Overview of New England’s Proposed Forward Capacity Market Settlement (a/k/a “LICAP Settlement”)

1. Overview of New England’s Proposed Forward Capacity Market Settlement (a/k/a “LICAP Settlement”) David T. Doot April 26, 2006

2. The Forward Capacity Market Settlement • Background • Overview of the Forward Capacity Market (“FCM”) Settlement Agreement (a/k/a “LICAP Settlement”) • Timing Considerations

3. Background The FERC Has Required Changes to the Existing New England Capacity Market • Revenues determined insufficient to support continued operation of necessary generation • PUSH bidding did not work • At present, 45 units in New England comprising over 6,200 MWs are under Reliability Must Run (RMR) agreements — with potentially more to come

4. Background The LICAP Proposal • ISO proposed Locational Installed Capacity (“LICAP”) mechanism in 2004 • After extensive hearings, ALJ concluded in June 2005 Initial Decision that LICAP (with adjustments) was just and reasonable • Based on reaction to Initial Decision, FERC • delayed implementation to no earlier than October 2006 • heard oral arguments on alternatives to LICAP • granted requests for settlement proceedings

5. Background • LICAP Settlement Proceedings • More than 30 days of formal settlement conferences between October 2005 and March 2006 • 175 Representatives – all six New England state regulatory agencies, the ISO and stakeholders • March 6, 2006: Settlement Agreement filed • March 27 and April 5, 2006: Comments filed • April 11, 2006: Settlement Judge’s Report filed

6. Background March 6, 2006 Settlement Agreement – the FCM Settlement Agreement • Requests FERC approval on or before June 30, 2006 • Of 115 Parties to the LICAP Proceeding: • 61 Parties signed the Settlement Agreement • 8 Parties filed comments opposing the Settlement Agreement • Remaining 46 Parties neither signed nor opposed (legally waived all opposition) • Opposition from the Maine PUC, Maine Public Advocate and Attorneys Generals in Connecticut and Massachusetts, as well as NSTAR and three consumer coalitions

7. The Forward Capacity Market Settlement • Highlights of Settlement Agreement • Competitive “Descending Clock” Auction to determine capacity price • Capacity secured three years in advance for single and multi-year “Commitment Periods” • Availability penalties and credits • Fixed Transition Payments from 12/06 to start of first Commitment Period • Bilateral Trading allowed • Self-Supply Option

8. Forward Capacity Auction (“FCA”) • Annual FCA to secure 100% of the Installed Capacity Requirement (“ICR”) • Capacity Payments begin approximately three years after FCA • First FCA planned for 1Q of 2008 for Commitment Period beginning Power Year 2010/2011 (i.e. June 1, 2010 to May 31, 2011) • Annual and monthly “Reconfiguration Auctions” as Commitment Period nears

9. FCA – Commitment Periods • New Capacity can be committed for a period of up to five years (one-year increments) • Extended period minimizes investment risk • Existing and Import Capacity committed for only one year • Some previously listed capacity may be considered New Capacity (e.g., new investment, re-powering, incremental output, new source review)

10. FCA – “Qualified Capacity” “Qualified Capacity” is capacity that can clear in a FCA as follows: • Existing Capacity equal to Summer Seasonal Claimed Capability • Option to de-list all or portion of Existing Capacity • New Capacity equal to its bid MWs (subject to demonstration) • Distinct methods to be developed to determined Qualified Capacity for Intermittent and Demand Resources

11. FCA – Qualification Requirements • New Capacity: site control, critical path schedule (including milestone criteria), initial interconnection analysis, financial assurance • New Import Capacity (i.e., no multi-year contract): backed by physical unit or external control area, financial assurance • Existing Capacity: financial assurance, possible market monitor review (depending on bid(s)) • Self-Supplied Resources (from LSEs) must meet same qualification standards

12. FCA – Financial Assurance Requirements • In general, governed by existing financial assurance requirements • New Capacity to provide up to 3X of expected monthly capacity payments • New Capacity has right to cover defaults up to a period of two years • Provisions to ensure price and payment certainty and finality

13. FCA – Descending Clock Auction - Overview • Auction starts with pre-determined price – 2X the cost of New Entry (“CONE”) • CONE is initially set at $7.50/kw-month • If more Resources are bid than are needed to meet ICR, price is lowered and bidding begins again • Continue lowering price and bidding until the Qualified Capacity of Resources bid equals ICR, which establishes the “Capacity Clearing Price”

14. FCA – Descending Clock Auction - Details • New Capacity and unit-specific bids from Existing Capacity to be taken or rejected in whole, unless otherwise specified by bidder • CONE is reset each year for subsequent FCAs based on past Capacity Clearing Prices • Price Protections • Rules to address FCA failures due to inadequate supply or insufficient competition • Special pricing rules to address potential for initial auction failures • Collar on capacity prices for first five FCAs (or first three successful FCAs)

15. FCA – Locational Mechanism • ISO to determine in advance whether separate Capacity Zones are needed based on an identification of transmission limits that may bind in the FCA • If separate Capacity Zones, the ISO will conduct separate but simultaneous FCAs for each Zone, which allows for price separation • No forced Capacity Zones

16. FCA – Auction Bids • Existing Capacity may export, de-list or permanently de-list all or portions of capacity (subject to market monitor review) • Capacity to replace export, de-list or permanently de-listed capacity may be committed in subsequent Reconfiguration Auctions • Import bids subject to market monitor review • Export, de-list or permanently de-list bids may be rejected for reliability reasons

17. FCA – Reconfiguration Auctions • Annual and Monthly Reconfiguration Auctions • Monthly auctions prior to June and October allow for whole season commitments • Allows for adjustments due to de-list, permanently de-list and export bids, as well as increases or decreases in ICR • Physical resources can trade capacity commitments

18. Rights and Obligations in FCM • Committed Capacity (i.e., listed) must offer into both Day-Ahead and Real-Time Markets • In general, Day-Ahead offers must have sum of start time plus min run time plus min down time that is less than or equal to 72 hours • Offers must reflect then-known, unit-specific operating characteristics • Penalty structure for violations of offer requirements • Economic outages not permitted • De-listed resources not required to offer, but if offered into Day-Ahead, subject to same rules as all other Resources

19. Capacity Payments • Monthly payments • Multi-year Commitment Periods adjusted for inflation • Capacity Payments will be reduced by Peak Energy Rents (“PER”) • Energy payments that would have been received by “proxy unit” • Initial proxy unit presumed to have 22,000 BTU/kWh heat rate • PER adjustments will be 12-month rolling average

20. Adjustments for Availability • Payments adjusted to reflect performance of units during “Shortage Events” • System-wide Reserve Constraint Penalty Factors (“RCPFs”) trigger Shortage Events • Penalties assessed for unavailability • Penalties per event equal 5% of yearly payment and are increased by 1% per hour for events that exceed five hours • Total penalties for one day not to exceed 10% of yearly payment • Total penalties for one month not to exceed 2.5 times that total monthly payment • Total penalties cannot exceed annual FCA payments (less PER deduction)

21. Adjustments for Availability • Penalties redistributed to Resources that were available during Shortage Event • In general, Resources available with notification plus start-up time of 30 minutes or less • Intermittent and Demand Resources not subject to availability penalties and credits

22. Transition Period • Existing UCAP Products in place through May 30, 2010 • Fixed Transition Payments (No PER deductions) 12/01/06 – 5/31/07 $3.05/kW-month 06/01/07 – 5/31/08 $3.05/kW-month 06/01/08 – 5/31/09 $3.75/kW-month 06/01/09 – 5/31/10 $4.10/kW-month

23. Transition Period • Availability measured by a weighted EFORd approach • Transition Payments netted against RMR Payments • Suppliers allowed to partially de-list or export units • $4.70/kW-month payment in 2010/2011 if no FCA held (or it fails)

24. Additional Settlement Provisions • External Resources to participate in FCM and Transition Period on a basis comparable to internal Resources • For FCM, bid and offer deadlines for Day-Ahead, posting of results and RAA process rolled back to earlier time periods during Dec, Jan and Feb (results targeted by 10:30 am) • For FCM, procurement of additional Supplemental Reserves from gas fired resources for Cold Weather Warnings or Events

25. Additional Settlement Provisions • Discussions Remain Confidential • Waiver by Settling Parties through September 5, 2008 (possibly earlier if FCA becomes final) to file complaint to modify Settlement Agreement • Capacity Clearing Prices and Transition Period payments subject to Mobile-Sierra standard of review

26. Timing Considerations • June 30, 2006 FERC approval or Settlement Agreement terminates • 30 days to renegotiate Settlement Agreement if FERC conditions or modifies • October 1, 2006 filing of Market Rule changes for Transition Period • 4Q of 2006 filing of process requirements to set ICR • February 15, 2007 filing of Market Rule changes for FCM

27. Questions?