A business of

Transmission Services Agreement

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Agenda

Why have a Transmission Services Agreement (“TSA”)?

Where does the TSA fit within TWBP commercial arrangements?

Content of TSA

Next steps

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Why have a Transmission Services Agreement?

KEPCO owns the electricity transmission assets…

… and KPX, as system operator, operates these assets…

… so some form of arrangement between KEPCO and KPX is needed “… to establish the contractual and operational framework under which

KEPCO provides transmission assets to KPX.”

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Why have a Transmission Services Agreement (2)?

We believe that the current MOCIE notification which requires KEPCO to provide transmission assets to KPX will not be sufficient going forward – for example, the current notification does not address roles and responsibilities for transmission system planning detailed provision of information and access to systems (e.g. SCADA,

analysis datasets, rating information) inspection of assets rights / obligations for testing of new infrastructure rights / obligations in force majeure situations performance and operating standards (other than for protection assets) general terms (e.g. modifications, disputes, confidentiality etc.)

It does not provide for any incentive mechanism for asset availability The contents of the draft Korean TSA and concepts used are consistent with

international practice - in particular, we have drawn on the Australian and Brazilian TSAs and on wider international experience on incentive regimes

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Where does the TSA fit? (1)

The TWBP commercial arrangements are intended to conform to the best practice document structure for a liberalised electricity market…

Legislative framework

Regulatory documents

Technical codesMarket agreements

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• Provision of assets to SO

• Maintenance / inspection rights

• Physical operation of network

• Co-ordination of network expansion

• Availability incentives

Where does the TSA fit? (2)

Each agreement deals with a consistent set of commercial and technical issues – e.g. the technical details of information to be provided by KEPCO to KPX on transmission assets is set out in the TSA under which KEPCO agree to provide the assets

G PSB D

Market Code• Multilateral governance

• MOCIE approval

• Market Governance• Pool Rules• System operation and

security• Revenue and

operational metering• Settlement rules• Retail market

operations

TSA• Bilateral governance

• MOCIE approval

T SO

Grid Code• MOCIE approval

• Connection• Network planning and

expansion• Network pricing

T SO G PSB T D

There are three key documents in the market agreements and technical codes category…

Proposed changes to any of the documents must be reviewed to check for inconsistencies, and must be approved by MOCIE

SO

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Where does the TSA fit? (3)

The TSA is therefore a key part of the overall commercial arrangements for the TWBP environment it provides the contractual framework for the provision of transmission assets

to the system operator its effective operation influences the overall efficiency of the operation of the

market

As such, in common with the market code and grid code KEC / MOCIE have a valid interest in the terms of the TSA, particularly in

relation to the promotion of overall efficiency compliance with the terms of the TSA should be a legal requirement set

down by KEC / MOCIE modifications to the TSA going forward should be approved by KEC /

MOCIE

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Content and purpose

The Transmission Services Agreement:

Lists the assets to be operated by KPX

Sets out rights and obligations for maintenance and inspection

Sets out rights and obligations for physical asset operation

Defines rights and obligations for network planning and new connections

Sets out governance procedures

Provides an incentive regime for asset availability

The current draft of the TSA represents drafting instructions to lawyers – it is not the final version of the agreement

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Provision of relevant assets

KEPCO agrees to provide all “relevant assets” for commercial use and operational control by KPX, on an exclusive basis, subject to the terms of the TSA

The “relevant assets” are all transmission assets owned or maintained by KEPCO save those listed in Schedule 1 of the TSA

The relevant assets may be changed according to the procedure set out in the TSA when new transmission assets are commissioned the capability of assets changes assets are retired

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Maintenance obligations and inspection rights

KEPCO is required to maintain its relevant assets (and associated equipment) in accordance with

the technical requirements of the Market Code ensure all personnel are appropriately accredited

KPX may inspect the KEPCO facilities according to the procedures set out in the TSA to verify compliance

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Physical operation of assets

KEPCO must ensure that KPX always has access to information and systems necessary for physical operation, including SCADA data analysis datasets technical asset information (set out in Schedule 3)

KEPCO is required to comply with switching instructions (incl. for reactive plant) from KPX in accordance with the Market Code

KPX is required to set out standards / principles for protection system configuration; for its own protection equipment, KEPCO is required to implement these standards

KPX, with KEPCO, must develop a black start plan, and comply with the Market Code in the event of a total or partial shutdown

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Network expansion planningThe process of network expansion planning in the TSA is divided into indicative planning and detailed planning

Indicative network planning

Forecasting possible G & L growth over next 10 years

Analysis of existing and future transfer capabilities

Statement of high level requirements for transmission augmentation

Other operational and economic information of use to prospective market participants

Detailed network planning

Development of detailed requirements for transmission augmentation

Analysis of technical options for augmentation

Full specification of detail of optimal augmentation option

Scheduling of augmentation projects across system

This separation is consistent with international practice – e.g. the processes followed by NEMMCO in Australia and NGC in the UK

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Network expansion planning (2)

KPX is required to ensure that, for long term planning purposes, KEPCO has access to system

models and information used for operational planning provide an indicative expansion plan to KEPCO

KEPCO is required to provide justification where it has not taken into account information provided by KPX in its detailed expansion plan

KPX and KEPCO are required to publish their respective plans

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New connections

KEPCO is required to provide information to KPX on proposed new connections, and provide

justification where it has not taken into account comments by KPX keep KPX informed of changes to existing connection details

KPX must agree KEPCO proposals for testing of new assets prior to their connection to the relevant assets programme of testing confirmation that assets meet performance / operating requirements confirmation of detail of safety measures

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Governance and general terms

KEC shall arbitrate between KPX and KEPCO in any disputes under the TSA (assuming the dispute resolution procedures in the Market Code do not apply)

The TSA can only be modified following a proposal from KEPCO or KPX, and proposed modifications must be approved by MOCIE

The TSA contains force majeure and confidentiality conditions

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Incentive regime on asset availability

The regime is intended to ensure that the assets are provided in a way which is consistent with overall economic efficiency in the market provide incentives to ensure assets are available and well maintained provide incentives to commit to (and implement) timely outages ensure that some portion of the cost to the market of amending generation /

load schedules to manage transmission constraints resulting from transmission outages is borne by KEPCO

The incentive regime in the TSA mirrors international practice UK: distribution companies Brazil: Transmission Concessionaires

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UK: Distribution incentive scheme

Ofgem (UK regulator) recently introduced an incentive scheme for distributors to penalise those companies which fail to meet targets for number of interruptions length of interruptions quality of telephone response to customers

The scheme will initially run for 3 years (from April 2002)

Discos can be penalised by up to 2% of their annual regulated revenue (c. £4m per company per annum) for failure to meet targets

They can earn additional revenue in the final year if they exceed targets

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Brazil: ISO – Transmission owner scheme

The TSA between ONS (the Brazilian ISO) and the Transmission Concessionaire contains an incentive scheme for asset availability

ONS pays the TC 1/12 of its annual allowed revenue per month - the allowed revenue for transmission assets includes: Direct and indirect costs of transmission network services Availability of equipment to compensate reactive power Ancillary services

The payment from ONS is reduced by a factor based on the duration of planned and unplanned outages

The per minute reduction in payments for unplanned outages is higher than that for planned planned outages: R$ 10/minute unplanned outages: R$ 150/minute for first 300 minutes, R$ 10/minute

thereafter

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Brazil: ISO – Transmission owner scheme (2)

No reduction is made for outages which are less than one minute in duration result from network improvements are requested by ONS or third parties for operational or safety reasons are caused unintentionally by ONS result from force majeure

The reduction in payments will be capped as follows for each year, the reduction will be no more than 25% of allowed revenue for each month, the reduction will be no more than 50% of the monthly

allowed revenue, with the remainder being carried over to the following month (subject to the yearly maximum)

The reduction rates per minute do note vary by time or asset class In the first 6 months of operation, ONS calculates the reduction in

payments, but it is not applied

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Detail of incentive regime in draft Korean TSA

The TSA defines a concept of “permitted outages” notified to KPX at least 4 weeks prior to commencement end on time

For each year, and for each class of asset, there is a maximum duration and frequency of permitted outages

Outages not notified more than 4 weeks in advance do not count against this maximum duration / frequency but do count as non-permitted

For all non-permitted outages, KEPCO is required to pay KPX a sum defined by a schedule to the agreement (to be defined)

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Incentive regime – worked example

Suppose for asset class j that the permitted off-peak outage duration was 10 hours and the permitted off-peak outage frequency was 5

Asset class J Cumulative duration

for threshold purposes

Cumulative frequency

for threshold purposes

Penalty incurred

?

Outage of 2 hours notified on time 2 1 No

Outage of 1 hour notified on time 3 2 No

Outage of 2 hours not notified on time

3 2 2 x value

Outage of 10 hours notified on time

13 3 3 x value

Outage of 5 hours notified on time 18 4 5 x value

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Incentive regime options

it could be “turned off” for the early period (e.g. first year?) of market operation, particularly if the regulatory regime for transmission is not well developed at that stage

the specification of the outage thresholds and the penalty values could be more or less detailed (e.g. by class of asset, by time period etc.)

some types of outages could be taken out of the regime (e.g. outages caused by KPX or resulting from force majeure)

the regime could be “two sided” – it could offer KEPCO an upside if they take fewer outages than planned penalties if they take more outages than planned

There are a number of possible options around the incentive scheme as currently specified – for example

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Next steps

The current draft of the TSA has been developed by KPX / PwC represents drafting instructions to lawyers

To reach a finalised and enforceable agreement the agreement will need to be reviewed by KPX, KEPCO and KEC / MOCIE,

and possible refined so that each are comfortable with its content the drafting needs to be legally reviewed KEC / MOCIE need to ensure that the legal market framework requires

compliance with the TSA

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