**NEWS MEDIA CONTACT FOR IMMEDIATE RELEASE**

Barbara A. Connors September 21, 2006

\(202\) 502-8680 Docket Nos. ER06-615-000, et al.

and ER02-1656-024

**COMMISSION CONDITIONALLY ACCEPTS CAISO MARKET REDESIGN,**

**ORDERS SYSTEMS TO BE TESTED, READY BEFORE IMPLEMENTATION**

The Federal Energy Regulatory Commission today conditionally accepted
the California Independent System Operator's (CAISO) Market Redesign and
Technology Upgrade (MRTU) proposal, concluding that the tariff reforms
will bring important corrections and improvements to the CAISO markets
necessary to enhance reliability of the grid, protect customers from
market manipulation, and to promote infrastructure development.

Many of the MRTU tariff revisions address known market-design flaws,
including those that contributed to the California energy crisis of
2000-2001. These flaws impede the ability of the CAISO to reliably
deliver low-cost energy and unnecessarily restrict customers from access
to supplies of choice, including long-term supplies.

The Commission conditionally accepted the CAISO's proposal, directing
significant changes in the MRTU tariff to address concerns raised by
commenters, and requires technical conferences to address, among other
things, concerns about operational rules that differ between the CAISO
and providers of transmission service in the West outside of California,
commonly referred to as "seams" issues.

"California's market redesign is the product of more than six years of
analysis, stakeholder input, coordination with state authorities and
Commission guidance. The purpose of the MRTU order is clear: to prevent
a recurrence of the California and Western power crisis from 2000-2001.
Once in place, MRTU will do that by helping to provide adequate
electricity supply in California, by fixing market rules flaws, and by
guarding against market manipulation," Chairman Joseph T. Kelliher
observed.

"So today, by fixing many of the inherent flaws in California's market
design that contributed to the 2000-2001 Western energy crisis, we take
important steps to address remaining shortcomings in California's
existing market structure and protect Western consumers against a repeat
of the energy crisis. And by enhancing system reliability and improving
market power mitigation, we create an environment more conducive to
investment in sorely needed energy infrastructure in California and
throughout the West," Chairman Kelliher said.

Today's 400-page order responds to the CAISO's 8,000-page filing and the
numerous and lengthy comments filed by market participants both inside
and outside California, pertaining to the various elements of the
proposed market design. The Commission conditioned its acceptance in
numerous areas and noted that CAISO must submit a number of compliance
filings. The Commission also ordered three technical conferences to
address specific MRTU elements.

"Although these reforms are significant, it is important to keep in mind
that the changes are incremental and supplement the existing market
structure," the Commission said, calling the redesigned market an
important step in promoting the development of effectively competitive
markets that will bring benefits to power customers.

The Commission, in setting November 1, 2007, as the effective date for
implementing the new market design, emphasized that it is "strongly
committed to a sound and orderly MRTU implementation plan and will not
allow that to be sacrificed for the sake of expedience." The Commission
ordered protections to ensure that systems are tested and ready before
they are implemented.

With today's order, the Commission addressed three of the key factors
that contributed to the California and Western energy crisis of
2000-2001: the lack of adequate resources, flawed market rules, and
market manipulation.

Significant components of the MRTU Tariff approved today include:

-   a more effective system for managing congestion;

-   a financially-binding day-ahead market;

-   system improvements that will increase operational efficiency and
    enhance reliability;

-   a more transparent pricing system;

-   improved market power mitigation measures;

-   the opportunity for demand response resources to participate in the
    ISO markets; and

-   a process that respects the resource adequacy requirements
    established by the California Public Utilities Commission and other
    Local Regulatory Authorities, with provisions to allow the CAISO to
    procure additional capacity if needed.

    The following are among the significant changes that the Commission
    ordered to the CAISO's MRTU proposal:

-   To address the jurisdictional concerns raised by some parties, the
    Commission rejected the CAISO's proposal to apply a 15 percent
    generating reserve requirement to all load-serving entities (LSEs)
    that serve load in the CAISO Control Area.  Instead, for LSEs not
    subject to the jurisdiction of the California Public Utilities
    Commission, the Commission allows the 15 percent requirement to be
    applied only as a default if that LSE in California fails to
    identify its reserve requirement.

-   The Commission rejected the CAISO's request for an exception or
    delay in complying with the Long-Term Firm Transmission Rights Final
    Rule, and directs it to comply with that Final Rule in order to
    expedite the provision of long-term transmission rights to users of
    the grid

The Commission also required that the CAISO certify to the Commission at
least 60 days prior to MRTU implementation that the software and markets
will work as expected.

The existing CAISO market was implemented in April 1998. As early as
January 2000, the Commission had determined that the CAISO's method of
managing congestion contained a serious flaw, which was later considered
a contributing factor in the energy crisis of 2000-2001. In December
2001, the Commission directed the CAISO to create a new day-ahead market
along with a revised congestion management plan. Since that time,
numerous Commission orders provided further guidance to the CAISO in
developing its proposed market design.

The Commission approved market power mitigation measures in the MRTU
proposal, including continued bid caps on energy and ancillary services,
and improved measures to protect against the exercise of market power in
discrete areas where insufficient competitive generation exists.

California's existing market design ignores large areas of transmission
congestion until the last minute (or "real time"), and as a result
allows buyers and sellers to submit schedules that cannot be
accommodated on the transmission system. In contrast, the MRTU will use
a locational pricing system and computer modeling of the grid that
identifies constraints as early as the day ahead so that the CAISO can
adjust scheduling accordingly.

With the new design, the CAISO will be able to identify transmission
bottlenecks ahead of time, better allocate use of transmission
facilities and make more efficient use of transmission and generation
resources to serve load, and provide system reserves on a least-cost
basis. This system will provide the system operator and market
participants with detailed price information and help determine
locations for development of needed generation and transmission
facilities.

A system of locational prices will reflect the market price of what
power is worth at various locations given the physical limitations of
the transmission system. Increased transparency in real-time prices and
congestion costs should provide better information on market-driven
locational siting alternatives for investment in generation and
transmission, the Commission said. However, the Commission asked for
more detail on locational pricing and directed the CAISO to supplement
its tariff filing within 30 days.

In addition to addressing tariff language for elements approved in prior
Commission orders, today's order also addressed issues not previously
before the Commission in concept. The order directed three technical
conferences to be convened to address the allocation of resource
adequacy import capacity, Business Practice Manuals and the so-called
seams issues.

The Commission also directed the parties interested in further
developing demand response in the CAISO markets to provide proposals to
the Commission that detail new avenues for incorporating
price-responsive demand in MRTU.

Among other things, the Commission order directs the CAISO to:

-   comply with the Commission's Long-Term Firm Transmission Rights
    Final Rule;

-   report quarterly on meetings with neighboring control areas on seams
    issues;

-   file quarterly performance reports once MRTU is implemented;

-   implement reserve shortage scarcity pricing within 12 months of the
    November 1, 2007, initial MRTU implementation; and

-   develop and implement interim measures to counteract incentives for
    Load Serving Entities to underschedule (this measure is to remain in
    place until convergence bidding is implemented).

In a separate order (ER02-1656-024), the Commission today accepted a
CAISO compliance filing and "perfect hedge" proposal, designed to
provide financial protection to existing transmission contracts holders
against any congestion charges that may arise under the locational
pricing in the proposed MRTU tariff.

R-06-58

\(30\)