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. 3 to the ISO Operating Agreement and Tariff, including the ISO Protocols

Relating to Transmission Priority for Certain Eligible Regulatory Must-Run and Eligible Regulatory Must-Take Generation

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 third of four contemplated amendments (“Amendment No. 3”) to the ISO Operating Agreement and Tariff (“ISO Tariff”), including the ISO Protocols.  Amendment No. 3, if accepted for filing by the Commission, would resolve pending “Regulatory Must-Take” and “Regulatory Must-Run” issues.  Unless otherwise noted, all capitalized terms shall be as defined in the ISO Tariff.
These amendments must be made by the ISO Operations Date to ensure that the ISO and the stakeholders operate in accordance with the terms of the ISO Tariff, including the ISO Protocols.  Consequently, the ISO requests that Amendment No. 3 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 ISO Tariff and ISO Protocol amendments (providing only the revised excerpts from the ISO Tariff, including the ISO Protocols, black-lined to indicate changes) (Exhibit A); and
•	a notice suitable for publication in the Federal Register (hard copy (Exhibit B) and diskette).
Also enclosed as Exhibit C is the instruction (without the worksheet referred to in the Exhibit) provided to the ISO by Pacific Gas and Electric Company for managing Congestion on Path 15, in particular, for preserving existing transmission priority for certain Eligible Regulatory Must-Take and Eligible Regulatory Must-Run Generation. 
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. 3 reflects the results of one aspect of these discussions.
The changes proposed in Amendment No. 3 involve clarifying language that reflects the intent of the ISO Tariff from inception.  It does not involve a change to any charge made under the ISO Tariff.  Therefore, the ISO respectfully requests waiver of the filing requirements under Part 35 of the Commission’s rules. 
Amendment No. 3 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. 3
A.	The Amendments Are Necessary to Preserve Existing Transmission Priorities for Certain Eligible Regulatory Must-Take and Eligible Regulatory Must-Run Generation 
The ISO proposes several amendments to the ISO Tariff, including the ISO Protocols, to preserve after the ISO Operations Date the priority that certain Eligible Regulatory Must-Take Generation and Eligible Regulatory Must-Run Generation (collectively, “RMT/RMR Generation”) currently enjoy in access to Available Transfer Capacity on Congested Inter-Zonal Interfaces.
The ISO Control Area includes, inter alia, certain transmission facilities that were constructed for the sole purpose of, or in close relationship with, adding nuclear, hydro-electric, and Qualifying Facility (“QF”) generating facilities, as well as executing power purchase contracts with minimum Energy take requirements (i.e., those facilities and contracts termed Eligible Regulatory Must-Take Generation and Eligible Regulatory Must-Run Generation under the ISO Tariff).  Of these transmission facilities, some represent Congested Inter-Zonal Interfaces.  
The ISO Tariff does not explicitly describe these relationships, nor does it explicitly set forth any transmission priority for RMT/RMR Generation. Prior to the Commission’s October 30 order, however, the ISO Tariff included language that some Participating Transmission Owners were apparently relying on to preserve existing transmission priorities for RMT/RMR Generation.  This provision, formerly ISO Tariff Section 2.4.2.2, was removed because it was related to the Overgeneration procedures rejected by the Commission.  It stated as follows:
The ISO shall give priority to Regulatory Must-Take Generation and Regulatory Must-Run Generation scheduled in the relevant Scheduling Coordinator's Preferred Schedule in evaluating the Preferred Day-Ahead Schedules and Preferred Hour-Ahead Schedules and preparing its Suggested Adjusted Day-Ahead Schedules for the Trading Day over all Generation other than that which is determined by the ISO to be needed for System Reliability.
Other than by way of the reference in Section 2.4.2.2 to Suggested Adjusted Schedules (which Schedules, in any event, are not binding on Scheduling Coordinators), the ISO Tariff and ISO Protocols do not anywhere state that RMT/RMR Generation should be treated with the highest priority (together with Reliability Must-Run Generation), in terms of access to Available Transfer Capacity on Congested Inter-Zonal Interfaces.  At least one Participating Transmission Owner, however, stated adamantly that it had always considered the priority of such Generation to be protected.
This Amendment No. 3 will clarify the stakeholders’ intent that RMT/RMR Generation be afforded the same priority enjoyed prior to the ISO Operations Date, consistent with existing operating arrangements.
This priority afforded to RMT/RMR Generation will be accomplished by the Scheduling Coordinator flagging the resource as either Eligible Regulatory Must-Take Generation, Eligible Regulatory Must-Run Generation, or Reliability Must-Run Generation, and submitting an Adjustment Bid with an assigned value, as specified in the proposed changes to the ISO Schedules and Bids and Scheduling Protocols.  These Adjustment Bids, in combination with the flag, will assure that the ISO’s Congestion Management algorithm will not curtail RMT/RMR Generation and Reliability Must-Run Generation until all other uses (both new firm uses and Existing Contract rights) of transmission have been curtailed 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 RMT/RMR Generation or 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). 
•	Third, any Existing Contract uses (if and to the extent necessary) will be curtailed. 
•	Finally, curtailments of RMT/RMR Generation or 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.
All new firm uses of ISO transmission service, whether for RMT/RMR Generation, Reliability Must-Run Generation, other "price-takers", or economic users of transmission, will be assessed Usage Charges associated with the use of Congested Inter-Zonal Interfaces.  In those instances involving non-economic curtailment (pro-rata) of new firm uses of ISO transmission service, Scheduling Coordinators will be liable for default Usage Charges in accordance with Section 7.3.1.3 of the ISO Tariff.  
B.	The Amendments Reflect the Board’s Understanding of a Fundamental Precept of the California Restructuring
The proposed amendments are a result of discussions between the ISO and several Market Participants relating to the treatment of RMT/RMR Generation.  As noted above, these discussions were initiated as the result of the ISO’s deletion of Overgeneration provisions from the ISO Tariff when it made its compliance posting December 23 on its “Home Page”.  PG&E objected to the deletion, asserting that a fundamental precept of the California restructuring was preservation of the ability of utilities to produce Energy from all RMT/RMR Generation.  In PG&E’s instance, it was concerned over the potential for its Diablo Canyon nuclear unit to be unable to generate if there were insufficient PX Demand south of Path 15.
This issue, which is part of a wider debate which has been running in California for several years, within and beyond the context of restructuring California’s electricity markets, was discussed in an executive session of the ISO Governing Board (“Board”) on January 21, 1998 and, the night preceding, at the meeting of the Grid Operations and Reliability Committee of the Board.  Following a lengthy discussion in executive session, the Board directed staff not to re-instate Section 2.4.2.2 of the ISO Tariff, as described above, because this provision does not address the concern expressed by PG&E.  The Board did, however, conclude that it was the intent of the stakeholders in the restructuring process that RMT/RMR Generation continue to enjoy protection from curtailment in the event of Congestion.  
Subsequent to the January 21st Board meeting, PG&E issued its “final” operating instructions to the ISO for Path 15.  Based on those instructions, ISO management determined that it could not follow PG&E’s instructions in all respects.  In a special teleconference meeting January 29, the Executive Committee directed management to seek FERC approval to vary from PG&E’s instructions to the extent necessary to work within software constraints until changes to software could be made (see discussion infra).  The third consideration of these issues was in a special teleconference meeting on February 11, when the Board confirmed its earlier findings and rejected PG&E’s assertion that RMT/RMR Generation should be exempt from Usage Charges.  
Accordingly, the Board directed ISO staff to promptly file proposed amendments to the ISO Tariff, including the ISO Protocols, to preserve the same transmission priority as currently provided to such resources by the relevant Participating Transmission Owner.  While the debate at the Board meeting centered on PG&E’s Diablo Canyon nuclear plant and QFs, the Board’s decision to maintain existing transmission priorities in Congestion Management applied to RMT/RMR Generation generally.
The proposed amendments are significant to the ISO and all other stakeholders that will participate in California's electricity markets.  As indicated above, PG&E raised the concern that the operation of its Diablo Canyon generating facility (a two-unit, 2160 MW nuclear power plant), and certain QFs in its service territory, could be affected as the result of the constrained transmission path that exists between these resources and PG&E's San Francisco load center.  This transmission path is referred to as "Path 15" and has been the subject of several Commission proceedings among the various Market Participants.
In expressing its concern, PG&E noted that ISO Tariff Section 2.4.2.2 was one of the few provisions in the ISO Tariff which preserved for its existing Regulatory Must-Take resources the priority which PG&E stated it was entitled to receive in the ISO's Congestion Management processes as a fundamental premise for the California restructuring “bargain”.  Today, the operation of these resources is closely linked to the Available Transfer Capacity of Path 15 -- as has been the case since PG&E's construction of Diablo Canyon.  In those instances when scheduled uses have exceeded the transfer capability of Path 15 (predominantly in the south-to-north direction), curtailments have been issued by PG&E in its dual role as Control Area operator and transmission service provider.  Curtailments of firm transmission service have sometimes occurred on Path 15.
Recently, the Western Systems Coordinating Council (“WSCC”) has adopted more stringent criteria which have adversely affected the operational transfer capability of several transmission paths, including Path 15.  Owing to these more stringent criteria, PG&E has limited south-to-north transfers over Path 15 on what PG&E describes as an “interim” basis.  The ISO has no information as to when this limitation will end, nor does it have any reason to believe that the limitation will be permanently lifted on or after the ISO Operations Date.  As such, the matter of Path 15 curtailments will continue to be of significant importance for the foreseeable future, and a matter for which the ISO will need to be fully apprised, and capable of responding to, in accordance with provisions explicitly stated in the ISO Tariff, including the ISO Protocols.
The ISO is obligated to accept PG&E’s instructions for operation of Path 15, including several levels of priority for the curtailment of transmission service prior to the curtailment of Diablo Canyon and certain QF contracts, which instructions involve both Existing Contracts usage and usage to serve native load.  As noted earlier, a copy of those instructions is attached hereto as Exhibit C.
C.	Effect of Tariff Amendment on Other Market Participants

When the ISO management assessed options to implement the Board’s directive to preserve existing priorities, it found two alternatives.  The one chosen by the Board, as described above, makes RMT/RMR Generation a new (and higher) priority of "price-takers" than all other users of Converted Rights (together with Reliability Must Run Generation). 
This approach was chosen over the only other alternative identified -- to treat RMT/RMR Generation as the equivalent of an Existing Contract.  That would have required a reservation of the maximum amount of transfer capacity for such resources over constrained paths and virtually eliminated many Existing Contract rights.  It also would have exempted RMT/RMR Generation from Usage Charges.  As noted above, PG&E proposed that option, which was expressly rejected by the Board in the February 11 teleconference.  The approach chosen ensures the greater use of the constrained path.
The ISO notes that, under the new market structure, in most cases Diablo Canyon and other RMT/RMR Generation would be able to serve PX Demand south of Path 15, requiring no action by the ISO.  This will mean that Existing Contract rights holders who historically have been cut to allow for the flow of Diablo Canyon power will have their Schedules honored, but arguably to the detriment of new firm users.  In other words, a Scheduling Coordinator who takes some of PG&E’s Load previously served by Diablo Canyon would use Converted Rights to deliver resources to that Load.  That Scheduling Coordinator will have a lower priority than Existing Contract rights holders if its resources are south of Path 15, even though, had PG&E continued to serve that Load with Diablo Canyon Energy, PG&E’s priority would have been higher than the priority of Existing Contracts.  The ISO notes this outcome for the Commission’s information, but stresses that this approach is the preferable one of the only two the ISO could identify to accommodate PG&E’s instructions and the original stakeholder intent.
D.	Request for Authority to Stage Related Functionality Regarding Existing Contract Priorities

The above discussion is relevant to understanding the difficulty ISO staff has encountered in seeking to preserve existing priorities.  A second, temporary difficulty has also been identified with respect to Path 15.  The transmission priorities on Path 15 are mixed, as Exhibit C demonstrates.  The ISO will not be able to implement fully PG&E’s instructions as to the priority of Existing Contracts, RMT/RMR Generation, and all other new firm uses until the software can be changed.  Pending full implementation of this software change, the ISO must use a manual work-around.  The work-around does not allow the ISO to curtail precisely in the manner presented in Exhibit C with the Converted Rights split between non-contiguous priorities.
This issue was presented to the Executive Committee on January 29.  Management presented the only two alternatives -- combine any non-contiguous priorities of Converted Rights into a single priority (which is what the ISO proposes) or delay the ISO Operations Date until the software redesign is completed and fully tested.  The Executive Committee unanimously approved management’s proposal to vary from PG&E’s instructions and seek FERC approval of that approach pending the software change.
This work-around is an equitable short-term solution (which may, in fact, not be used at all if software installation and testing are completed as scheduled).  The ISO therefore respectfully requests authority to vary from PG&E’s instructions to the extent necessary to move Priority Group 2 Converted Rights into Priority Group 4.  This will require moving between 196 and 776 MW of Converted Rights (reflected on page 2 of PG&E’s instructions as “SCE’s & SDG&E’s CCPIA”) wholly behind the Existing Contract rights in Priority Groups 2 and 3 until the software redesign is complete and in operation.
Good cause exists for approving this variance from the PG&E instructions.  Without it, the ISO Operations Date will be delayed.  Although the staging potentially disadvantages Market Participants whose Preferred Schedules may be reduced, the cost to the market (and likely the affected Market Participants) of deferring operations is likely to be far greater than any harm resulting from application of the interim priority rule.  Existing Contract holders are not harmed by the interim rule -- in fact, one, California Department of Water Resources, may be advantaged.
IV.	EFFECTIVE DATE
The ISO respectfully requests that the Commission accept for filing Amendment No. 3 and allow it to become effective as of the ISO Operations Date.  The ISO notes that this amendment involves staged functionality, as described above.  When the final software redesign is completed, the ISO will make a compliance filing to indicate its ability and commitment to follow PG&E’s instructions without modification, unless and until the Commission directs the ISO to operate differently or instructs PG&E to modify its instructions to the ISO.
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. 3.  Good cause exists for the Commission to grant the ISO a waiver of the 60-day notice requirement.  Absent the amendment, the ISO will be unable to commence operations and meet PG&E’s instructions regarding operation of Path 15.  No “purchasers under other rate schedules” would be affected by the granting of this requested waiver because the entities relying on the ISO Tariff are the only entities to which Amendment No. 3 would apply.
This is a difficult and exceedingly complex issue, which has absorbed a significant amount of ISO management time to resolve.  The issue did not arise (and thus the failure of the ISO system design to reflect the stakeholders’ intent was not identified) until PG&E protested, shortly after December 23, the deletion of certain ISO Tariff provisions related to Overgeneration.  PG&E did not provide its first draft of instructions for Path 15 until early December, long after ISO software design was final and coded.  The ISO staff took the issue to the Board at the first available opportunity, the January 21 meeting, obtaining the Board’s direction to modify the ISO Tariff and software to recognize the priority of Regulatory Must-Take and Must-Run resources.  It has taken a substantial commitment of time and effort to find a means to implement the Board’s direction, including a special teleconference meeting of the Executive Committee on January 29 and a special teleconference meeting of the Board on February 11.  The ISO was not able to file any proposed amendment until the software design (and manual work-around solution) could be identified.  If the notice period is not waived, the ISO will have to delay operation until the Commission acts.
The ISO will, concurrently with this filing, take steps to ensure that all parties are quickly informed of this Amendment No. 3 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.
In addition, to avoid substantial delay and to minimize the time that the interim rule must operate, the ISO has commenced the process of software redesign in advance of Commission acceptance, notwithstanding that certain Market Participants may disagree with the Board’s characterization of the restructuring “deal” regarding RMT/RMR Generation and/or PG&E’s instructions for Path 15.  For that reason, the ISO respectfully urges that the Commission give it early guidance if it does not intend to accept this filing or intends to order more than a nominal suspension.
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. 3 to the ISO Tariff, including the ISO Protocols, for filing and allow it to become effective as of the ISO Operations Date. 
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