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FCM Performance Incentives: Initial Areas of Focus

FCM Performance Incentives: Initial Areas of Focus. Capital Power, Dominion, EquiPower , Entergy , Exelon, NextEra, NRG. Disclaimer.

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FCM Performance Incentives: Initial Areas of Focus

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  1. FCM Performance Incentives:Initial Areas of Focus Capital Power, Dominion, EquiPower, Entergy, Exelon, NextEra, NRG

  2. Disclaimer • All of the generating companies that worked on this presentation did so out of interest in helping to move the stakeholder process forward with respect to the ISO’s FCM White Paper (Oct 2012) • Questions and statements herein are intended to promote dialogue in a constructive manner • Nothing in this presentation should be interpreted as a formal or informal position of any of the companies on the ISO Whitepaper

  3. There exist several significant open issues with respect to the White Paper • Mitigation • Penalties for Non-Performance • Financial Assurance • Zonal Requirements • ISO Data/Analysis • Settlements

  4. 1. Mitigation • Need to understand how the Market Monitor will evaluate the risk component of a capacity offer as soon as possible. This is a threshold issue. • Mitigation cannot be an after-thought in market design reforms; it is central to whether any given reform will work or not • As we understand ISO’s proposal, bids and offers represent the risk capacity suppliers are willing to take in providing the capacity product. That is a business judgment that should not be second guessed by the market monitor. If sellers price their risk too high, they run the risk of being excluded from the market. • Under the ISO’s proposal, would there still be a ‘must-offer’ requirement on existing capacity resources? • If bids and offers are mitigated with respect to the amount of risk a supplier includes, does the mitigated value become a cap to the penalties that the Participant will incur?

  5. 2. Penalties for Non-Performance • Will the ISO cap the penalties for non-performance or will there be unlimited risk? • If unlimited, suppliers and investors may be unable to quantify or hedge and may find the market unacceptably risky • The market needs to allow for a range of reasonable risk management strategies, such as bilateral coverage, flexible time periods for coverage, etc. • Will ISO allow daily or weekly capacity bilaterals, as opposed to just monthly or yearly? • Will ISO revise its current zonal restrictions relating to bilateral trading? • Will FCM continue to be strictly ‘physical’ or will it become more ‘financial’ in nature? • The market needs to consider what mechanisms will exist for hedging the risk of non-performance in situations that are beyond the control of the Participant • E.g., transmission-related outages and planned outages • E.g., units that are not called by ISO far enough in advance to honor start-up times or other physical characteristics • E.g., units that are not called upon by ISO to perform because they are not economic in the interval • E.g., intermittent resources

  6. 3. Financial Assurance • We assume there will be changes to the Financial Assurance Policy as a result of the pay for performance changes. • Will generators be required to provide financial assurance to cover the full extent of any potential underperformance penalty? • Increased FA requirements could represent a significant cost change for some Participants with generating assets • Additional FA to cover potential penalties will further increase the cost of providing capacity

  7. 4. Zones and Zonal Requirements • ISO has stated that it intends to model 4 capacity zones for FCA #8 (litigation ongoing at the FERC) • What capacity zones does ISO intend to model coincident with its pay for performance changes (currently intended for FCA #9)? • Will ‘scarcity’ occur zonally, or only on a system-wide basis?

  8. 5. ISO Data/Analysis • ISO has noted that Pricing in the risks associated with its pay-for-performance model will result in an increase in FCM base payments • ISO has committed to providing data/analysis on expected “scarcity conditions” • When will data/analysis be available? • What does ISO expect the resource mix to look like under its proposal, based on the incentives built into the proposal? • FCM was predicated on an expectation that ICR would grow at a steady pace, and new entry would be needed in almost all years, which would support long-run prices near CONE. What are the implicit assumptions that are necessary to make the ISO’s new proposed model work?

  9. 6. Settlements • Further explanation is needed to understand whether and if there will be a differential between what would get collected from underperforming resources and what would be paid to over-performers • Will there be any rebate back to load?  White Paper suggests as such ‘because of the reduction in reliability that they experience’ • If so, won’t the tariff incent load-serving entities to bid their load in an uneconomic manner in order to capture a rebate? • Conversely, will load be required to make up any payments in the event of any deficits? • What will be the impact of any settlement on the payments owed to resources?

  10. Questions?

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