C. Ray
Counsel for 
The California Independent System Operator Corporation

CERTIFICATE OF SERVICE
I hereby certify I that have this day served the foregoing submittal upon each person designated on the Official Service List compiled by the Secretary in Docket Nos. EC96-19-003 and ER96-1663-003, in accordance with the requirements of Rule 2010 of the Commission’s Rules of Practice and Procedure, 18 C.F.R. § 385.2010.
Dated at Washington, D.C., this 25th day of February, 1998.

_____________________
Harry Dupre