ISO Market Participants:
Since Trade Month November 2000 (which settled beginning in January 2001),
payment defaults in the ISO markets have caused the ISO to pay less than the
full amount due Scheduling Coordinators (SCs) in the monthly cash clearing
process.  The purpose of this message is to describe the ISO's policies and
procedures in settling the market when defaults occur.  
As set forth in Section SABP 6.7.4 of the ISO Tariff, when payment defaults
occur from SCs that have obligations to the ISO's markets (Debtor SCs), the
shortfall is to be prorated to SCs with net amounts due them (Creditor SCs)
based on their outstanding balances. The principles that drive how amounts
are settled and defaults are allocated to Creditor SCs are summarized below:
Proportionate allocation of defaults - The total amount of market defaults
is allocated to the Creditor SCs on a proportionate basis such that each
Creditor SC receives the same percentage of their total net amount
receivable for the month.  SCs are allowed to net the credits and debits on
a monthly basis as described below.  The intent of the Tariff is to
equitably distribute market shortfalls only to those SCs that have net
market receivables for the period.  
Each month is treated as a whole period - Final and preliminary invoices are
combined when possible (see exception conditions below) in allocating market
defaults.  Cash payments from the market are received in two stages
(preliminary and final).  At preliminary, market payments are distributed
based on the preliminary amounts due to the Creditor SCs as set forth in the
preliminary invoices. Final invoices serve essentially as true-ups to the
preliminary invoices, and accordingly, payments received at final are
redistributed to the extent possible to achieve true-up allocations for the
whole month considering the combined amounts due the Creditor SCs from both
the preliminary and final invoices.
Each month is treated as a discrete period - Market defaults are generally
allocated to the Creditor SCs that have amounts due for the month being
settled.  The exceptions to this rule involve (1) SCs that are Creditor SCs
in the current month but have default obligations relating to prior periods
or (2) Debtor SCs that pay in the current month but have unpaid balances for
prior months.  In the first instance, the Creditor SC would not be paid to
the extent of default obligations from prior months.  Amounts due to the
Creditor SC would be allocated back to the default period and such proceeds
would be allocated based on remaining amounts still owed for that period. In
the second instance the current month's payment is carried back and applied
first to the oldest outstanding balance. The proceeds would be distributed
to the Creditor SCs for that earlier period based on the Creditor SCs unpaid
balances in that month.  With respect to the carry back of payments to the
earliest period, Pre and Post bankruptcy debts are deemed to be from
different SCs.
GMC defaults are remedied as a first priority on market payments  - GMC is
billed separately from market billings on both preliminary and final
invoices each month.  In the event of payment default on any GMC invoices
(at either preliminary or final), market funds are transferred to satisfy
GMC obligations before any market distributions are made.  This first
priority position for GMC revenues is set forth in Section SABP 6.3.1.3 of
the ISO Tariff.  Therefore, when both GMC and market defaults occur (as has
occurred in each of the past few months), the Creditor SCs have two
reductions to the market clearing amounts ultimately paid - an allocated
portion of the GMC default, and an allocated portion of the market default.
RMR invoices and payments are not affected by market or GMC defaults - The
RMR invoicing process involves amounts due from the PTO's to the RMR Owners
as set forth in monthly invoices processed through the ISO's systems.
However, such amounts are invoiced independent of the ISO's market and GMC
billing processes, and accordingly, market and/or GMC defaults do not impact
RMR related payments. 
There are a number of factors that complicate the monthly process of
allocating cash to Creditor SCs when defaults occur.  Some of these factors
include:
*	amounts received after payment date deadlines - such amounts are
typically included in the next distribution
*	market payments due to Creditor SCs that default on GMC in the
current month - such market allocations are reduced by the specific amount
of the GMC default by the Creditor SC
*	allocations to prior months - not made unless the amount exceeds
0.5% of that months billed amounts
*	small invoices under $5,000 are paid in full rather than the
allocated percentage.
For more information about these allocation issues or any other related
matters, please contact Melodie Iverson (916) 351-2174 (e-mail
mkiverson@caiso.com <mailto:miverson@caiso.com> ) or Mike Epstein (916)
351-2314 (e-mail mepstein@caiso.com <mailto:mepstein@caiso.com> ) at the
ISO.  


Byron B. Woertz, Jr.
Director, Client Relations
Phone:  (916) 608-7066
Pager:   (800) 481-7037