Market Evolution Program

1. Market Evolution Program DAM Design Issues - Participants & Obligations May 12, 2003

2. Agenda • Working Group Administrative Items • Paying Loads HOEP for energy not consumed • Importers and Exporters • Decommitting Units Selected Day Ahead • Offer or Cost Based Start-up/Shut-down Costs • Drivers for Physical Resources To Show-up In Real-time • Self-Scheduling Resources • Physical Bilateral Contracts Public 2

3. Purpose of These Slides These slides are meant to support a discussion of the various financial strategies that might be employed by market participants in a Day Ahead Market and their potential implications for design requirements. The specific design of the Day Ahead Market is an ongoing exercise between the IMO and its stakeholders. In no way are these slides meant to construe any design features of the Day Ahead Market. Public 3

4. Paying Loads HOEP For Energy Not Consumed • Discussion Point • Loads have proposed that energy not consumed has same value as energy produced Public 4

5. Importers And Exporters • Voluntary? • Day-ahead market • financial commitment for energy bought/sold • Unit-commitment • consider energy in unit-commitment? • Ramp Capacity/Transfer Capabilities • Inter-Jurisdictional Coordination • Transmission Rights Public 5

6. Decommitting Units • Basis for decommitting resources in New York • NYISO can decommit a Day-Ahead committed resource that is no longer economic (e.g. during over-generation conditions in which all generators are at minimums and additional reductions are required, or when previously committed peaking resources are no longer needed to meet requirements).(Reference: NYISO Operating Procedures, Sect. 4.2.9) Obligation of NYISO for decommitted resources • In the event a Day-Ahead committed resource is subsequently decommitted by the NYISO, that resource will be guaranteed full recovery of its start-up and minimum generation costs for its position in the Day-Ahead market. Public 6

7. Offer or Cost Based Startup/Shutdown Costs • DAM WG preference leaning towards Offer Based • Market driven vs. Rule driven • Supports more open and liquid market • Cost based would introduce overhead associated with audit & compliance • NYISO (offer based) looks at historical performance -- may consider need for mitigation procedures • Shutdown costs still need to be evaluated in terms of: • components of shutdown or fixed costs • dispatchable loads held whole for costs • multi-part bid components Public 7

8. Drivers For DA Committed Resources in Real-time • Unit Commitment Day Ahead • Financial commitment • Real-time revenue opportunities • Promotes price certainty - resources not showing up drive prices up • Operational certainty • In NYISO -- ICAP semi-annual auction is based on real performance Public 8

9. DAM Solution Impacts on Real-time • Changing offers after financial or unit commitment • Impact on real-time scheduling and pricing • Pricing methodology - 5 minute/HOEP Public 9

10. Intermittent & Self Scheduling Generators • Participate like any other generator? • Offer strategy DAM vs. RT -- e.g., negative MMCP? • Loads perception -- SSG’s are the same as non-dispatchable loads? Other Participants • Offers/Bids Not Tied To Physical Resources • Voluntary? • Generators buying in DAM • Loads selling in DAM • Other ‘financial’ participants Public 10

11. Physical Bilateral Contracts Aspects of bilateral contracts: • Terms and Terminology • Liquidity and the Choices to be Made Public 11

12. Currently, bilateral contracts may or may not be revealed to the IMO - at the choice of the market participants involved. When they are they are referred to as “physical bilateral contracts” Terms and Terminology Bilateral Contracts Out-of-market Bilateral Contracts Physical Bilateral Contracts • No IMO rule-making jurisdiction • Variety of over-the-counter products • Recognized in today’s “Market Rules” • Facilitates the removal of bilateral energy transactions from the IMO-administered real-time market • Not tied to physical scheduling • Does not have to match physical quantities Public 12

13. Terms and Terminology When a physical bilateral contract is delivered to the IMO, it will have contractual terms that are seen by the IMO and additional terms that do not need to be revealed to the IMO. Total Bilateral Contract Terms Contractual Terms Delivered to the IMO as part of Physical Bilateral Contract Data Out-of-market Contractual Terms Together, these terms constitute the entire contract • Price • Financial Security • Payment and Default • Assignment of other settlement amounts • Agency Agreements...etc. • Quantity • Location • Buying and Selling Market Participants • Duration • Assignment of hourly uplift components Public 13

14. Liquidity and the Choice to Be Made • Whether or not the IMO would continue to support physical bilateral contracts after the opening of a Day Ahead Market is a vitally important decision to be made as part of the DAM high-level design. • Continued support of physical bilateral contracts has an important impact on the DAM in many different areas including: • Relative Liquidity between the DAM and the Real-time market; • Flexibility in regards torisk/return strategies; • Prudential Support; • Gaming opportunities, etc. • What FORM physical bilateral contracts might take is a set of more detailed decisions that would follow the initial, high-level design decision. Public 14

15. At the highest level, there are 4 possible choices regarding the IMO’s recognition of PBC’s once the DAM is implemented Today... ...Tomorrow CHOICE 1 CHOICE 2 CHOICE 3 CHOICE 4 Real-time Market Real-time Market Real-time Market Real-time Market Real-time Market Physical Bilateral Contracts Physical Bilateral Contracts Physical Bilateral Contracts DAM DAM DAM DAM Physical Bilateral Contracts Physical Bilateral Contracts Public 15

16. Choice 1 - Features: • No PBC’s recognized by the IMO in either market • Market Participants free to contract for their needs through out-of-market arrangements • Choice 1 - Possible Rationale: • Everything that can be accomplished by PBC’s can also be done through out-of-market contracts • possibly encourages the long-term development of a more robust over-the-counter market • Choice 1 - Possible Liquidity Bias: • Neutral between both markets. • Any bias between the two markets would be created by out-of-market contracting activity outside the scope of DAM design CHOICE 1 Real-time Market DAM Public 16

17. Choice 2 - Features: • A lot like today: Market Participants would continue to be able to submit physical bilateral contract data in the real-time energy market • No PBC’s recognized by the IMO in the DAM market • Possible modification to data submission timelines • Choice 2 - Possible Rationale: • Do not disturb current business practices • Would still offer market participants to fully insulate their energy transaction from prices in either IMO-administered market • Choice 2 - Possible Liquidity Bias: • Likely towards the real-time market. • Buying and Selling Market Participants (i.e. parties to a PBC) would likely refrain from taking a position in the DAM in order to ensure their real-time PBC’s are perfectly hedged against real-time prices CHOICE 2 Real-time Market Physical Bilateral Contracts DAM Public 17

18. Choice 3 - Features: • No PBC’s recognized by the IMO in the R.T. market • For most PBC uses, the ultimate financial outcome would be IDENTICAL to Choice 2. • Choice 3 - Possible Rationale: • Bring more liquidity to the DAM • Depending on contract features choice 3 doesn’t have to disturb the financial outcomes already present in the market today. • More risk/return choices for market participants using the DAM • Choice 3 - Possible Liquidity Bias: • Likely towards the DAM. • Buying and Selling Market Participants (i.e. parties to a PBC) would be inclined to take a position in the DAM in order to ensure their PBC’s are perfectly hedged against DAM prices CHOICE 3 Real-time Market DAM Physical Bilateral Contracts Public 18

19. Choice 4 - Features: • PBC’s recognized by the IMO in BOTH markets • For most PBC uses, the ultimate financial outcome would be IDENTICAL to Choices 2 and 3. • Possible modification to data submission timelines in order to avoid gaming opportunities • Choice 4 - Possible Rationale: • More risk/return choices for market participants using the DAM or the real-time market • Choice 4 - Possible Liquidity Bias: • Neutral or slightly biased towards the R.T. market because of existing PBC activity in the R.T. market CHOICE 4 Real-time Market Physical Bilateral Contracts DAM Physical Bilateral Contracts Public 19

20. Summary • In their most basic form, bilateral contracts provide a basic financial outcome for the buying and selling market participant: namely, the transaction of energy at an agreed price that is not necessarily subject to the market price (be it day-ahead or real-time). • None of the 4 choices prevent this basic financial outcome. • The choices do however, affect: • the relative liquidity of the DAM and Real-time markets (in a voluntary context) • where the liquidity of the bilateral contracts market may gravitate towards • the complexity of the new DAM design • the risk/return choices that market participants will have with respect to the DAM Public 20

21. End of Slides Public 21