GOV FERC.

Electric Power Market Summary SUMMER 2006

FERC.GOV/MARKET OVERSIGH T FEDERAL ENERGY REGULATORY COMMISSION @

NORTHWEST SOUTHWEST MIDWEST SPP TEXAS PJM SOUTHEAST NEW YORK NEW ENGLAND

eak electrical demands in summer 2006 were much higher in Palmost all regions of the United States than in summer 2005. Every regional transmission operator (RTO), and most other regions, set demand records. The bulk power grid and wholesale power markets performed well under the stress.

Ten percent more electricity was produced by -fired generators in summer 2006 than in summer 2005. Lower-priced gas, newly installed gas-fired generators, and more expensive fuel oil all contributed to this trend.

Market Oversight | Reports & Analyses | Market Summary 1 Market Oversight 2005 were broken. The California Independent System Operator System Independent California The broken. were 2005 summer in set records demand many and StatesUnited the of regions all Peak DemandsMuchHigher in2006 by region. peak loads, scarcity, though the price levels and scarcity extreme mechanisms varied during and, generators more-expensive of use the reflect to rose hydropower, and occasional moderate weather. During hot weather, prices were moderated by lower natural gas prices, greater supplies of nuclear and portions of the Midwest) and California. Throughout summer 2006 prices declined in the Northeast and Midwest and rose in PJM (Mid Atlantic and market problems. Connecticut, Long Island, and Ontario— had no load shedding southwest California, vulnerable—southern interruptible considered areasEven loads. of curtailment and transactions, emergency public conservation, warnings, as such actions emergency needed still they area every helped grid operators maintain reliability during peak periods, but in almost power-consuming regions except inthe West. major most in consumption reduced August Juneand of parts in weather in summer 2006 grew only one percent from the previous summer. Milder mean failure ofthebulkpower system, notthefailure oflocal distribution systems orthe “Blackouts” are failures ofthegridto provide power for anyreason. Inthisreport theterms from exceeding supply, causing widespread gridcollapse; “” issynonomous. 2 Metering (FERCStaff Report,August 2006.) payments. For acomplete definitionseeAssessment ofDemandResponseand Advanced 1 “Loadshedding”meansdisconnecting consumers from thegrid,usually to prevent demand Changes inelectric usagebyend-usecustomers inresponse to price changesorincentive Peak electrical demands electricity for prices wholesale average 2005, summer to Compared response demand robust and availability generation Unprecedented Despite spells of record-breaking heat, U.S. consumption of electricity | Reports &Analyses 3 in summer 2006 were much higher in almost | Electric Power Market Summary 2 or serious

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FEDERAL ENERGY REGULATORY COMMISSION @ FERC.GOV over anhour. mand” and“load” are usedinterchangeably inthisdocumentto meansystem power averaged demand istheaverage ofallhourly demandsinaregion duringthesummer. Theterms “de 3 service allow for suchdisconnection. disconnection ofconsumers, such asinterruptible customers, whosecontracts orterms of significant disruptions. both the grid stressesand the markets. it because In summer significant 2006, both functioned is without demand peak of Growth demand. peak historic their exceeded regions, other RTOs,most All and demand. peak in growth substantial saw (MISO) ISO Midwest the and PJM (CAISO), Peak demandisaregion’s highest hourly power demandduringthesummer. Average E LECTRIC P OWER M ARKET SUMMER S UMMARY 2

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Market Oversight drastic to leading software, schedule changeswithneighboring PJMandOntario. real-time its slow to procedures reliability thunderstorm with combined congestion unusual when excursions price generation was available. Nevertheless, NYISO experienced large real-time most when month, the of end the at occurred heat the 2006 May in But year. prior a in problem heat April an had (NYISO) Operator System a two-hour rolling blackout in April 2006 and the New York Independent generation supplies if have not troublesome yet fully returned be from spring can maintenance: ERCOT weather had hot Pre-summer 2006. May Monthly records also were widely broken, especially in especially broken, widely were also records demand peak Monthly | Reports &Analyses | Electric Power Market Summary

FEDERAL ENERGY REGULATORY COMMISSION @ FERC.GOV summer 2005 (see charts Net Generation by Energy Source and Change in Large Increase inNatural Gas-Fired Generation h latecet eeaos icuig a-rd obsin turbines. combustion gas-fired including generators, least-efficient the of use greater required demands peak High 2005. summer to compared gas was 10 to 20 percent cheaper, depending on location, in summer 2006 Natural increase. the to contributed factors Several LLC. Energy Bentek gas in consultant by increases estimates to according generation, largest power for consumption the had gas-dependent, strongly both regions, (FRCC) Council Coordinating Reliability Florida and (WECC) Council Net Generation Output by Source.) The Western Electricity Coordinating a-rd oe gnrto rs 1 pret n umr 06 over 2006 summer in percent 10 rose generation power Gas-fired E LECTRIC P OWER M ARKET SUMMER S UMMARY 3

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Market Oversight warmest Electrical ConsumptionGrew Modestly summer 2006,whilein2005oilhadbeencheaperthangas. in prices gas natural than sharply.higher fell were oil prices fromFuel oil generators, while -fired output was almost unchanged. Power generation 22.6 of GW.addition total generating a of gas-fired out 2005, summer new since added of was capacity (GW) gigawatts 20.2 about Nationwide, including Boreal Summer,September 14,2006. 4 NationalClimaticData Center, Report onClimate of2006-August inHistorical Perspective In summer 2006, despite record-breaking heat waves and the second- the and waves record-breakingheat despite 2006, summer In renewable and nuclear hydropower, from increased also Output 4 summer on record, U.S. consumption of electricity grew only one | Reports &Analyses | Electric Power Market Summary

FEDERAL ENERGY REGULATORY COMMISSION @ FERC.GOV E LECTRIC P OWER M ARKET SUMMER S UMMARY 4

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Market Oversight cooling requirements measured incoolingdegree days average show figures following The growth. consumption electricity U.S. eastern cities needed less. This diversity in cooling requirements also limited regions power-consuming major outside the West. the of most in consumption reduced August and June in weather Milder summer. previous the from percent days for thatdate. ence between the daily meantemperature and65°Fisthe numberofcooling degree 5 Western cities needed more cooling in 2006 than in 2005, but many but 2005, in than 2006 in cooling more needed Westerncities Acooling degree dayisameasure ofdemand for airconditioning. Thepositive differ | Reports &Analyses | Electric Power Market Summary 5 forbothsummers. -

FEDERAL ENERGY REGULATORY COMMISSION @ FERC.GOV were available a larger fraction of the time in California, for example, than But generators. suppliers for and system operators maintenance seemed well-prepared: needed generators on schedule average to unable be would peak hours but during weekend days as well, raising concerns that operators during only recordsnot demand brokeWest, the waveIn heat 11-day the demand. There were no instances of involuntary load-shedding (blackouts.) Bulk Power System Performed Well UnderStress The U.S. bulk power system performed well in the face of very high very of face the in well performed system power bulk U.S. The E LECTRIC P OWER M ARKET SUMMER S UMMARY 5

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Market Oversight concerns raising exports, and imports with also credits strictplanningcriteriaandgoodtransmissionperformance. (LIPA) PowerAuthority Island Long problems. avoid helped generation of availability high and response demand good elsewhere, as capabilities; considered vulnerable was Island Long generators. of availability record-high and Connecticut— Southwest in effective particularly were programs—which flagged for concern, West load-shedding. wassubjectedtoinvoluntary concern summer of area an as 2006 May in FERCby (identified California hour.Neithersouthern and day peak the reduction programs was a 4.1 percent reduction, more load- than 2,000 MW, utility at other and conservation, loads, curtailable and interruptible of effect combined The use. curtail to customers interruptible upon call to it allowing percent), 5 below fall to expected are or below are reserves operating than (when emergency 2 Stage abundant a reached CAISO more so, Even normal. were supplies hydropower and conservation, for well. dependent California,alsoperformed import- in critical system, transmission the summer,and previous any in 9 8 7 http://www.ferc.fed.us/EventCalendar/Files/20060518103507-A-3-with-talking-ptsl.pdf. 6 Distribution-level systems didnotfare aswell astransmission duringheatevents. LIPA Ibid., note 3. Ibid., note 3. SeeSummerEnergy Market Assessment (Item A-3),Commission meetingofMay18,2006; During summer 2005 Ontario experienced many transactional problems Eastern areas also weathered the heat well. Southwest Connecticut, also appeals public to strongly responding by contributed Consumers 8 due to a tight demand and supply balance and limited import import limited and balance supply and demand tight a to due | 7 benefited from ISO-New England’s demand-response Reports &Analyses | Electric Power 10 6 that it could adversely affect adversely could it that ) nor any other region in the in region other any nor ) Market Summary

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FEDERAL ENERGY REGULATORY COMMISSION @ FERC.GOV lcrct Sse Oeao (EO si go gnrto availability Toronto-areaand generation capacity, new hydropower), and good wind from (including said (IESO) Operator System Independent Ontario’s Electricity percent. 90 by problems such reduced process neighboring MISO and NYISO day-ahead in scheduling 2006, but a new 11 10 Southern California Edisonreplaced hundreds ofdistribution . extensive local outages whenanumberofdistribution lineswere damagedbyoverloading. experienced afew distribution lineoverloads. InnearbyQueens,Consolidated Edisonhad several utility- and took programs, capacity-based paid conservation, responsevoluntary forms: Demand regions. several in reliability improved full output. below there generators some kept temperatures discharge on limits and sources water cooling Highin temperaturesexception. an was region (MISO) Operator System Independent Midwest The availability. good lowest power plantoutagerateever. PJMandNew England alsoreported availability.average than better much suggests which of waves, out heat the forced during were service generators two only said NYISO average. on MW percent during the same period in 2005, amounting to an additional 1,350 94.6 to compared August,July, June,and during capability total their of tomaintaining reliability during hot weather. important was availability plants operated at improved 96 percent This summer. the during hotweather. marketproblemsand avoidoperational helped also upgrades transmission NYISO plannedfor aforced outage rate of5.43percent, equalto about2,100MWonaverage. Ibid.,note 3. n eea, eeao otgs ee t nsal lw ees during levels low unusually at were outages generator general, In out ead epne a a omn atr ht significantly that factor common a was response demand Robust 11 California reported that during its peak week it had the had it week peak its during that reported California E LECTRIC P OWER M ARKET SUMMER S UMMARY 6

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Market Oversight generation insummer2006. Prices fellinallthree regions. pocket (Zone J) had approximately one gigawatt of new, efficient gas-fired load YorkNew City the and percent, 6 than less grew peaks NYISO and California’s peakrose 10percent anditsaverage pricerose 5percent. 2005. summer than higher percent 14 was price 2006 summer average its demand. For example, PJM’s record peak demand increased 8 percent and summer peak RTOsin in increasegreatestrose the prices with that shows table following The availability. generating better and prices gas natural lower demand, average moderate demands, peak higher of combinations Market Prices Reflected Supply andDemand toflowexports toPJM. byimproving allowto scheduled voltagesenough all transmission NYISO demand Notably, load. interruptible response in NYISO’s western zones on Aug. 2 and assisted PJM on its peak day control load administered Where record peaks grew more modestly, prices fell. MISO, ISO-NE, to response in expected as performed generally markets Electricity | Reports &Analyses | Electric Power Market Summary

FEDERAL ENERGY REGULATORY COMMISSION @ FERC.GOV Scarcity Pricing Present in Several Areas During High Loads review, the MISO Independent Market Monitor raised questions about questions raised Monitor Market Independent MISO the review, lower loads helped maintain adequate reserve levels and lowered prices. In resulting Energy The programs. demand-response took level utility implemented and MISO 2, Aug. load interruptible of loss through the trigged that actions (EEA) 31 Alert Emergency July on loads peak During MWh. these During periods the zones. ISO administratively all set the systemwide in energy price hours to $1000/ four about active was pricing scarcity 2 Aug. on and Maine, but zones all in hours two than less for activated were Onreserves Aug.hours. peak during depleted scarcitywere1, prices MWh to$1,500/MWhforonefive hoursoneachofthesedays. on these days. Hourly settlement prices for some zones ranged from $420/ floors price set prices Scarcity offer.resource (demand-response) scarcity the or price locational the of higher the is price clearing the conditions, Underthese 3. Aug. and 2, Aug. 1, Aug.JulyJuly 19, 18, on systemwide emergency conditions. NYISO’s meet two demand-response programs were used locally or or reserves operating maintain to needed are measures administered spotmarkets andinbilateralmarkets. market designelement thatreflects reserve values inenergy prices. 12 Highlocational prices alsoresulted from co-optimization ofenergy andreserves, a rcs oe o ey ih ees uig et ae i bt RTO- both in waves heat during levels high very to rose Prices In MISO the conditions for activating scarcity pricing did not occur.not did pricing scarcity activating for conditions the MISO In Aug.activatedon scarcityAug.ISO-NE pricing and 30-minute 1 as 2 demand-response when activated is pricing scarcity NYISO, In E LECTRIC P OWER M ARKET SUMMER S UMMARY 7 12

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Market Oversight of $400/MWh,asshown inthefollowing table. example, For prices. fuel exceeded,cap cases westernsoft some the reached, in prices and bilateral and power between relationship the in and set by thehighestofferprice. be to region entire the for price marginal locational the for provisionscall pricing scarcity PJM’s them. implemented never but reduction) voltage a as (such actions such of warnings issued PJM actions. emergency other take or voltage reduce generation, emergency dispatch RTOmust the it, for energyare offered at$1,000/MWhandare eligibletosettheprice. used reserves operating invoked, is MISO) in pricing shortage-condition pricing. and actions EEA of interaction the 7e6b0a48324a ber 20,2006http://www.midwestmarket.org/publish/Document/3c9065_10e9e96031d_- tions. Patton, David;IndependentMarket Monitor Review: 2006Peak LoadEvent; Septem suppressing “legitimately high prices” withemergency procedures duringshortage condi ing andemergency operating procedures andrecommended MISOdevelop waysto prevent 13 In bilateral markets, scarcity was reflected in both bilateral trading bilateral both in reflected was scarcity markets, bilateral In Scarcity pricing was not triggered in PJM in summer 2006. To trigger The IndependentMarket Monitor noted alackofexplicit rules coordinating shortage pric | Reports &Analyses | Electric Power 13 If scarcity pricing (called pricing scarcity If Market Summary

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FEDERAL ENERGY REGULATORY COMMISSION @ FERC.GOV their prices. If market prices for electricity and gas are such that even the even that such are gas and electricity for prices market If prices. their with which a generator must convert gas to electricity to break even, given efficiency electricity.the for is price it the rate, heat implied an Knownas to delivery inWECCorCAISO. tion, inthiscase for sales thatare 24hours orless andare entered into thedayofor day prior soft cap allows market participantsto submitbidsabove thebid cap withadequate justifica in theWECCoutsideofCAISO to a$400/MWh“soft”cap, 114FERC61,135, paragraph 1.A 14 scarcity premium inelectricityprices. a suggesting strongly levels, those above well were 2006 26, July and 24 July between west the in rates heat implied that shows chart The kWh. Btu/ 20,000 need plants least-efficient the and Btu/kWh, 10,000 about of electricity. is very high—it indicates that there may be a scarcity premium in the price rate heat implied the is, money—that make could generator least-efficient Byorder dated Feb. 16,2006,theCommission modifiedtheprice cap onspot market sales An indicator of scarcity is the ratio between the price for natural gas and The actual heat rate for a simple cycle gas-fired generator is typically is generator gas-fired cycle simple a for rate heat actual The E LECTRIC P OWER M ARKET SUMMER S UMMARY 8

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