Southwest Power Pool, Inc. Revision History

Revision History

Date or Version Author Change Description Comments Number Version 0.0 Rob Janssen/Chris Initial Draft January 6th, 2015 Haley Version 1.0 CMTF Small Updated Language February 13th, Group/Chris Haley 2015 Version 2.0 CMTF Small Updated Language February 20th, Group/Chris Haley 2015 Version 12.0 CMTF Small Updated Language Added CONE Payment May 8th, 2015 Group/Chris Haley language Version 14.0 CMTF Small Updated Language Added LRE to GO and May 26th, 2015 Group/Chris Haley Load Sharing Backstop language CMTF Approved Lanny Nickell/Chris Update Language Clarified language Version 8.0 Haley February 17, 2016 CMTF Approved Rob Janssen Edits Update Language Clarified language Version8_1 February 23, 2016

Table of Contents Southwest Power Pool, Inc. Revision History

Existing Planning Reserve Margin Assurance

Current mechanisms to ensure timely, reliable assurance of Planning Reserve Margin (PRM) requirements in SPP are inadequate. Currently identified mechanisms are:

 NERC reliability standard penalty provisions in SPP’s Attachment AP1

 Potential revocation of membership under the SPP Membership Agreement

1 See SPP OATT Attachment AP Both of these existing, identified assurance options are either too extreme or occur too late to assure that required levels of PRM are maintained. An appropriate assurance mechanism should incent proper planning to ensure timely compliance with PRM requirements and should result in compensation to the parties potentially impacted by non-compliant parties. That is, if a Load Responsible Entity (LRE) is short on capacity and the region relies on the excess capacity of other parties in SPP to provide adequate regional reliability, then those parties should be the ones receiving compensation through the assurance mechanism. SPP’s existing assurance mechanisms are either unlikely to be exercised or would be exercised in a way that would not encourage proper behavior proactively and would not adequately compensate parties with capacity in excess of the PRM requirements in SPP.

Future Planning Reserve Margin Assurance

1.0 Assurance Principles A. Any new future PRM assurance mechanism should be designed based on the following principles:

I. Assurance should be timely and proactive, preferably by determining a Load Responsible Entity’s (LRE’s) potential lack of compliance in advance and allowing such LRE to potentially take corrective action, if available.

II. Assurance should consist of a payment by a deficient LRE to those parties with excess capacity in SPP.

III. The amount of the payment should economically incent LREs to address their PRM capacity deficiency.

IV. The receipt of the payment should be allocated to the appropriate parties in a manner reflecting the impact of the LRE’s PRM deficiency. Southwest Power Pool, Inc. Revision History

The term “PRM deficiency” includes the entire capacity deficiency of an LRE with regard to its failure to meet SPP’s PRM requirement, which includes both capacity required to meet an LRE’s peak load as well as the capacity required to meet an LRE’s PRM requirement above peak load.

2.0 Proposed Guidelines A. Consistent with these principles, the Capacity Margin Task Force (CMTF) recommends that the following principles be adopted regarding the assurance of PRM in the SPP region:

I. An effective assurance mechanism in the SPP region would utilize payments to provide compensation from LREs who are short on capacity to those in the SPP region who are long on capacity. This mechanism may only be used to pay LREs and other capacity resource owners in the SPP region.

II. The status of each LRE’s compliance would be established in advance of the summer peak season(s), which is June 1st through September 30th, by SPP Staff based on load forecast and accredited capacity data provided by each LRE and Staff’s independent review of such data to ensure accuracy and compliance with SPP’s PRM calculation requirements.

III. Prior to the start of the summer peak season(s), each LRE that is short on capacity has the option to make appropriate arrangements, including entering into a bilateral contract for capacity or demand response from any Generation Owner or demand response provider, including another LRE, that is long on capacity in the SPP region. Any such arrangements will need to meet the terms of applicable SPP Criteria and/or SPP OATT provisions for PRM requirements existing at the time such arrangements are relied upon to satisfy an LRE’s PRM.

B. Finally, if an LRE’s reserve margin is not compliant with the relevant SPP Criteria and/or SPP OATT provisions prior to the start of the summer peak season(s) then that LRE shall make a PRM deficiency payment in accordance with Section 3.0 F.

3.0 Planning Reserve Margin (PRM) Deficiency Payment Guidelines A. The amount of the PRM deficiency payment shall be based on the Cost of New Entry (CONE) for new generation in SPP. The CONE figures for each year shall be developed and published by SPP as part of the compliance assurance process and shall be based on publicly available information, such as that from the Energy Information Administration (EIA) for the SPP region. The sliding scale shall be:

1. When the region-wide PRM is equal to the SPP PRM requirement plus 8% 2or greater, then the CONE would be based on 125% of the estimated annual capital and fixed operating costs of a new natural gas-fired peaking facility.

2 Refer to the SPP Criteria and/or OATT for the latest Planning Reserve Margin requirement 2. When the region-wide PRM is equal to the SPP PRM requirement plus 3% or greater, but less than the PRM requirement plus 8%, then the CONE would be based on 150% of the estimated annual capital and fixed operating costs of a new natural gas-fired peaking facility.

3. When the region-wide PRM is less than the SPP PRM requirement plus 3%, then the CONE would be based on 200% of the estimated annual capital and fixed operating costs of a new natural gas-fired peaking facility.

B. The CONE multiplier of the assurance mechanism discussed above provides increasing incentives consistent with the potential for reduced reliability in the SPP region. The CONE multiplier mechanism also reflects the increased reliability value of capacity as PRMs diminish in the SPP region.

C. The total PRM deficiency payment made by an LRE for the annual summer peak season(s) shall cover the annual capital and fixed operating costs as defined in the assurance mechanism.

D. Referencing the most recent EIA report on Updated Capital Cost Estimates for Utility Scale Electricity Generation Plants, SPP will annually determine the appropriate CONE value based on an appropriate natural gas peaking technology3. The CONE value most appropriately only reflects costs and shall not include the anticipated net revenue from the sale of capacity, Energy or Ancillary Services.

E. The results shown in Table 1 were derived by SPP based, in part, upon data supplied by the EIA in year 2013 dollars, which were inflation-adjusted (1.72%) using data from the Bureau of Labor Statistics in order to convert EIA cost data from 2013 dollars into 2015 dollars. In order to produce the annualized CONE value for the LREs from these cost numbers, SPP assumed: a 50/50 debt to equity ratio; a 20-year project life and loan term; a 5.25 percent debt interest rate; an 11 percent after tax internal rate of return on equity; a 38.9 percent combined effective federal and state tax rate; and a calculated weighted average cost of capital based on a combination of debt and equity financing (8.1%). SPP along with stakeholders will continue to examine these factors annually in order to determine if any modifications are needed. These factors and assumptions are comparable to those used by other RTOs in the development of CONE estimates4.

Plant Size, MW 210

Capital Recovery, $/kw-yr. 78.32

3 The CT unit cost used is the Frame 7FA 05 which is labeled Advanced CT in the U.S. Energy Information Administration’s Updated Capital Cost Estimates for Utility Scale Electricity Generating Plants 4 The assumptions made in the CONE calculation are consistent with the EIS Market Offer Cap calculation that was FERC approved and are similar to MISO’s methodology. Southwest Power Pool, Inc. Revision History

Fixed O&M Costs, $/kw-yr. 7.29 Total Fixed Expenses, $/kw-yr. 85.61 Total Fixed Expenses, $/MW-yr. 85,605.58 Total Fixed Expenses, $/MW-yr. (125%) 107,006.98 Total Fixed Expenses, $/MW-yr. (150%) 128,408.37 Total Fixed Expenses, $/MW-yr. (200%) 171,211.16 Table 1 Combustion Turbine Plant, 2015 Results

F. The LREs who are found to be deficient in meeting their PRM requirement as determined by this assurance policy are subject to the deficiency payment requirement based on the applicable CONE. The LRE is responsible to make a deficiency payment for the PRM deficiency, including any deficiency in meeting peak load in addition to meeting SPP’s PRM requirement. The deficiency payment shall be made to SPP, and SPP shall initially distribute such payment to all the LREs who have surplus reserves above the SPP PRM requirement. The allocation of the payment to each of these LREs shall be based on the LRE’s contribution on a MW share to the total SPP Region’s MW above the PRM requirement. Therefore, in combination, all the LREs who have PRMs in excess of the SPP PRM requirement will receive 100% of the deficiency payment. The capacity being provided to the LRE that is deficient must be subtracted from the surplus reserves of each LRE that is long. This process will ensure this block of MW’s will no longer be available for capacity contracts to other LRE’s during the peak season. SPP Capacity Margin Task Force, Enforcement Policy Small Group Proposed Method (by example) to transfer enforcement funds from deficit LRE(s) to the LREs meeting their reserves.

Reserve Margin 1.25xCONE 13.64 125 $/kW-yr demonstration purposes

Amount Planning Minimum Gen Deficit Planning long above Pool LRE Load MWs needed to meet LRE LRE ID Generator minimum Reserve Deficit Forecast Long the Reserve zeroed Capability Reserve Margin MW Margin MW out Margin MW A 100 118 18 113.64 4.36 4.36 14.66% 45.6 B 10000 11500 1500 11364 136 136 C 500 570 70 568.2 1.8 1.8 D 4000 4500 500 4545.6 -45.6 0 E 250 290 40 284.1 5.9 5.9 F 3500 4050 550 3977.4 72.6 72.6 G 900 1045 145 1022.76 22.24 22.24

Total 19250 22073 21875.7 197.3 242.9

Weighting LRE to Pool 1

% long of the total Total Total MW Payment LRE ID pool percentage value amount owed excess allocated allocated the long LREs reserves A 2% 2% 0.8 $ 102,314 B 56% 56% 25.5 $ 3,191,437 C 1% 1% 0.3 $ 42,240 D 0% 0% 0.0 $ - E 2% 2% 1.1 $ 138,452 F 30% 30% 13.6 $ 1,703,664 G 9% 9% 4.2 $ 521,894

1.000 1.000 45.600 $ 5,700,000 Figure 1 Example of Allocation of PRM Deficiency Payment

G. In the event that the total PRM deficiency in the SPP region is greater than the total capacity LREs have in surplus of their PRMs, allocation of deficiency payment shall occur using the following steps. 1) Payment for the portion of PRM deficiency equal to surplus capacity will be allocated to all LREs who have surplus reserves as described above. 2) Remaining deficiency payment will be allocated to generator owners who have SPP accredited resources with excess capacity not already committed, for the portion of PRM deficiency payment that did not get allocated in step 1. This allocation will be based on the non-LRE capacity resources’ contribution to the total of all such excess, uncommitted non-LRE capacity in SPP. 3) As a final backstop, if there is still unallocated deficiency payment after steps 1 and 2 above, then it will be distributed to originally non-deficient SPP LREs based on their SPP load-ratio share. Southwest Power Pool, Inc. Revision History

H. SPP shall create a voluntary process for non-LRE capacity resources in the SPP Balancing Authority, as referenced above, to participate in the Planning Reserve Assurance Policy consistent with the LRE’s timeline for submitting the Resource Adequacy Workbook (RAW) data request to SPP.

4.0 Planning Reserve Margin (PRM) Timeline A. For clarity, after the determination of peak season PRM compliance (prior to the start of the applicable peak season for an LRE), a LRE’s intermittent failure to maintain the availability of its resources, including demand response and purchased capacity, shall not indicate that it is non-compliant with the PRM assurance process. PRM is intended to provide for planned reliable operations of the SPP system and the ability to satisfy LRE’s load under reasonably anticipated circumstances. It should be expected that at certain times, any LRE may need to use the resources comprising its PRM for operational purposes, resulting in available resources less than the LRE’s peak load plus its PRM requirement.

B. This PRM assurance policy is intended to ensure that each LRE enters the peak season with its PRM intact and ready to meet peak load conditions. This shall be the determining factor of whether compliance with this policy is met for the peak season after the determination of compliance has been made. During the peak season, it is expected that each LRE will at all times maintain the availability of its owned or contracted resources to meet its daily load and operating reserves obligations, per the SPP criteria, at a minimum. However, compliance with any such operating reserve requirement shall be monitored and assessed by SPP Staff and the appropriate SPP working group (the ORWG) separately from this PRM assurance policy.

C. The intent of this PRM assurance policy is that each LRE will provide SPP it’s RAW by February 15th of each year with a plan to meet its PRM requirement. If the LRE workbook is complete and shows that the LRE has adequate planning reserves, the LRE will be considered to have met its PRM requirement. If the LRE does not have adequate reserves in place, it will have an opportunity to bilaterally contract for additional capacity in the timeframe between February 15th and May 15th. So long as the LRE solves its deficient PRM by May 15th, it will be considered to have met its PRM requirement. If the LRE fails to obtain additional capacity or submit its data to SPP by May 15th, it will be considered deficient and, as such, will make a deficiency payment.

Additionally, below are some details on the data submission, calculation errors, and timeline requirements:

a. The RAW submissions by LREs on February 15th will be used to qualify the LREs’ PRM requirement for the upcoming summer peak season. Absent any calculation errors or otherwise misstated information, any LRE that has adequate reserves in this submission is considered to have met its PRM requirements. b. The February 15th submission may include any resources, new or existing, provided they are expected to be available during June 15th – September 15th. The LRE can count on these resources for compliance with the PRM assurance policy. If after February 15th, the planned availability of a resource change such that it is not available during June 15th – September 15th, it will still be considered as available in the determination of that LRE’s PRM. c. Resources that are expected by February 15th to be unavailable during part or all of the period from June 15th – September 15th will not count as capacity for purposes of meeting the LRE’s PRM requirement. d. Any LRE that is short of its PRM requirement in the February 15th submission will have until May 15th to correct the deficiency with bilateral contracts. This provides 90 days for LREs to bilaterally contract for additional capacity and obtain transmission service or rely on SPP’s transmission deliverability determination to arrange capacity needed to meet its PRM. Should the LRE also need capacity to cover part of its load obligation, FIRM transmission is required and the LRE will have 90 days to arrange for that transmission. e. Any LRE that fails to supply a RAW to SPP will be considered to be deficient of its PRM requirement. If the LRE does not submit the required data by May 15th, SPP will consider them in violation and subject to the assurance policy for the entirety of their PRM requirement, which includes all capacity required to meet the LREs peak load.

D. Post-season analysis should be conducted to compare the actual results versus each LREs planning forecast. Further PRM assurance activities would not be based on the post-season analysis, although SPP may refer cases of potential violations of the PRM assurance rules to the Markets and Operations Policy Committee (MOPC) for further investigation and action, if necessary. Post-season analysis would be used to evaluate LRE’s planning forecast consistency and develop further improvements for the PRM assurance process. Southwest Power Pool, Inc. Revision History

Figure 2