March 3, 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. 4 to the ISO Operating Agreement and Tariff, Including the ISO Protocols
	Relating to Inter-Scheduling Coordinator Trades, a Gaming Issue, Other Matters
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”) submits the fourth of five contemplated amendments (“Amendment No. 4”) to the ISO Operating Agreement and Tariff (“ISO Tariff”), including the ISO Protocols.  Amendment No. 4 involves the following matters: 
(1)	a mechanism, as requested by the Market Participants, to resolve mismatches in Inter-Scheduling Coordinator Trades;
(2)	a mechanism, developed with the input and support of the Market Participants, to allow Scheduling Coordinators to buy back and sell back Ancillary Services in the Hour-Ahead Market;
(3)	a clarification in the allocation of Replacement Reserves under varying conditions in the Day-Ahead and Hour-Ahead Markets; 
(4)	amendments to conform the ISO Tariff provisions on Black Start and Voltage Support to contractual agreements between the ISO and providers of Black Start and Voltage Support; 
(5)	clarification of the payments process for Reliability Must-Run Contracts pursuant to Section 5.2.7 of the ISO Tariff and amendments to the calculation of Reliability Must-Run payments in Appendix H to the Settlement and Billing Protocol to conform these to the Reliability Must-Run Contracts;
(6)	clarifications to certain definitions for the Imbalance Energy calculation;
(7)	a simplification of the calculation of the Usage Charge and provision for reductions in the Usage Charge revenues of Participating TOs;
(8)	amendments necessary to reflect the limitations of a temporary manual workaround for assessing Wheeling Access Charges in certain cases until a recently discovered software variance can be corrected; 
(9)	amendments to various default Usage Charge provisions to address gaming opportunities; and
(10)	an amendment to delete a previously over-looked reference to an obligation eliminated in November of 1997 regarding the obligation of the ISO to provide Scheduling Coordinators with Generation Meter Multipliers at the same time that Final Hour-Ahead Schedules are published.
These amendments must be made effective by the ISO Operations Date, to ensure that the ISO operates in accordance with the terms of the ISO Tariff, including the ISO Protocols, and to facilitate smooth market operations.  Consequently, the ISO requests that Amendment No. 4 be accepted and made effective as of the ISO Operations Date.  As noted below, the ISO respectfully requests a waiver of the 60-day notice requirement.
Included with this submittal are the original and six copies each of this letter and the following:
•	the proposed Amendment No. 4 (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 (Exhibit B).
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 as they are identified in anticipation of the start of ISO operations.
Amendment No. 4 in part reflects the results of one aspect of that preparation, namely the ISO’s systematic review of its software capabilities against the provisions of the ISO Tariff, including the ISO Protocols. Amendment No. 4 also in part reflects the results of certain of the stakeholder discussions.
The changes proposed in Amendment No. 4 largely involve clarifying language.  Therefore, the ISO respectfully requests waiver of the filing requirements under Part 35 of the Commission’s rules.
Amendment No. 4 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 ISO Tariff filed with the Commission August 15, 1997, against which the ISO has blacklined the changes filed today.
III.	THE NATURE OF AMENDMENT NO. 4
A.	Inter-Scheduling Coordinator Trades
The ISO proposes to change the ISO Tariff, including the Scheduling Protocol and the Schedules and Bids Protocol, to address concerns that have arisen during market simulation testing.  This issue has been discussed with the Scheduling Coordinator User Group (“SCUG”) in a series of meetings and conference calls.  The ISO Governing Board ("Board") was first briefed on the issue at its January 21, 1998 meeting, at which time it delegated to ISO management the authority to file any necessary Tariff amendments to implement a process acceptable to the Scheduling Coordinators (or "SCs" in the following example).
The problem arises because of delays being experienced in the scheduling process.  The ISO scheduling process for the Day-Ahead Market assumes the following:

10:00 a.m.	SC submits Initial Preferred Schedule
10:05 a.m.	ISO closes Preferred Schedule (validated)
11:00 a.m.	ISO posts Suggested Adjusted Schedule
12:00 p.m.	SC submits Revised Preferred Schedule	
12:05 p.m.	ISO closes Revised Preferred Schedule (validated)
1:00 p.m.	ISO posts Final Schedule
5:00 p.m.	ISO completes Schedule check outs with WSCC Control Areas.

	In other words, the design assumes that Balanced Schedules are submitted without any errors and the system is thus able to validate them almost instantaneously.  The schedule then assumes the ISO will run the Congestion Management software and within an hour, provide, if Congestion exists, suggested revisions to each Scheduling Coordinator. 
Each Scheduling Coordinator has an hour to revise its Schedule and submit a new Balanced Schedule.  Based on those Schedules, a final Congestion Management run is made and Final Schedules posted.  This must be accomplished close to the scheduled times to enable the ISO to perform check-outs with neighboring Control Areas. 
During testing, the time required to complete and post initial Preferred Schedules has been significantly longer than anticipated.  A significant contributor to the delay has been the mismatches between the parties involved in Inter-Scheduling Coordinator Trades.  In other words, for a single buy-sell between Scheduling Coordinators, the ISO has noted on a regular basis that the seller will report a sale of, for example, 100 MW, but the buyer will report a purchase of only 90 MW or the seller will report a sale at 90 MW and the buyer of 100 MW, even though both Scheduling Coordinators have submitted Balanced Schedules.
The ISO must contact both Scheduling Coordinators to resolve the difference before either Scheduling Coordinator's Schedule can be validated.  If the difference is not resolved, both Schedules are rejected.  Because the ISO's software will not allow it to run the market unless there are Schedules representing at least 90% of the Load, and because many Inter-Scheduling Coordinator Trades are with the PX, which currently represents a majority of the Load, mismatches in Inter-Scheduling Coordinator Trades can in some cases literally stop the market.
While the times by which Schedules are validated are improving, they remain sufficiently delayed to raise serious questions as to whether the ISO will be able to accommodate Revised Preferred Schedules.  While suspending the Congestion iteration process would be one way to address the issue as the learning curve improves, the Scheduling Coordinators have expressed strong opposition to that step because of the economic impact to them of not being able to adjust Schedules to avoid Congestion Usage Charges.
With the concurrence of the Scheduling Coordinators, the ISO is proposing to implement a new procedure to resolve these mismatches when the parties themselves are unable to do so.  The ISO anticipates that, as Scheduling Coordinators become more experienced, the need for the ISO to resolve mismatches will diminish.  
This procedure is limited to the Day-Ahead Market.  It cannot be implemented in the Hour-Ahead Market due to insufficient time.
For the Day-Ahead Market, once Preferred Schedules are submitted, the ISO will run the validation process.  If an Inter-Scheduling Coordinator Trade does not match, either due to quantity or location errors, the ISO will give the Scheduling Coordinators involved in the trade approximately one half-hour to resolve the discrepancies and submit modified Preferred Schedules.  At the time the ISO notifies them of the mismatch the ISO will confirm to each Scheduling Coordinator who the other Scheduling Coordinator involved in the trade is and the nature of the mismatch.  
Only the Scheduling Coordinators involved in the mismatch will be allowed to modify their Preferred Schedules or Revised Schedules.  The only modification permitted will be for the Scheduling Coordinators to match their Inter-Scheduling Coordinator Trade and then balance their individual Preferred Schedules or Revised Schedules.  
After the one half-hour has elapsed and modified Preferred Schedules or Revised Schedules have been submitted, the ISO will re-run the validation.  If one or more Scheduling Coordinators are still not matched, the ISO will implement the following procedure: 
1.	The ISO will determine which Inter-Scheduling Coordinator Trades do not match.  If the only disagreement is over the quantity of the trade, the ISO will adjust one of the Schedules to match the lower of the scheduled quantities for the trade (i.e., if one Scheduling Coordinator (“SC1”) is selling 100 MW to another Scheduling Coordinator (“SC2”) and SC2 is buying 50 MW from SC1, then the trade would be reduced to 50 MW).  However, if the Scheduling Coordinator with the higher Energy quantity has only Inter-Scheduling Coordinator Trades within its Schedule, then the other Scheduling Coordinator’s Schedule will be increased to match the higher Energy quantity traded (i.e., based on the previous example, if SC1 only has Inter-Scheduling Coordinator Trades then SC2’s trade would be increased to 100 MW from 50 MW).
2.	If there is a dispute over whether the Scheduling Coordinators agreed to any trade at all, or a dispute over the Zone at which it was designated to have occurred, the ISO will remove the disputed trade from the Schedules in which it appears.
3.	As a consequence of these adjustments, the Scheduling Coordinators whose Schedules have been adjusted no longer will have a Balanced Schedule.  The ISO will adjust various resources in each such Scheduling Coordinator’s portfolio based on the type of resource in the following priority: Demands, exports, imports, Generation, other Inter-Scheduling Coordinator Trades.  The adjustments will be based on the available Adjustment Bids. 
4.	The ISO will record the Adjustment Bids that were utilized for this purpose to eliminate the possibility of confusion and remove them from consideration in real time procedures such as Intra-Zonal Congestion.
The ISO will consider the continued need for this process as the market develops.  Over time, the ISO expects Scheduling Coordinators will gain sufficient experience in the market to avoid mismatches.  Moreover, based on discussions with the Scheduling Coordinators, the ISO believes that markets will themselves, in the longer term, develop a structure to resolve mismatches.
B.	Buy Back And Sell Back Of Ancillary Services In The Hour-Ahead Market
The ISO’s software (but not the ISO Tariff) would allow Scheduling Coordinators to “buy back” in the Hour-Ahead Market Regulation, Spinning Reserve, Non-Spinning Reserve or Replacement Reserve that the Scheduling Coordinator had sold to the ISO in the Day-Ahead Market.  The price for this “buy back” would be the Hour-Ahead Market Clearing Price for the Ancillary Service concerned.  The ISO wishes to offer Scheduling Coordinators this additional option, which will also add flexibility to the ISO’s Ancillary Services market.  Accordingly the ISO proposes revisions to Section 2.5 of the ISO Tariff and Appendix C to the Settlement and Billing Protocol to enable the payments to be made that reflect this change.  Amendments are required to Section 2.5.10.2 of the ISO Tariff, section 5 of the Schedules and Bids Protocol and section 9 of the Scheduling Protocol to provide for the buy-back procedures to be recognized in the scheduling process.
In addition to the buy-back discussed above, the ISO’s software (but not the ISO Tariff) allows a Scheduling Coordinator to “sell back” in the Hour-Ahead Market Regulation, Spinning Reserve, Non-Spinning Reserve or Replacement Reserve if its obligation for any of these Ancillary Services for which it has not self-provided is reduced in the Hour-Ahead Market as compared with the Day-Ahead Market.  This means that the Scheduling Coordinator can sell back to the ISO in the Hour-Ahead Market any of these Ancillary Services in excess of its non-self-provided obligation in the Hour-Ahead Market (although the Scheduling Coordinator will still be charged by the ISO for any amount owed from the Day-Ahead Market).  This is subject to the important proviso that there are buyers in the Hour-Ahead Market for the excess, i.e., that there are Scheduling Coordinators in the Hour-Ahead Market whose non-self-provided obligation has increased as compared with their obligation in the Day-Ahead Market.  The price for any sell back would be the hourly user rate for the Hour-Ahead Market for the Ancillary Service concerned.
The ISO wishes to be able to offer Scheduling Coordinators this option as well, which will also add flexibility to the ISO’s Ancillary Services Market.  Amendments are required to Section 2.5.21 of the ISO Tariff to provide for this in principle.  In addition, Sections 2.5.20.2 and 2.5.28 of the ISO Tariff and Appendix C to the Settlement and Billing Protocol require amendment to allow the payments to be made that reflect this change.
The ISO is aware that the Commission has limited the ability of certain Scheduling Coordinators to sell Ancillary Services at market-based rates. Although these “buy-backs” and “sell-backs” will be at market-based rates for all Scheduling Coordinators, the approach would not necessarily violate the limits placed on cost-of-service regulated sellers.  First, the buy-back is a purchase.  A cost-of-service regulated Scheduling Coordinator may be limited in its ability to take advantage of the sell-back option. 
C.	Allocation of Replacement Reserves Under Varying Congestion Conditions in the Day-Ahead and Hour-Ahead Markets
The ISO’s Settlement system aggregates the total cost for the supply of Replacement Reserve in the Day-Ahead and Hour-Ahead Markets and allocates this cost to Scheduling Coordinators based on allocation formulas set out in the ISO Tariff, including the ISO Protocols.  In the absence of Congestion, the Settlement system allocates these Charges across the entire ISO Control Area.  If there is Congestion in the Day-Ahead and Hour-Ahead Markets, the Settlement software allocates properly such charges on a Zonal basis. 
However, if there is no Congestion in the Day-Ahead Market but there is Congestion in the Hour-Ahead Market (or vice versa) the ISO’s Settlement software allocates charges for Replacement Reserve on a uniform basis (either on a Zonal basis or across the entire Control Area, but not both).
Accordingly the ISO proposes to apply the following rule.  If there is Congestion in the Day-Ahead Market, the ISO will allocate the Replacement Reserve capacity Charges (both Dispatched and Un-Dispatched) on a Zonal basis.  If there is no Congestion in the Day-Ahead Market, the ISO is going to allocate the Replacement Reserve capacity Charges on an ISO Control Area-wide basis (irrespective of whether there is Congestion in the Hour-Ahead Market or not). 
The ISO considers this rule to reflect the fairest methodology for allocating Replacement Reserve capacity Charges, given the software constraints, because it expects Congestion to be identified in most cases in the Day-Ahead Market.  The ISO therefore proposes to amend Sections 2.5.28.4 and 11.2.4.1 of the ISO Tariff and section C2.2.3 of Appendix C and section D2.3 of Appendix D to the Settlement and Billing Protocol accordingly. 
D.	Black Start And Voltage Support
The principal purpose of the amendments to the Black Start and Voltage Support sections in the ISO Tariff is to conform the ISO Tariff wording to the arrangements reached by the ISO and providers of Black Start and Voltage Support.  These arrangements are the product of extensive negotiations and, because of time pressures, the exact details and ramifications of the final outcome could not be reflected accurately in the ISO Tariff.  It should be noted, however, that these arrangements are already reflected in the ISO Settlement and Billing Protocol (Appendix G is of particular relevance to these issues), and the proposed amendments seek to conform the ISO Tariff provisions to the contractual arrangements between the parties (as already reflected in the ISO Settlement and Billing Protocol).
The proposed amendments to the Black Start provisions: (a) clarify that Black Start services may be provided to the ISO either by Black Start Generators or by owners of Reliability Must-Run Units; (b) clarify that providers of Black Start service currently will not receive any payment for Black Start capacity but will receive payment for Energy output in the event that they are called upon to provide Black Start Energy; and (c) clarify that Black Start Generators will be paid directly by the ISO for their services whereas owners of Reliability Must-Run Units will be paid by the ISO through their Scheduling Coordinators.
The proposed amendments to Voltage Support provisions: (a) clarify that long term Voltage Support is provided to the ISO by owners of Reliability Must-Run Units; (b) clarify that payments for long term Voltage Support to owners of Reliability Must-Run Units will be made by the ISO through their Scheduling Coordinators; (c) clarify the formula for calculating payments for short term additional Voltage Support; and (d) provide for the ISO to recover charges for Voltage Support on a Zonal basis rather than on a Control Area basis (which amendment will allow the charges to more accurately reflect the localized character of Voltage Support).
E.	Reliability Must-Run
These changes clarify a potentially confusing provision in the ISO Tariff regarding the relationship between the payments received by the ISO from Scheduling Coordinators and the amounts paid by Participating TOs in relation to Reliability Must-Run services.  The Reliability Must-Run Contracts provide that the ISO will pay the net difference between amounts received by owners of Reliability Must-Run Units from the market (their Scheduling Coordinators) and the amounts owed under the Reliability Must-Run Contract.  The proposed deletion in Section 5.2.7 of the ISO Tariff eliminates any inference that netting applies only to Ancillary Services revenues.
Additionally, Appendix H to the Settlement and Billing Protocol is being amended to include two payment items included in the Reliability Must-Run Contracts but not in the equations in Appendix H.  Specifically, certain equations in Appendix H are being amended to include separate items for credits to be made against amounts due to Reliability Must-Run Unit owners from their Scheduling Coordinators for Energy delivered pursuant to an ISO Dispatch notice issued in real time.  Other changes correct typographical errors.
F.	Imbalance Energy Calculation 
The purpose of these amendments is to clarify the definitions of the terms for actual exports (“Ea “) and actual imports (“Ia “) which are used in the calculation of Imbalance Energy.  Similarly, the definitions of metered imports (“Ik”), metered exports (“Ek “) and metered Generation (“Gk") used in the calculation of Unaccounted for Energy are clarified to show that they relate to metered (as opposed to scheduled) imports, exports and Generation respectively.
G.	Calculation Of Usage Charge And Methodology For Applying DebitsTo Participating TOs
The purpose of the changes to the Usage Charge sections in the ISO Tariff and Settlement and Billing Protocol is twofold.  First, the equations for the calculation of the Usage Charge (and rebates) to Scheduling Coordinators can be expressed in a simpler and more accurate form.  The changes in sections E 2.1 and E 2.2 of the Settlement and Billing Protocol reflect this.
Second, under normal operating conditions, the ISO will remit the net Usage Charge revenues collected from Scheduling Coordinators for each Inter-Zonal Interface based on Participating TOs’ ownership of the interface.  However, the description of payments to be made to Participating TOs under Section 7.3.1.6 of the ISO Tariff and in Appendix E, Usage Charge Computation, to the Settlement and Billing Protocol requires further clarification.  Thus, this amendment includes changes to both referenced provisions. 
In the course of testing the ISO’s software, it became apparent that, under certain conditions, the net Usage Charge revenues payable to Participating TOs may be reduced and as a result Participating TOs may incur a charge.  
ISO management discussed this issue with the Participating TOs and with the Scheduling Coordinators.  Both groups advised the ISO management that during the development of the ISO system, stakeholders had agreed that the Participating TOs should not incur such charges.  The ISO management reported the matter to the ISO Board at the regularly-scheduled meeting on January 21 (and the night before in the Grid Reliability and Operations Committee meeting).  
The Board directed ISO management to examine possible options to eliminate the Participating TO debits, including by way of manual work-arounds, until the software can be modified.  Unfortunately, a feasible manual work-around does not exist at this time, and will not exist as of the ISO Operations Date.  The ISO has taken action to ensure that the software will be modified as soon as possible to eliminate charges to Participating TOs.  However, until such time as the software has been modified and tested, Participating TOs will be debited under the conditions described below.
Calculating the net Usage Charge revenues under Section 7.3.1.6 of the ISO Tariff involves offsetting Usage Charges payable by Scheduling Coordinators scheduling in the direction of the Congestion from those scheduling in the direction opposite to Congestion (thereby helping relieve Congestion across the particular Inter-Zonal Interface).  Further clarification is needed to cover instances in which transmission capability is reduced for the Hour-Ahead Market after the Day-Ahead Market has closed and Scheduling Coordinators have been charged for Congestion.
When Available Transfer Capacity in a Congested Inter-Zonal Interface is reduced after the issuance of Final Schedules in the Day-Ahead Market and, as a result, Congestion conditions constrain Final Day-Ahead Schedules, then Congestion algorithms will produce debits (charges) to Participating TOs.  This condition can occur as a result of: 
•	Participating TOs instructing the ISO to reduce interface limits based on operating conditions, after the issuance of Final Day-Ahead Schedules; or

•	Unscheduled transmission system outages (i.e. Forced Outages) that limit a given Inter-Zonal Interface transfer capacity after the ISO's issuance of Final Day-Ahead Schedules.

Such debits (charges) to Participating TOs will be apportioned to those Scheduling Coordinators whose Final Day-Ahead Schedules were reduced and will be a deduction in the calculation of such Participating TOs’ net entitlement to Usage Charges for Hour-Ahead Congestion.
The proposed amendments reflect that Participating TOs’ debits in the Hour-Ahead Market will be limited to circumstances in which Congestion is found and transfer limits are reduced.  If Inter-Zonal Interface restrictions remain, the following Day-Ahead Market will not result in further debits to Participating TOs.
This concept is reflected in the proposed amendments to Section 7.3.1.6 of the ISO Tariff and Appendix E to the Settlement and Billing Protocol.
H.	Wheeling Access Charges
Recent software testing and applications review has uncovered a major variance in software performance from the ISO’s system design.  Specifically, the ISO Settlements software calculates and allocates the Wheeling Access Charges using a methodology that is different from the methodology used in the ISO Tariff.
This variance was only recently discovered.  It is not possible to implement a change to the ISO software in time for it to be effective as of the ISO Operations Date.  The only options are to delay the ISO Operations Date or attempt a manual work-around.  This issue was presented to the Grid Reliability and Operations Committee (the "Committee") at its meeting on February 23, 1998.  The Committee was informed of the variance and the expected time to implement the correction.  ISO management requested authorization to prepare and file necessary ISO Tariff amendments to reflect the suspension of charges and any other temporary amendments to the ISO Tariff required to reflect actual functionality, pending correction of the software variance.  The Committee recommended and the Board authorized, at the February 24, 1998 meeting, the filing of necessary amendments, as contained in this section.
Although this issue was only identified recently, management has been able to identify means to calculate Wheeling Access Charges manually.  But absent an ISO Tariff change, the ISO will not have sufficient means to obtain information about Wheeling transactions at Bulk Supply Points or other points of interconnection between the ISO Controlled Grid and the transmission system of a Non-Participating TO to make the manual calculations. 
Accordingly, the ISO proposes to obtain scheduling information for such transactions from the relevant Scheduling Coordinators and settle Wheeling charges and payments for such transactions on the basis of the information received.  This requires adding a new Section 7.1.4.4 to the ISO Tariff that obligates Scheduling Coordinators to provide the ISO with information on Wheeling Out or Wheeling Through transactions.  The ISO will use such information to settle Wheeling Access charges until the software variance is corrected.
The ISO proposes an automatic termination provision for Section 7.1.4.4 of the ISO Tariff with seven (7) days notice posted on the WEnet.  This termination provision is set out in Sections 7.1.4.4.1, 7.1.4.4.2 and 7.1.4.4.3 of the ISO Tariff.  This automatic termination is necessary to eliminate at the earliest possible time the additional burden being placed on Scheduling Coordinators until the ISO software variance is corrected. 
I.	Default Usage Charge
The ISO Tariff requires a default Usage Charge to be applied in the event that the Adjustment Bids received by the ISO are insufficient to alleviate all Inter-Zonal Congestion.  Specifically, Section 7.3.1.3 of the ISO Tariff states: 
Default Usage Charge.  If inadequate or unusable Adjustment Bids have been submitted to the ISO to enable the ISO’s Congestion Management to schedule Inter-Zonal Interface capacity on an economic basis, then the ISO will assume a decremental bid of zero and an incremental bid equal to the highest Hourly Ex Post Price for the Zones on either side of the Inter-Zonal Interface for the relevant Settlement Period.

	The software cannot, however, calculate the default Usage Charge as the Tariff contemplates.  Rather, the software currently specifies that the default Usage Charges on interfaces with residual Congestion are derived from an assumed decremental bid of zero and an assumed incremental bid that is the maximum of the previous day’s prices in the Imbalance Market. 

The ISO considered modifying the Tariff to conform to the software.  However, a gaming concern has been identified regarding the design of Congestion Management with respect to the PX procedure for establishing Zonal Market Clearing Prices.  The problem occurs if there are insufficient Adjustment Bids to enable the ISO to clear Inter-Zonal Congestion. 
The example below will illustrate the problem.

PX Final Zonal
Price=$170

PX Final Zonal
Price=$200

Initial PX Day Ahead MCP=$25
ISO Default Usage Charge=$30

 1800 MW flow limit

Initial: G1=1000
Final:  G1=900

Initial: D1=2100
Final:  D1=2050

Initial: G2=1000
Final:  G2=900

Initial: G3=100
Final:  G3=250

A

B

G1:  1000MW Energy and No Adjustment Bid
G2:  1000MW Energy and No Adjustment Bid
D1:  Load, with No Adjustment Bid
G3:  100MW Energy, and Adjustment bids of 
      100-150 @ $30/MWh and
      150-200 @ $200/MWh

In the example, the Day-Ahead PX Market Clearing Price is initially set at $25.  Generator #1 and #2 each are selected to run in the Day-Ahead Energy auction at 1000MW, and neither submits Adjustment Bids.  Generator #3 is a 300MW Unit that is selected for 100MW Energy output, and has submitted Adjustment Bids as indicated.  The default Usage Charge is the previous Trading Day’s highest Imbalance Energy Market Clearing Price of $30 and is entered in the program prior to execution.  When Congestion Management runs, it will exercise both the Adjustment Bids for Generator #3 and raise Generator #3 output to 200MW.
This is not sufficient to relieve Congestion.  Therefore, the program will allocate additional reductions pro rata and produce the final schedules listed above.  The default Usage Charge will be set at $30.
The problem occurs as the PX attempts to set Zonal Market Clearing Prices based on the ISO default Usage Charge.  By definition, the PX Zonal prices must differ by the amount of the Usage Charge.  This could mean that the Market Clearing Price in Zone A is $0/MWh and the Price in Zone B is $30/MWh.  But Generator #3 had an Adjustment Bid of $200.  The PX must therefore raise the Zonal price in Zone B to $200.  This means by definition that the Zonal price in Zone A must now be $30 less or $170.  Essentially, this will provide enormous incentive for Generators #1 and #2 never to submit Adjustment Bids, because periodically, they will receive a windfall based upon the artificially high PX Market Clearing Price.
Many gaming scenarios could be demonstrated in addition to the problem outlined here.  This problem has already surfaced during testing, and could be present immediately at the ISO Operations Date.  The potential economic consequences are significant as can be calculated from the example above.
In addition to the potential for gaming, the ISO is concerned about the adverse effect on reliable operations.  System security and stability require prices sufficient to assure that adequate resources are attracted to the imbalance market.
This issue, the potential for gaming it creates, and the need for corrective action was first discussed with the Executive Committee of the Board at a special teleconference on February 17, 1998 and more extensively at the Grid Reliability and Operations Committee meeting February 23.  From February 17 through the end of the month, numerous discussions were held with Scheduling Coordinators to determine how to minimize the gaming and reliability risks while at the same time limiting the adverse economic impacts on Scheduling Coordinators who are unable to submit Adjustment Bids to avoid Usage Charges.  At the February 24 Board meeting, the Board directed management to file a Tariff amendment providing that the ISO would set the default Usage Charge at a price no higher than $500/MWh and that management would, in consultation with the Scheduling Coordinators and the ISO’s economic consultants, set the default Usage Charge.  Based on those discussions, the ISO is proposing two related changes as follows:
First, as noted, the ISO proposes to amend the ISO Tariff to set default Usage Charges initially at $250/MWh.  The ISO will retain the ability to move the figure incrementally or decrementally, but no higher than $500/MWh, by giving seven days’ notice published on the WEnet and the ISO’s “Home Page."  Necessarily this price is initially a matter of judgment, but after start-up further studies can be used to justify a lower or higher price if the evidence from accumulated experience warrants a change.  The ISO is committed to reduce this price if there is reasonable assurance that the Day-Ahead Market for Adjustment Bids works smoothly and that a lower price suffices.  (Conversely, if the market appears to be clearing near the selected price, the ISO needs the flexibility to increase the default Usage Charge.)
Second, the ISO will partially address Scheduling Coordinator concerns by permitting Adjustment Bids on all loads, not just those which can be physically curtailed.  This second amendment allows Scheduling Coordinators relying solely on Inter-Scheduling Coordinator Trades to avoid the default Usage Charge by relying on the Imbalance Market. 
J.	Generation Meter Multiplier Will Not Be Published with the Final Hour-Ahead Schedules
In November, several ISO Tariff provisions were removed or modified to reflect limitations in the software’s ability to produce Generation Meter Multipliers calculations.  Inadvertently, one of the provisions intended for deletion remained in the ISO Tariff.  This provision, set forth in ISO Tariff Section 2.2.13.3.1.5, states that the ISO is to provide Scheduling Coordinators with “Final Generation Meter Multipliers for each Generation location and Scheduling Point in accordance with Section 7.4.2.”  This amendment, consistent with the ISO’s previous deletions, removes that remaining incorrect reference to the ISO’s schedule for providing GMMs.
IV.	EFFECTIVE DATE
The ISO respectfully requests that the Commission accept for filing Amendment No. 4 and allow it to become effective as of the ISO Operations Date.
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 for Amendment No. 4 and moves for waiver of the 60-day notice requirement for the termination of Section 7.1.4.4 of the ISO Tariff with seven (7) days notice posted on the WEnet.  Good cause exists for the Commission to grant a waiver to the ISO of the 60-day notice requirements.  Amendment No. 4 resolves for Market Participants certain problems involving a wide variety of functions.  These proposals must be allowed to become effective on the ISO Operations Date in order to ensure that some of the most crucial activities under the ISO Tariff, including the ISO Protocols, are optimally structured at the initiation of operations.  If the proposed amendments are not allowed to become effective on the ISO Operations Date, Market Participants will have unnecessary problems.  Several of the amendments, particularly those related to Settlements, clarify the wording of the ISO Tariff, including the Protocols, and will avoid potential confusion or disputes.
The ISO is making this filing at the earliest practicable date.  These issues have only recently been discovered, and the ISO staff, in working to find solutions to each issue, have consulted with the affected parties.  Moreover, by making this Amendment No. 4 effective as of the ISO Operations Date, all parties will have advance notice of effectiveness, because the Commission's December 23, 1997 order requires the ISO to provide the Commission and the parties 15 days’ prior notice of the ISO Operations Date.
The ISO will, concurrently with this filing, take steps to ensure that all parties are quickly informed of this Amendment No. 4 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 requirements, accept Amendment No. 4 to the ISO Operating Agreement and ISO Tariff, including the ISO Protocols, for filing and allow it to become effective as of the ISO Operations Date and grant such other relief as is requested herein.
	Respectfully submitted,

	______________________
	Fiona Woolf
	Linda C. Ray
	Bridget E.R. Shahan
	Counsel for The California
	Independent System Operator
	Corporation 

CERTIFICATE OF SERVICE
I hereby certify that I 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 3rd day of March, 1998.

	________________________
Harry Dupre

Notice Suitable for Publication in the Federal Register

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

NOTICE OF FILING
Take notice that on March 3, 1998, the California Independent System Operator Corporation (ISO) filed for Commission acceptance in this docket, pursuant to Section 205 of the Federal Power Act, an application to amend the ISO Tariff, including the ISO Protocols, and a motion for waiver of the 60-day notice requirement.  The ISO requests that the proposed amendments be made effective as of the ISO Operations Date.
The ISO states that Amendment No. 4 would provide (1) a mechanism to resolve mismatches in Inter-Scheduling Coordinator Trades; (2) a mechanism to allow Scheduling Coordinators to buy back and sell back Ancillary Services in the Hour-Ahead Market; (3) a clarification providing for the use of Day-Ahead Market Clearing Prices to allocate Replacement Reserves; (4) amendments to conform the ISO Tariff provisions on Black Start and Voltage Support to contractual agreements between the ISO and providers of Black Start and Voltage Support; (5) clarification of the payments process for Reliability Must-Run Contracts pursuant to Section 5.2.7 of the ISO Tariff; (6) clarifications to definitions for the Imbalance Energy calculation; (7) a simplification of the calculation of the Usage Charge relating to Participating TO debits; (8) amendments necessary to reflect the limitations of a temporary manual workaround for assessing Wheeling Access Charges until a recently discovered software variance can be corrected; (9) amendments to various default Usage Charge provisions to address gaming opportunities; and (10) deletion of the requirement that the ISO publish the Hour-Ahead GMMs.  The ISO states that the proposed amendments are necessary for the initial operations of the ISO.
The ISO additionally requests that the Commission allow an automatic termination, upon seven (7) days notice, of proposed Section 7.1.4.4 of the ISO Tariff. 
Any person desiring to be heard or to protest said filing should file a petition to intervene or protest with the Federal Energy Regulatory Commission, 888 First Street, N.E., Washington, D.C.  20426, in accordance with 18 C.F.R. §§ 385.212 and 385.207.  All such petitions or protests should be filed on or before _________.  Protests will be considered by the Commission in determining the appropriate action to be taken, but will not serve to make protestants parties to the proceeding.  Any person wishing to become a party must file a petition to intervene.  Copies of this application are on file with the Commission and available for public inspection.