Project 24255 -- Mechanism to Ensure Capacity Adequacy (MECA)

							Mechanism to Ensure Resource Adequacy (MERA)

     A Joint Proposal by ARM, LCRA, …..




                   Draft 1/7/03
I. Introduction

The objective of this mechanism is to ensure adequate resource investment and “to keep the lights
on.” The objective is not to enforce regulator-mandated contracting and risk management
techniques. Risk Management of each entity is their private business – what types and amounts of
contracts whether call options or forward purchases, whether to be long or short in the long- or
short-term, how to deal with counterparty credit risks, etc.

The following proposal to ensure adequacy, apart from relying solely on the market, results in the
least distortion of the market from a contracting or “doing business” perspective while securing
additional resource investment for the ERCOT system.


II. Joint Proposal - MERA

The proposed Mechanism to Ensure Resource Adequacy (MERA) can be summarized as follows:
1. By January of each year, ERCOT determines the amount of the reserve margin for the second
   year in the future based on ERCOT forecast of load, announced resource retirements and new
   resource additions.

2. If the projected reserve margin is less than what is required, the PUCT may direct ERCOT to
   issue an RFP.

3. With 3 months notice, ERCOT then issues a Request for Proposals for deliverable resources that
   must be in commercial operation by June of the second future year.

4. New and retired resources (resources that have been out of the market for the entirety of the
   previous calendar year), or resources that will be taken out of service unless they receive a
   capacity payment, have the option of bidding an amount ($/MW-year) required to make these
   resource investments viable and the resources available to ERCOT. Any resource that claims
   that it will be taken out of service unless it receives a capacity payment must exit the market for
   not less than one full year if it is not selected through the ERCOT RFP process.
5. To qualify as a bidder, resources must post security in the amount of $1/kW bid. If the resource
   were selected and failed to be commercially operational by June of the second future year, then
   the resource would forfeit this posted security.


6. ERCOT will acquire sufficient deliverable resources to meet the target reserve margin at the
   lowest cost and will pay all selected bids their winning bid price over the summer peak hours in
   the second future year based on their availability over that period.


7. In the second future year, selected resources are paid an Adequacy Payments equal to their bid
   price spread evenly over every interval of the peak 16-hour summer period (June 15 to
   September 15) multiplied by their hourly Available Capacity scheduled to ERCOT as described
   below. Available Capacity is the resource capacity that is available and (a) if off-line, bid to
   ERCOT as Replacement Reserves or (b) if on-line, bid to ERCOT for Balancing Energy Service
   for the particular hour at an offer price of no greater than $1,000/MWh and is not bilaterally
   scheduled as an Energy Schedule nor providing any other Ancillary Service. Any existing or
   non-selected resources can also bilaterally schedule Available Capacity to counterparties other
   than ERCOT and these resources are not paid by ERCOT. Selected resources can also
   bilaterally schedule Energy and Available Capacity to counterparties other than ERCOT;
   however, by doing so, they forgo any Adequacy Payment from ERCOT.


8. Every QSE that is short for a particular interval pays an Inadequacy Charge equal to the
   capacity-weighted average bid price for all selected resources spread evenly over every hour of
   the peak 16-hour summer period (June 15 to September 15) multiplied by the QSE’s Inadequacy
   Amount, as defined below, for the corresponding interval. A QSE’s Inadequacy Amount for a
   particular interval is equal to the amount by which the QSE’s net load and resource imbalance,
   if short, exceeds the sum of its Available Capacity schedules for that interval. Any difference
   between Adequacy Payments to QSEs with Selected Resources and Inadequacy Charges paid by
   QSEs is uplifted (or credited) to all QSEs on a load ratio share basis.
III. Advantages of MERA

   MERA is forward looking and accelerates entry and additional resource investment –
    Resource Adequacy RFP process held sufficiently in advance of need to make investment
    decisions and security deposits from bidders to ensure availability.

   No Increase in Complexity for Participants –MERA does not complicate current business
    practices in the ERCOT Market (particularly important for REPs) – there is no new “regulatory”
    capacity requirement that must be negotiated in each and every contract.

   No Contract Modification Required - No existing bilateral forward contracts need to be
    modified nor is there any change in the current practice of forward contracting.

   Does not dictate the risk management strategies of various entities – Entities may have an
    added “incentive” to forward contract with creditworthy and reliable counterparties because of
    the potential exposure to Inadequacy Charges.

   Incentive compatible for LSEs – Permits all LSEs the same flexibility to match resource term
    structure (risk exposure) to load as load grows or declines over time.

   Gives proper credit to Firm (LD or no force majeure) Contracts - LSEs that have firm
    contracts for 100% of peak are not exposed to Inadequacy Charges.

   Very Similar to Replacement Reserves - If reserve margin need is properly determined, then
    in real-time, due to forced outages and weather conditions, there will be entities that rely on and
    purchase from Selected Resources, either bilaterally or through BES, and thus pay the direct
    cost of Resource Adequacy. If ERCOT acquired resources beyond this need, then that cost is
    uplifted to all QSEs on a load ratio share – similar to Replacement Reserves.

   Market Manipulation concerns - concerns about market power abuse in the procurement
    process are minimized since only additional need is acquired. This also helps reduce the cost of
    this product for consumers.

   Extremely Clean Self-arrangement provision – since QSEs incur Inadequacy Charges if they
    don’t bilaterally contract and schedule sufficient resources to meet load, all existing Resources
    that are available can charge the same premium, if any, as selected resources. Self-arrangement
    will be embedded in bilateral contracts.

   Incentive to be Available - MERA pays selected resources only if they are available in the
    future years.