PROPOSED RULE

      The proposed text for the new P.U.C. Substantive Rule is as follows:

§        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
      (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

(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
        (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.

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