Alternatives to Nodal Pricing for Load

1. Alternatives to Nodal Pricing for Load NEPOOL Markets Committee Henry Yoshimura Manager, Demand Response ISO New England Inc. Holyoke, Massachusetts May 25, 2004

2. Presentation Topics • Purpose and Background • Summary of Recommendations and Findings • Analysis of Alternative LMP Zones • Special Case Nodal Pricing of Load • Next Steps

3. Study of Alternatives to Full Nodal Pricing for Load • The draft report – “Alternatives to Full Nodal Pricing for Load” – was circulated for review on May 19, 2004. • The draft report was based on presentations made to NECPUC on April 13, 2004, and the NEPOOL Markets Committee on April 22, 2004. • Purpose of today’s meeting is to approve the draft report, which would form the basis for the July 1st filing with the Commission.

4. FERC Order – January 28, 2004 • The Commission found nodal pricing for load to be a just and reasonable pricing method. • However, the Commission would reconsider if other methods could provide price transparency and accurate price signals for demand response more efficiently. • ISO-NE and NEPOOL were directed to study: • The potential reconfiguration of zones, and • Pricing alternatives “that would permit nodal pricing for some load in limited circumstances.” • By July 1, 2004, ISO-NE and NEPOOL were directed to file: • The results of the above-mentioned study. • Any changes recommended as a result of that examination, or a justification for retaining the status quo, and a timeframe for implementation.

5. Study of Alternatives to Full Nodal Pricing for Load TABLE OF CONTENTS 1 Executive Summary • Background • Study Overview • Analysis of Alternative LMP Load Zone Configurations • Special Case Nodal Pricing • Recommendations Appendices

6. Recommendations • Request the Commission to waive the full nodal pricing requirement. • Implement Special Case Nodal Pricing. • Continue to use the present eight Load Zones to price energy for load at this time. • However, if additional zones are created for other purposes (e.g., locational ICAP or reserves), then zonal energy prices should recognize the new zonal configuration.

7. Findings - 1 • Alternative LMP Load Zones • Prices relatively consistent within existing Load Zones. • Exceptions are Connecticut and Maine. • NOR in Connecticut and SME in Maine stand out. • However, the difference is less than $2.00/MWh on average over the course of the year. • At such a small price differential, the additional price transparency created by splitting off NOR or SME from CT and ME, respectively, is not expected to produce any noticeable increase in demand response. • Experience with Real-Time Load Response Programs suggests that prices of $100/MWh or more are needed to produce a discernable amount of demand response.

8. Findings - 2 • Alternative LMP Load Zones (cont) • Would impose additional metering costs, and would take up to a year to implement. • Could conflict with state pricing policies, particularly bilateral arrangements made to serve “provider of last resort” services. • Unknown impacts on other bilateral arrangements. • Once planned transmission upgrades go into service, price differentials between zones disappear; changes to Load Zones would be effective for only a few years. • Given the above, creating new Load Zones based on energy price differentials is not justified. • However, if new Load Zones are created for other purposes (e.g., locational ICAP or reserves), zonal energy prices should be re-computed consistently with the new zonal configuration.

9. Findings - 3 • Special Case Nodal Pricing (SCNP) • Recommend implementing SCNP to meet the Commission’s objectives. • Implementing full nodal pricing imposes transaction costs on those who stand to lose as well as those who stand to win. • SCNP requires participating loads that stand to benefit from nodal-based settlement to pay the transaction costs. This results in a solution that is: • Economically correct, • Financially viable, and • Equitable. • SCNP supports economic development and retention of large C&I customers.

10. Findings - 4 • Special Case Nodal Pricing (SCNP) • SCNP results in a gradual transition of loads to nodal pricing to the extent cost-effective. • Zonal prices will increase somewhat as some loads (at lower cost nodes) migrate to nodal prices. • Such marginal increases may result in additional loads migrating to nodal settlement. • When transaction costs exceed the benefits, customers will choose to remain on zonal pricing. • SCNP will increase Demand Resources in the market, without subsidizing participating load. • More price responsive loads. • More ICAP Resources.

11. Analysis of Alternative LMP Zones • Compare the level and pattern of LMPs of alternative Load Zones based on known electrical interfaces. • Compute and compare the mean and standard deviation of LMPs for 13 RTEP regions. • Determine if certain RTEP regions have price levels and patterns statistically differentfrom other zones. • Ensure consistency in nodal prices within each RTEP region. • Consider the impact of RMR and SCR resources on LMP. • The manner in which reliability resources are used in CT suggests that power costs for SWCT and the rest of CT are similar, but further separates NOR from the rest of the state. • Consider Load Zones for non-Energy Markets. • Locational ICAP or reserves.

12. Analysis of Alternative LMP Zones • Multiple Comparison Test results • CT and ME consistently stand out at the high and low ends of the price spectrum, respectively. • NOR and SME stand out from the rest of CT and ME, respectively. However, the difference in the annual means is less than $2.00/MWh. • Price differences are more pronounced in the summer. • The prices of all other zones do not significantly diverge from each other, and tend to converge around the hub price. • Cluster Analysis results • Groups of nodes (clusters) with similar prices (without regard to location) mostly consisted of nodes in the same zone or in a contiguous zone. • Prices within each zone are consistent. • Creation of additional zones for energy purposes is not justified at this time. Additional zones may be necessary for other locational markets.

14. Special Case Nodal Pricing (SCNP) • SCNP permits specific loads to settle at nodal prices. LSEs would be allowed to enroll loads that: • Can be mapped to a specific SCADA point and node. Aggregation of loads across diverse locations would not be allowed. • Are compliant with certain technical and administrative criteria. • Are at least 5 MW in size. • LSEs must comply with all applicable wholesale and retail requirements related to the enrolled load. SCNP does not allow bypassing of wholesale or retail market requirements.

15. Special Case Nodal Pricing (SCNP) • Load participating in SCNP must satisfy, at its own expense, all metering and telemetering requirements, including those required under OP 14 & 18. • Once in the program, customers may not switch back to zonal pricing for at least 12 months. • Participating customers are not eligible to participate in other LRP. • Loads may be enrolled in a non-dispatchable, or a dispatchable option. • Those electing the dispatchable option would be eligible for ICAP credit.

16. SCNP – Dispatchable Option • Customer must designate a “Lead Participant” and a “Designated Entity,” in accordance with asset registration requirements. • Customer must register the amount of dispatchable load, which would receive Locational ICAP credit: • Must not exceed the customer’s non-coincident peak demand. • Minimum 5 MW of interruptible load, specified in full MW amounts. • Loads must be connected to a RIG box. • Load must curtail at Action 9 of OP 4 – Actions During a Capacity Deficiency – within 30 minutes of ISO request.

17. SCNP – Dispatchable Option • The customer must submit a Day-Ahead Demand Bid for its registered load to establish its dispatch rate. • If bid price > DA nodal price  load purchases DA energy. • If bid price < DA nodal price  load is scheduled to interrupt. • Operating Reserve charges apply if the load does not follow its interruption schedule in real time. • Customer must monitor its Real-Time LMP and request “dispatch off” and “dispatch on” status from ISO. • If load is dispatched off, any energy purchased DA would be credited at the Real-Time LMP. • Fully integrated Dispatchable Load will be available for real time dispatch when proposed changes to the energy and reserve markets are completed. • These loads may be able to participate in the Forward Reserve Market.

18. SCNP Implementation • Thorough review of several requirements and rules may necessitate changes: • OP 14 – Technical requirements for Generation, Dispatchable, and Interruptible Loads • OP 18 – Metering and Telemetering Criteria • Manual M-11 – Define operational requirements • Market Rule 1 & Manual 28 – Define settlement needs • Manual 20 – Define obligations to receive LICAP/LUCAP credit • Manual M-36 – Forward reserve market rules and procedures • Expand Asset Registration process to include settlement-only nodal pricing customers and/or Dispatchable Loads

19. SCNP Implementation (cont) • Work with Meter Reader Working Group to define roles, settlement needs, and modify data reporting procedures. • Modify settlement software to settle SCNP load and recalculate zonal prices. • Prepare special computer displays for use by ISO Control Room Operators. • Set up training sessions for customer Lead Participants and Designated Entities. • Establish verbal communication protocols for economic and emergency dispatch of dispatchable loads. • After approval of this approach, implementation timeframe would be established.

20. Next Steps • May: Finalize reports/proposals, discuss with stakeholders, and prepare FERC filing • June: Stakeholder approval of FERC filing • July 1, 2004: File with FERC