March 11-12, 2013 MARKETS Committee

1. March 11-12, 2013 MARKETS Committee Christopher Parent Market Development | cparent@iso-ne.COM |413.540.4599 Creating a tiered Reserve Constraint Penalty Factor (RCPF) structure for Total Operating Reserves TMOR RCPF & Replacement Reserve

2. Using Replacement Reserve in place of Normal Supplemental Commitment • The system will be operated to meet an replacement reserve (RR) requirement starting on October 1, 2013 • This requirement will be included in in the Forward Reserve Market (FRM), Day-Ahead Market, RAA/SCRA and Real-Time • Replacement reserves (RR) can be met by resources providing ten or thirty minute reserve capability • Having an increased reserve requirement will reduce the need to use supplemental commitments under normal operating conditions • The system will be committed to meet load plus reserves • This is expected to improve real-time price formation

3. Pricing Total Operating Reserve Requirement differently than Minimum 30-Minute Reserve Requirement • In real-time, the replacement reserve requirement will be met by the same products as today (i.e., TMR, TMOR), but the ISO is proposing to create a discrete replacement reserve RCPF (i.e., multi-tiered demand curve for 30-minute reserve capability) • Resources in real-time will be redispatched to meet the total operating reserve requirement, helping to ensure capability is available to manage uncertainties that may materialize within the operating day • Operations will not take emergency actions to maintain the replacement reserve requirement; rather using these actions to maintain only the minimum 30-minute reserve requirement • When operations takes emergency actions, the replacement reserve constraint is expected to remain violated meaning that the real-time reserve price would be minimally the RCPF associated with replacement reserve

4. Current Conceptual Reserve Demand Curve

5. Proposed Conceptual Reserve Demand Curve

6. Planned Impact Analysis of the increase for the Replacement Reserve Requirement • Evaluate the impacts of increasing the total operating reserve requirement across the day-ahead and real-time markets • This analysis would use previous increases in Ten-Minute Reserves (TMR) as the baseline • Evaluate the impacts of increasing the TMOR requirement in the Forward Reserve Market • This analysis would use previous increases in TMR as the baseline

7. Proposal Summary and Schedule • Replacement reserve will be used in place of normal supplemental commitment in real-time, included in the day-ahead market and purchased in the FRM • The replacement reserve requirement will have a different RCPF than minimum 30-minute reserve requirement • These changes are expected to go into effect for October-2013

8. Appendix: Operating Reserve Scenarios Provide overview of operating reserves requirements and how resources capable of reserves meet these requirements

9. Current Total Operating Reserve Requirement does not include Replacement Reserves • In many hours the system has available reserves in excess of the total operating reserve requirement

10. Using Replacement Reserves to increase the Operating Reserve Requirement • Including replacement reserve in the total operating reserve requirement will not necessarily result in additional commitment • The commitment process results in available reserves being in excess of the total operating reserve requirement in many hours

11. Available Reserves above RequirementAll Hours: 2009-2012

12. Available Reserves above Requirement Peak Hours: 2009-2012

13. Emergency Actions will not be used to maintain Replacement Reserves Requirement

14. Emergency Actions will be used to maintain the Minimum 30-Minute Reserve Requirement