PROPOSED RULE The proposed text for the new P.U.C. Substantive Rule is as follows: §25.xxx. Tiered Frequency Response Service Pilot Program. (a) Purpose. The purpose of this section is to provide the independent organization in the ERCOT Region (“ERCOT”) the required program elements for, and the necessary directives to implement, a one-year pilot program for a new demand-side service within the ERCOT Region to be entitled Tiered Frequency Response Service (TFR). A primary focus of the pilot project shall be instantaneously interruptible loads with highly fluctuating non-seasonal consumption characteristics, in furtherance of this Commission’s directives in the April 11, 2001 Final Order in Docket No. 23220 mandating that load resources that have historically participated in the ERCOT Region as demand side resources have reasonable opportunities to continue to participate and that additional measures be developed to enable load resources greater opportunity to participate in the ERCOT Region markets. (b) Application. This section applies to all loads located within the geographic confines of the ERCOT Region, including those situated within the geographic service area of a Non-Opt-In Entity. (c) Definitions. The following words and terms, when used in this section, shall have the following meanings unless the context clearly indicates otherwise: (1) Average Demand — the energy consumed by a load over a specific period of time divided by the number of hours in the same period of time. (2) LaaR — Load Acting as a Resource, as that term is defined in the ERCOT Protocols. (3) Non-Opt-In Entity — an electric cooperative or municipally owned utility that has not opted for retail customer choice. (4) Non-Seasonal Load — load which operates during all months of the year and does not exhibit a pattern of minimum and maximum demands corresponding to specific seasons of the year. (5) Qualifying Load — any non-seasonal load, regardless of it’s load shape, load factor or fluctuating characteristics, that is capable of being instantaneously interrupted and that cannot or does not wish to meet the operational requirements for participation as a LaaR in the ERCOT Region’s Responsive Reserve market. (6) Tiered Frequency Response (TFR) Service — the reliability service mandated by this section of the Commission’s Electric Substantive Rules. (7) Under-Frequency Relay (UFR) — a device capable of sensing a drop in the system-wide frequency. If the system-wide frequency experiences a decline below the re-set level, the UFR will respond by disconnecting the load Petition of Chaparral, SMI and Nucor April 14, 2006 to Adopt TFR Rule Page 2 controlled by the UFR from the ERCOT System (as defined in the ERCOT Protocols). (d) Eligibility to provide TFR Service. In addition to meeting the definitional requirements of a Qualifying Load set forth in subsection (c)(5) of this section and any other requirements contained in subsection (e) of this section, a load must meet the following additional requirements to be eligible to provide TFR Service: (1) The owner or operator of the load must install and maintain a UFR under the sole operational control of ERCOT that is capable of being set to trip at both 59.85Hz and 59.75Hz. (2) A potential TFR provider must have no history of non-compliance with any ERCOT Protocol or program contractual requirements applicable to it. (3) The TFR provider must bear the cost of any telemetry between the load, the UFR and ERCOT necessary for ERCOT to monitor the load and verify the proper operation of the UFR. (4) A TFR provider must register with ERCOT as a Resource Entity and register each ESI ID providing TFR Service. (5) A TFR provider must execute a one-year standard contract with ERCOT (“TFR Agreement”), which may be renewable for subsequent terms pursuant to subsection (l), requiring the TFR provider’s full performance with all TFR Service requirements and contract terms and conditions for the duration of the contract. (6) No load designated by a single ESI ID shall be eligible to provide TFR Service if any portion of the load covered by the ESI ID is concurrently providing any other Ancillary Service as a LaaR. (e) Basic Requirements of TFR Service. (1) ERCOT shall administer implementation, subscription to, and enforcement of TFR Service requirements. (2) ERCOT shall limit TFR Service to a pool of Qualifying Loads with an aggregate annual average demand of no more than 5001000 MW. (3) ERCOT shall enter into one-year TFR Agreements with the owner or operator of Qualifying Loads that may be renewable for subsequent terms pursuant to subsection (l), providing for the installation by the Qualifying Load and subsequent sole operation by ERCOT of UFRs that shall remain continuously armed for the duration of the TFR Agreement, except during ERCOT.- required periods of interruption. The terms and conditions of the standard TFR Agreement, which shall be drafted by ERCOT’s legal staff, shall be equitable, just and non-discriminatory, and non-revocable by the Qualifying Load after the first six months of the TFR Agreement, except for ERCOT’s breach and failure to cure as provided in the TFR Agreement and revocable at ERCOT’s sole option for non-performance or contractual breach by the Qualifying Load. The TFR Agreement shall require the imposition of severe financial penalties upon Qualifying Loads for breach. A load that elects to Petition of Chaparral, SMI and Nucor April 14, 2006 to Adopt TFR Rule Page 3 opt out of a TFR Agreement during the initial six month trial period shall be barred from providing TFR Service for a period of three years from the date on which the Qualifying Load opted out of the TFR Agreement. (4) During the term of the TFR Agreement, the frequency at which the UFR is set to trip will be rotated between 59.85Hz and 59.75Hz at six-month intervals corresponding with the first and second six-month periods of the calendar year. In the event that a TFR Agreement does not commence on a date corresponding to either calendar six month period, ERCOT. shall set the trip frequency at either 59.75Hz or 59.85Hz, at ERCOT’s sole discretion, until the commencement date of the next calendar six month period, at which time the frequency trip setting will be rotated to the frequency trip setting not initially chosen by ERCOT, Inc. In selecting the initial TFR Agreement frequency trip setting, ERCOT shall be guided by the goal of having approximately one- half of the loads providing TFR Service at 59.75Hz and one-half at 59.85Hz at any given time. (5) Applications to provide TFR Service shall be processed and contracts executed on a first come, first served basis. Upon reaching the 5001000 MW aggregate cap for TFR Service, ERCOT shall maintain a waiting list for future participation by Qualifying Loads and, as space becomes available to provide TFR Service, ERCOT will allow Qualifying Loads to participate in the service in the order in which they applied. (6) No limits shall be set on the number or duration of interruptions during the TFR Agreement’s term, or any portion thereof. However, UFRs shall not be tripped manually by ERCOT for reasons other than a system emergency or capacity insufficiency. ERCOT shall provide to the QSE for the Qualifying Load as much advance notice of a manual trip as reasonably possible given the specific circumstances. If ERCOT determines automatic tripping of UFRs has caused or will cause frequency control or other reliability problems for the ERCOT System, ERCOT with notice to participating load, may elect to disable the UFRs to avoid automatic tripping or modify trip settings. (7) A load providing TFR Service shall not be considered to be a LaaR, nor shall it be required to meet any qualification, eligibility or performance requirement expected of a LaaR in the ERCOT Protocols, except to the extent that such qualification, eligibility, or performance requirement is expressly contemplated in this rule. (f) Determination of TFR provider’s contract load quantity. (1) The TFR provider’s contract load quantity shall equal the TFR provider’s average demand for the twelve months immediately preceding the month of execution of the TFR Agreement. The contract load quantity shall be used for the purpose of determining the aggregate amount of load deemed to be providing TFR Service at any given time. . Petition of Chaparral, SMI and Nucor April 14, 2006 to Adopt TFR Rule Page 4 (2) The TFR provider’s contract load quantity is not an indicator of the amount of load that will be shed by the TFR provider upon operation of the UFR. The amount of load shed at any given moment will likely be more or less than the contract load quantity but shall in any event be the entire load controlled by the UFR. (g) Compensation to providers of TFR Service. (1) For each calendar month during the term of the TFR Agreement, compensation for each participating Qualifying Load will be determined by taking 75 percent of the higher of the average price per megawatt paid in the ERCOT Region’s Responsive Reserve Service market for that month, or for the corresponding calendar month in 2005, and multiplying that amount by the participating Qualifying Load’s average demand for the month for which compensation is being calculated. That product is then multiplied by the number of hours in the month to derive the total compensation for TFR Service for that month. (2) Compensation to loads providing TFR Service will accrue on a calendar month basis and shall be paid to the QSE representing the participating Qualifying Load as part of the regular settlement process set forth in Section 9 of the ERCOT Protocols. (h) Implementation Deadline for TFR Service. ERCOT shall take such steps as necessary, including the drafting of any required TFR Agreements, to ensure that it will be ready to accept applications for the provision of TFR Service by no later than December 1, 2006August 1, 2007, and that Qualifying Loads will be able to commence providing TFR Service under standard TFR Agreements by no later than January September 1, 2007. ERCOT shall include a description of TFR Service and the service’s eligibility requirements on its website and in all appropriate consumer education undertakings. (i) Recovery of TFR Service costs. ERCOT shall recover the monthly cost of TFR Service compensation from QSEs on a monthly load ratio share basis. (j) Treatment for Reserve Margin Calculations. All Qualifying Loads providing TFR Service shall be treated as non-firm and excluded from system peak demands in all ERCOT resource analyses and reserve margin calculations. (k) Testing and verification. ERCOT shall implement qualification procedures for determining the eligibility of applicants under the criteria set forth in this rule and shall develop and implement reasonable testing and verification programs to ensure the proper functioning and setting of the UFRs as well as the proper functioning of any required telemetry equipment. (l) Term of TFR Service and Renewal of Contracts. TFR Service will be implemented initially as a pilot program utilizing one-year contracts. This will allow the Commission to evaluate the utility and value of TFR Service and make any necessary modifications to take effect after the end of the one-year TFR Agreement term. If the Commission takes no action to modify the rule during the first term of a TFR Agreement, the TFR Agreement will be renewable for an additional term of one, two or three years at the option of the Qualifying Load, subject to any commission action to discontinue or modify the terms of TFR Service and participating loads’ right to terminate the TFR Agreement if the commission modifies the terms. Each Qualifying Load will notify ERCOT, Inc. of its choice of renewal option no less than thirty days before the anniversary date of its TFR Agreement with ERCOT.