March 31, 1998

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

Re: 	The California System Independent Operator Corporation, Docket Nos. EC96-19-___ and ER96-1663-___

Amendment No. 7 to the ISO Operating Agreement and Tariff, including the ISO Protocols

Relating to Transmission Priority for Reliability Must-Run Generation and Existing Contracts, Adjustment Bids, 
Energy Bids and Reliability Must-Run Charges.

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 for filing an amendment (“Amendment No. 7”) to the ISO Operating Agreement and Tariff, including the ISO Protocols (“ISO Tariff”).   Amendment No. 7, if accepted for filing by the Commission, would accomplish the following objectives:
•	re-propose a number of changes that reflect Commission-authorized priority of Reliability Must-Run Generation and Existing Contracts in Congestion Management;   
•	impose a temporary rule precluding certain Adjustment Bids -- those applicable to Dispatchable Loads and exports; 
•	impose a temporary rule to minimize further software problems with the balancing Energy software (the “Balancing Energy and Ex Post Price” or “BEEP” software); and 
•	clarify wording relating to Reliability Must-Run charges.
To ensure that the ISO and the stakeholders operate in accordance with the terms of the ISO Tariff, including the ISO Protocols, the ISO requests that Amendment No. 7 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:
•	proposed Amendment No. 7 (providing only the revised excerpts from the ISO Tariff, including the ISO Protocols, black-lined to indicate changes from the December 23, 1997 ISO Tariff posting) (Attachment A); and
•	a notice suitable for publication in the Federal Register (hard copy (Attachment 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, its stakeholders and the Commission have been engaged in an extraordinary level of effort to prepare for the ISO Operations Date.  As the Commission is aware, the ISO has continued testing and will initiate operations today, March 31, 1998.  This included adding an additional two days of uncoupled market simulation testing (when the market software is not used to dispatch the system) and two days of coupled testing (when the system is operated in real-time using market and dispatch software).  These tests were concluded last weekend.  They were added to the schedule to allow the ISO to evaluate the efficacy of software changes made as late as March 24.  In addition, the ISO has continued to confer with stakeholders over problems identified and anticipated for the start of ISO operations, principally through daily conference calls with any Scheduling Coordinator wishing to be included and the Task Force -- representatives of the five Chief Executive Officers whose reliability certificates were filed yesterday.
To the extent any change is considered a change to any charge made under the ISO Tariff, the ISO respectfully requests waiver of the filing requirements under Part 35 of the Commission’s rules.
Amendment No. 7 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.  It is the ISO Tariff Compliance Posting, not the Tariff filed with the Commission August 15, 1997, against which the ISO has blacklined the changes filed today.  The ISO intends to post a new, consolidated ISO Tariff on its Home Page.  It will incorporate all of the Amendments not rejected by the Commission.  Pursuant to the Commission’s December 17 Order, the ISO will also make a compliance filing of the ISO Tariff with the Commission no later than 60 days after the ISO Operations Date.  
III.	THE NATURE OF AMENDMENT NO. 7
The several changes to the ISO Tariff, including the ISO Protocols, are summarized in this part III.  Items A and D discuss certain long-term measures.  Items B and C describe temporary rules necessary to open the markets pending software corrections.
A.	Transmission Priorities for Reliability Must-Run Generation and Existing Contracts
The ISO is proposing amendments to the Schedules and Bids Protocol (“SBP”) and the Scheduling Protocol (“SP”) that initially were proposed as part of Amendment No. 3.  Amendment No. 3 principally related to changes in the software to accommodate the ISO Governing Board’s direction that the ISO give Eligible Regulatory Must-Take and Eligible Regulatory Must-Run Generation transmission priority.  The Commission rejected Amendment No. 3 on March 25 on the basis of concerns relating to this proposed priority.
The changes the ISO proposes here, in this Amendment No. 7, describe the manner in which the ISO intends to provide transmission priorities to Reliability Must-Run Generation and Existing Contract rights.  Giving these two types of resources priority is wholly consistent with the Commission’s orders; in fact, the software changes regarding Existing Contracts reflected in the Protocol provisions are consistent with the Commission’s October 30 Order. 
The priority afforded to Reliability Must-Run Generation and Existing Contract rights in the event of Congestion Management will be secured by the Scheduling Coordinator flagging the resource type and submitting Adjustment Bids for Existing Contracts, within assigned ranges and for Reliability Must-Run Generation, at the prescribed value.  This process is described in detail in the proposed language in the two Protocols.  These Adjustment Bids, in combination with the flag, will ensure that the ISO’s Congestion Management algorithm will not curtail Reliability Must-Run Generation until all other uses (both new firm uses and Existing Contract rights) of transmission have been curtailed and will protect Existing Contracts rights as follows:
•	First, economic resources and trades, which have been allocated new firm use transmission service, that submitted Adjustment Bids within the normal range will be curtailed. 
•	Second, schedules that do not have Adjustment Bids and are not Reliability Must-Run Generation, which have been allocated new firm use transmission service, will be curtailed (to zero if necessary on a pro-rata basis).  This category will include Eligible Regulatory Must-Run and Eligible Regulatory Must-Take Generation.
•	Third, any Existing Contract uses (if and to the extent necessary) will be curtailed.  
•	Finally, curtailments of Reliability Must-Run Generation, which have been allocated new firm use transmission service, will be implemented on a pro-rata basis unless otherwise required in instructions received from Participating Transmission Owners. 
•	B.	Temporary Rule Limiting Adjustment Bids Applicable to Dispatchable Loads and Exports
As the Commission is aware, the ISO has continued to test its newly-developed systems and procedures in preparing for the ISO Operations Date.  During the ISO's most recent coupled tests on March 27 and 28, an analysis of questionable prices in certain hours based on the results of running Congestion Management software (“CONG”) revealed a problem with Adjustment Bids associated with Dispatchable Loads and exports.
The ISO has identified a software design flaw relating to the use of incremental Adjustment Bids for Dispatchable Loads and exports available for managing Congestion on a given Inter-Zonal Interface.  As noted above, the problems associated with incremental bids for exports and Dispatchable Loads was not found until the second coupled test.  In both the first and second coupled tests, it was clear that CONG was taking incremental bids for exports and Dispatchable Loads into account.  However, during the second coupled test, the ISO employed a comparative analysis of Adjustment Bids to quantify the effectiveness of incremental versus decremental Adjustment Bids on Generators, Dispatchable Loads, imports, and exports.  From this comparative analysis, it was determined that CONG was not properly implementing incremental export Adjustment Bids to counter-flow power across Congested paths.  Therefore, the degree of Congestion relief, and the resulting transmission prices for Congested paths, was found to be in error.  Removing the incremental export Adjustment Bids in the analysis produced accurate CONG results.  The same was found to be true for incremental Dispatchable Load Adjustment Bids.
Creating a temporary rule precluding Scheduling Coordinators from submitting incremental Adjustment Bids for exports and Dispatchable Loads will allow CONG to produce accurate Congestion Management solutions.  This is only a temporary measure to be taken by the ISO until the software can be corrected so that all Adjustment Bids are properly treated.  
The primary effect on the market of not allowing these incremental Adjustment Bids will be to diminish the ISO's effectiveness in counter-flowing power across constrained paths to relieve Congestion.  The types of transactions that will not be allowed under the temporary rule are as follows:
•	increases in Load on the unconstrained side of a path in combination with corresponding increases in Generation on the constrained side of the path, thereby creating a counter-flow across the path, will not be allowed due to the inability to accept incremental Adjustment Bids for Dispatchable Load; and
•	incremental export Adjustment Bids for a path that is constrained in the import direction would also create counter-flows across the constrained path, relieving Congestion.  Such increased exports will not be available to mitigate Congestion under the temporary rule.
Because, on an interim basis, Dispatchable Loads and exports will not be used to relieve Congestion, there could be some effect on the level of the Usage Charge for Congested Inter-Zonal Interfaces.  There are, however, measures that Market Participants may use to mitigate this temporary limitation.  One such strategy would be to submit decremental bids on imports, which would effectively substitute for the prohibited incremental bid on exports.  The ISO is taking steps to inform Market Participants of the counter measures available to them.
The ISO is pursuing a software modification with the highest of priorities.  The ISO expects that the software will be modified, tested, and implemented, and the limitation removed by May 1998.
Therefore, the ISO proposes to establish a temporary rule regarding Adjustment Bids for Dispatchable Loads and exports.  This rule, to be included in a temporary Section 27 of the ISO Tariff, will allow only decremental Adjustment Bids associated with Dispatchable Loads and exports (i.e., Scheduling Coordinators cannot submit incremental Adjustment Bids for Dispatchable Loads or exports).
C.	Temporary Rule Disqualifying Certain Energy Bids
The ISO is proposing a temporary rule affecting the calculation of the Ex Post Prices.  Both the two-week coupled run simulation and the subsequent two-day coupled simulation on March 27 and 28 have generated several unusually high balancing Energy prices.  In brief, the balancing Energy software (“BEEP”) is calculating prices based on assumptions that are not true – that each bid BEEP directs the operator to Dispatch is in fact dispatched by the operator.  The ISO’s proposed temporary rule allows BEEP to set prices more nearly equal to the bids actually used.
The solution, which is, in effect, a price cap, will remain in place until changes are made to the BEEP software to enable BEEP to calculate the Ex Post Prices based on resources actually dispatched by the operator, rather than on the resources BEEP directs the operator to Dispatch.  The necessary software change is expected in about 60 days.
To understand the issue, a brief recap of the more lengthy discussion from Amendment No. 6 may be useful.  First, the artificially high prices can be traced primarily to the following factors:
•	the inability of ISO dispatchers to contact all the resources instructed by BEEP for Dispatch (which the ISO has discovered is still not possible, even with the expanded 10-minute period in Amendment No. 6);
•	ramp rate limits reducing the available capacity and available decremental adjustments in any 10-minute period; and
•	the calculation of Ex Post Prices based on BEEP output rather than on the cost of those resources actually contacted by the ISO operators in response to BEEP instructions.
These factors can, in periods of high imbalance, result in BEEP progressing through the merit order stack of bids to the higher price segments before actually having used many of the lower-priced available bid segments.  In certain low load periods and during morning and evening ramps, it is not unusual for BEEP to march to the highest bids in the stack for that hour.  For example, in one hour sampled, BEEP called on the last three bids in the stack -- at the $2400/MWh level -- when the next lowest bids were $72/MWh.  In fact, resources at half that price were available and these were the only ones called upon by the ISO’s operator.
When the ISO filed Amendment No. 6, it believed that the BEEP calculation, after making software modifications, would not be significantly different from the market clearing price that would have been derived from BEEP considering only resources actually dispatched.  However, the experience in the two-day coupled run demonstrates that the problem remains significant.  The ISO has done very rough calculations and determined that the market impact of BEEP calculating the market clearing price based on these very high bids could run into the tens of millions of dollars or higher, depending on the price cap used.
1.	Criteria for Possible Solutions
The ISO’s Market Surveillance Unit, working with the Task Force, looked at a variety of possible solutions.  In evaluating options, the following criteria were used:
•	ability to establish the BEEP price based on the resources actually instructed,
•	ease of operator action,
•	ability to correct off-line any operator errors recognized after the end of the operating hour,
•	ability to establish a clear and objective set of procedures for operators to follow,
•	ability to eliminate extreme BEEP Interval Ex Post Prices that clearly would not be reached except for interim deficiencies in current operating procedures and corresponding software, and
•	ability to mitigate excessive progression through the BEEP merit order stack of bids.
2.	Proposed Solution
As discussed, the problems with BEEP were described in detail in Amendment No. 6.  One of the modifications in Amendment No. 6, specifically the new definition of “BEEP Interval Ex Post Prices,” provides a mechanism for the ISO to deem bids “ineligible.”  That definition allows the operator to eliminate resources from the price calculation that the operator knew could not respond to a Dispatch instruction.  The proposed solution in this Amendment No. 7 for the persistent artificially high BEEP prices is to utilize this authority (and the software implementing it) to “disqualify” bids above a specified level.  Because the ISO wishes to have discretion to set the cap from day to day, based on an evaluation of the market effect of the price, it is proposing a temporary ISO Tariff section setting forth the specific criteria and procedure the ISO will use.  
Before the start of the operating hour, the ISO operator will review a merit order list of the bids available for that hour to detect any bids in excess of the applicable cap.  Since the Supplemental Energy market closes 45 minutes before the hour, there will be sufficient time to produce and review such a list using the existing operator interface screens.  In the first BEEP Interval of the hour, resources that exceed the bid cap will be eliminated using an existing tagging procedure available on the BEEP operating screens.  The tags will remain in effect for the entire hour without requiring further operator intervention.  This procedure has been tested and found feasible.
The ISO proposes an initial price limit of $125/MWh for Energy bids evaluated in BEEP.  This amount is higher than the respective costs of all resources within the ISO Control Area and close to the top of the range of cost of any resource.  The ISO does not expect this amount to cause any shortage of bids in the market.  The ISO considered a $250/MWh limit, but based on preliminary calculations, has concluded that the higher limit would risk imposing substantial additional costs on the market.  The ISO proposes to change the limit as necessary, for the next Trading Day, based on the recommendation of the Market Surveillance Unit.  The ISO will notify Market Participants of the applicable price level either through WEnet or via the ISO’s Home Page.  The notification will be made for each Trading Day on the previous day during the period between the issue of the Final Day-Ahead Schedule (1 pm) and the issue of the Final Hour-Ahead Schedule for the first Settlement Period of the Trading Day (11 pm).
D.	Reliability Must-Run Charge
Finally, the ISO respectfully requests leave to clarify an ambiguity. In Amendment No. 4, which was accepted by the Commission on March 30, 1998, the ISO amended Section 5.2.7 of the ISO Tariff to delete potentially confusing wording that could be construed to imply that, in relation to Reliability Must-Run Charges, netting applies only to Ancillary Services revenues.  The California Public Utilities Commission has requested, during recent Reliability Must-Run negotiations, that the ISO make a further clarification.
As explained in the ISO’s Amendment No. 4, the Reliability Must-Run Contracts provide that the ISO will pay the net difference between (1) the amount received by Owners of Reliability Must-Run Units from the market through their Scheduling Coordinators and (2) the amount owed by the ISO under the Reliability Must-Run Contract.  The ISO sends the invoice received from the Reliability Must-Run Owner to the utility that is a party to the TCA in whose Service Area the Reliability Must-Run Unit is located.  The utility referenced in Section 5.2.7 is responsible for all costs incurred under a Reliability Must-Run Contract less payments to the Scheduling Coordinator representing the Reliability Must-Run Unit for Energy or Ancillary Services. The responsible utility pays the difference because the Reliability Must-Run Unit dispatched resolves a transmission constraint in its Service Area.  
The proposed clarification states that payments for Energy and Ancillary Services provided under the Must-Run Contract and purchased by Scheduling Coordinators shall be deducted from the amount recovered from the utilities responsible for the Must-Run payments. The equations for these formulae are set forth in Appendix H to the Settlement and Billing Protocol in Appendix L of the ISO Tariff. 
IV.	EFFECTIVE DATE
The ISO respectfully requests that the Commission accept for filing Amendment No. 7 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 in respect of Amendment No. 7.  Good cause exists for the Commission to grant the ISO a waiver of the 60-day notice requirement.  The measures set out in Amendment No. 7 are necessary to ensure proper operation on start-up.  The ISO is mindful of the Director of the Office of Electric Power Regulation’s admonishment regarding waiver of the 60-day notice period.  However, the ISO submits that Amendment No. 7 is critical to the ISO’s operations.  In fact, the BEEP and CONG problems were only identified on Friday, March 27, and substantial ISO resources were devoted to finding solutions over the weekend.  Thus, the ISO must respectfully ask for the Commission’s indulgence once more and requests that these amendments be made effective as 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. 7 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 ISO’s “Home Page” 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. 7 to the ISO Tariff, including the ISO Protocols, for filing and allow it to become effective as of the ISO Operations Date. 
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 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 (1997).
Dated at Washington, D.C., this 31st day of March, 1998.

_____________________
Harry Dupre