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CAPX 2020 <br />INTERIM REPORT <br />DECEMBER 2004 <br />ATTACHMENT C <br />OVERVIEW OF MARKET CHANGES <br />The federal policy changes of the early 1990s designed to open access to wholesale <br />electricity markets caused significant changes in operation of the transmission grid and led to <br />creation of regional transmission organizations (RTOs). In 1996, the Federal Energy <br />Regulatory Commission (FERC) mandated that electric utilities offer "open access" to their <br />transmission systems. Since 2000, the FERC has strongly encouraged all of its jurisdictional <br />utilities to join RTOs and to transfer to the RTO functional control of the utilities' <br />transmission assets. Non jurisdictional utilities -such as Minnkota Power Cooperative and <br />Great River Energy -have the option to join an RTO as well, and some have. <br />The Midwest Independent Transmission System Operator Inc. (MISO), which began <br />operations on Feb. 1, 2002, is the RTO for utilities in large parts of the Midwest and Upper <br />Midwest. MISO is developing rules and systems for users to follow in conducting grid <br />operations in accordance with North American Electric Reliability Council (NERC) <br />standards. It operates with stakeholder input and participation under the FERC's overall <br />direction. MISO controls access to and use of the grid for wholesale transactions for its <br />member companies. Most of Minnesota's transmission system now is operated under the <br />oversight of the MISO umbrella organization. <br />Placing functional control of jurisdictional utility transmission assets under MISO was a first <br />phase in FERC RTO policy implementation, which was designed to open up access to <br />wholesale electric energy markets. The second phase is to establish an energy transaction <br />market that allocates transmission access based on economic signals rather than physical <br />line-loading procedures. This second, market-based phase of MISO RTO implementation is <br />called the Day 2 Market. <br />MISO has announced its intention to begin operating a Day 2 market on March 1, 2005. This <br />market will allow MISO to manage congestion on the wholesale electric power system <br />through the use of locational marginal pricing (LMP), which will be the market-clearing <br />price for energy at the location to which the energy is delivered or from which it is received. <br />LMP varies by time and location, based on physical limitations, congestion and loss factors. <br />The Day 2 Market will consist of two key components: <br />^ Day-ahead energy transactions based on each market participant's forecasted needs and <br />resource availability. <br />^ Real-time transactions that true-up system-wide supply and demand. <br />Currently, no price signals exist to designate congested or less-congested power delivery <br />routes on the transmission grid. Price signals would encourage market participants to <br />consider the most efficient alternatives to deliver power. Wholesale energy purchase <br />decisions are less efficient than they could be at times under the current system. For <br />14 <br />