NEPOOL Manual 6 Financial Transmission Rights Session Content

1. NEPOOL Manual 6Financial Transmission RightsSession Content June 11, 2002 Douglas James, ISO New England

2. Content of Today’s Session • FTR/ARR Overview • Brief Review of FTR Auction • Discussion of FTR Auction Revenue Distribution • Qualified Upgrade Awards • 4-Stage Allocation

3. FTR/ARR Overview • SMD will introduce LMP in NE • SMD also includes financial instrument to manage congestion risk: FTRs • All FTRs initially made available by auction • FTR Auction results in • FTRs • Auction Revenues

4. FTR/ARR Overview • FTR/ARR implementation basis: • NEPOOL OATT Schedule 14 & 15 • Now MR 1X & Appendix C

5. NEPOOL Manual 6Financial Transmission RightsPart 1 - FTR Auction June 11, 2002 Douglas James, ISO New England

6. Definition and Purpose • What’s an FTR? • Financial instrument to manage congestion risk • Entitles holder to share of Congestion Charges that arise during periods of congestion • Settled hourly against differences in Congestion Compo- nent of Day Ahead Energy Market LMPs (Section 5) • Defined in MW from point of receipt to point of delivery • Unidirectional • How do I get one? • Created/Sold in ISO administered FTR Auction (Section 3) • Traded in Secondary Market (Section 4)

7. FTR Valuation, Participation • Valuation of FTRs • Benefit when FTR designation is in same direction as congested flow • CC of DA LMP higher at point of delivery • Liability when FTR designation is opposite congested flow • Any actual deliveries opposing the congested flow would receive congestion credit offsetting such liability • Requirements to participate • FTR Auction, Registered secondary trading • Registered as FTR Customer • Financial Assurance Policy • Unregistered secondary trading • No requirements, settle with registered holder

8. FTR Auction Overview • Auction: opportunity to acquire and sell FTRs • only way to create an FTR (may later subdivide) • Short term and long term auctions • Initially monthly; full transmission capability • 2 six month auctions; 10 then 25 % of capability • Then annual; 50% of capability • Remainder of capability available in monthly auctions • On-peak and off-peak auctions • On-peak: weekday hours ending 0800 - 2300 • Off-peak: weekday hours ending 2400 - 0700, weekends, NERC holidays

9. FTR Auction Overview (Continued) • FTR Characteristics • Available between any Locations for which LMP is calculated and posted: Hub, Load Zone, Node, External Node • Designated as injections/withdrawals from Locations within and external to NEPOOL • Magnitude to nearest 0.1 MW • Provides hedge for deliveries consistent with FTR • Do not hedge against losses • FTR Auction is a Reconfiguration Auction • enables purchase of FTRs that are different from those offered for sale in the auction

10. Simultaneous Feasibility Test (SFT) • Preserves economic value of awarded FTRs • must collect sufficient Congestion Charges to cover FTR credits (revenue adequacy) • requires transmission system to support awarded set of FTRs during normal conditions • Power Flow: quotes modeled as generation and load at injection/withdrawal Locations • model expected network topology for period • thermal ratings, interface limits • loop flows from other Control Areas • normal conditions and single contingency events • market feasibility test; not a reliability analysis

11. Determining Winning Quotes • Winning Quotes: • Set of simultaneously feasible FTRs with highest total auction value • determined by bid and offer prices • Steps: • download bids/offers from database • solve linear programming problem (LP) • check simultaneous feasibility (SFT) • iterate LP/SFT • upload results

12. Auction Timeline • ISO initiates, directs, oversees FTR Auction • Annual (initially, long-term) auction • five business day quoting window opens five business days before beginning of month preceding period before FTRs are effective • results posted within six business days (intended to be before monthly auction window opens) • Monthly auction • five business day quoting window opens 15 business days before start of auction month • results posted within four business days

13. Auction Business Rules • Bids and Offers: • Must be Eligible FTR Bidder to buy/FTR Holder to sell • To sell, must own for entire auction period duration • Rejected quotes may be resubmitted in quoting period • Bids: are for purchases up to the specified quantity (no minimum quantity may be specified) • Offers: are for sales up to the specified quantity (no minimum); may specify a reservation price • Outstanding FTRs modeled as fixed injections • Awarded FTRs may be acquired from FTR Holders in secondary market: registered/unregistered FTRs

14. FTRSecondary MarketsOverview • FTRs are originally awarded in the NEPOOL FTR Auctions • FTRs may be freely traded on the secondary market • NEPOOL FTR secondary trading market facilitates trade of existing FTRs between FTR Holders • Allows trading of existing FTRs only • Transfer of ownership is automatically registered with the ISO for FTR trades made through eFTR • FTRs can be traded independently of eFTR, however they can only be registered to the ISO via eFTR • FTRs cannot be reconfigured in the secondary market; may be subdivided in time and quantity

15. eFTR Secondary Trading Center • FTR Holders can buy and sell FTRs directly with other FTR Holders through the Secondary Trading Center • eFTR Secondary Trading Center allows users to: • View FTR Postings • Post FTRs for Resale • Buy and Sell FTRs • The NEPOOL FTR Auction User’s Guide will have detailed instructions for participating in the secondary market (Guide is currently under development for mid-July release)

16. Secondary Trading Business Rules • An FTR can be split into multiple FTRs: • They may have different MW amounts, start and end times than the original FTR • However, an FTR cannot be reconfigured into FTRs with a larger MW value, earlier start time, later end time, or different from/to Locations • FTR MW values can be split in 0.1 MW increments • Deadline for all FTR trades for the Operating Day is the end of the previous Operating Day • Once per day, updated FTR information reflecting the previous day’s trades is sent from the eFTR database to ISO NE’s settlement systems

17. Tsm Congestion Credit Target Allocations • Monthly Transmission Congestion Credit Target Allocations calculated with Hourly Positive and Negative FTR Target allocations summed separately for each FTR Holder • Positive FTR Target Allocations are compensated as Transmission Congestion Credits • Negative FTR Target Allocations are added to the Congestion Revenue for the month; FTR Holder is charged this amount • Congestion Revenue available for a month is equal to: • Total Congestion Charges collected in the month, plus • FTR Negative Target Allocations for the month, plus • Any Congestion Revenue Excess from previous month

18. Transmission Congestion Credits • The ISO compares the total of all monthly Positive FTR Target Allocations to the total Transmission Congestion Revenues Available • If total Positive FTR Target Allocation is <= Transmission Congestion Revenue, • FTR Holders receive Tsm Congestion Credit equal to Positive FTR Target Allocation • If total Positive FTR Target Allocation is > Tsm Congestion Revenue, • FTR Holders receive shares of the Monthly Tsm Congestion revenues in proportion to their Positive Target Allocations

19. Excess Tsm Congestion Revenues • If there is any Excess Transmission Congestion Revenue remaining at year end, then: • Stage One: Excess Transmission Congestion Revenue allocated in proportion to, but not greater than, any unpaid monthly Transmission Congestion Credit Target Allocations • Stage Two: Any remaining Transmission Congestion Revenue is distributed pro-rata to entities who paid Transmission Congestion Charges in that calendar year

20. NEPOOL Manual 6Financial Transmission RightsPart 2 - Auction Revenue Settlement June 11, 2002 Douglas James, ISO New England

21. ARROverview • FTR Auction revenues are distributed to: • Sellers of FTRs in the Auction, then • Certain entities paying for new transmission upgrades via Qualifying Upgrade Awards, then • Entities that pay Congestion Charges via the 4-stage process described in Appendix C

22. ARR Definition & Eligible Entities • ARRs represent shares of revenues generated by sale of FTRs in a specific auction and characterized by: • an injection Node/External Node • a withdrawal Node • a MW quantity • ARRs are allocated to entities exposed to paying the cost of congestion in NEPOOL: • Transmission Customers • Congestion Paying Entities • Parties to Excepted Transactions, NEMA Contracts

23. FTR & ARRModels • Same model, derived from EMS & DAM model • FTR: network, ratings, interface limits, contingency file (no load, no generation) • ARR: network, ratings, interface limits, contingency file, load, generation • ARR Input from FTR: clearing price at each Node, total auction revenue (+ same model)

24. ARR Allocation: 4-Stage Process • Stage 1 - ARRs (MW) are initially assigned based on: • Load ratio share of NEPOOL generators and tie sources • Load - NEPOOL metered peak load distribution, scaled up to meet generator capacity plus tie source capacity. • Generation - demonstrated Seasonal Claimed Capability • Tie Sources - based on rated Total Transfer Capacity • Excepted Transactions (Attachments G & G2 of NOATT) • May elect special treatment – as a lumped transaction from specific source(s) to sink(s) vs. generic load ratio share of all sources to each sink

25. ARR Allocation: 4-Stage Process • Stage 2 - Remove negatively valued ARRs, run SFT • Eliminate initially assigned ARRs having negative values as determined by prices in associated FTR Auction • Reduce remaining ARRs to achieve simultaneous feasibility; these are Stage 2 ARRs (both Excepted Transactions and load share ARRS are subject to reduction) - For all non-NEMA ARRs, these are the final MW values; Stage 3 re-allocates NEMA ARRs only.

26. ARR Allocation: 4-Stage Process Stage 3 & 4 reallocate ARRs to NEMA LSEs • Stage 3 • Replace NEMA Stage 2 ARRS with initial assignment of ARRs for NEMA Contracts • Eliminate initially assigned NEMA Contract ARRs having negative values as determined by associated FTR Auction • Reduce remaining NEMA Contract ARRs to achieve simultaneous feasibility, resulting in Stage 3 ARRs

27. ARR Allocation: 4-Stage Process Stage 3 & 4 reallocate ARRs to NEMA LSEs • Stage 4 • Stage 2 awards are adjusted for NEMA Contract ARRs awarded in Stage 3 • Stage 2 awards (with NEMA adjustments) and Stage 3 awards are tested for simultaneous feasibility • Only the NEMA Stage 2 ARR awards are reduced • These are Stage 4 awards – the ARR MW allocation is complete

28. ARR Valuation – MW to $ • Value 4-Stage ARR (MW) Awards • At each destination Node (load), multiply each ARR award (in MW) by the difference in the clearing prices determined in that FTR Auction for the same origin Nodes or External Nodes and such destination Node as the ARRs. • Sum $ Value of ARR Awards by Load Zone • Apply Proportional Adjustment to Achieve Revenue Neutrality

29. ARR Valuation – MW to $ • Distribute $ Shares Within Each Load Zone • In proportion to Real-Time Adjusted Load Obligation, excluding External Transactions, within the Load Zone. • With adjustments for Excepted Transactions and NEMA Contracts. • RTALO at the time of the NEPOOL coincident peak for the month being settled.

30. ARR Settlement Timeline Auction revenues are settled on a monthly basis • Monthly Auctions: • Auction revenues are collected and distributed in second month after the auction • ARR quantities and values are calculated using data for the month in which the auctioned FTRs are effective • Long-term Auctions: • Monthly share of revenue (by number of days in a month) collected and distributed as for the monthly auctions.

31. FTR Auction & ARR Timeline