October 7-8, 2014 | NEPOOL MARKETS COMMITTEE

1. October 7-8, 2014 | NEPOOL MARKETS COMMITTEE Matt Brewster Market Development413.540.4547 | Mbrewster@iso-ne.com Design changes for FCA10 to implement capacity zone demand curves FCM Sloped Demand Curve: Conforming changes for FCA10

2. Design changes for FCA10 (and beyond) to implement capacity zone demand curves • Includes conforming design changes necessary to implement capacity zone demand curves • Changes to become effective beginning with FCA10 • Rules for conduct of the FCA slide 3 • Eliminating zonal administrative pricing rules slide 7 • Overview of tariff redlines slide 12

3. Forward Capacity Auction Conforming changes to FCA starting price and descending clock auction (DCA)

4. FCA starting price for capacity zones • An import-constrained capacity zone may have a separate Net CONE if estimated to be ≥ 115% of system Net CONE • Current estimates are < 105% in CT, NEMA/Boston, SEMA/RI • FCA starting price for a zone with separate Net CONE would be the zone’s demand curve “cap” price • e.g., MAX ( 1.6 x zone Net CONE, zone Gross CONE ) • Separate DCA rounds may be conducted for capacity zones with a unique FCA starting price

5. FCA starting price for capacity zones (cont.) • New capacity zones may be identified in year prior to FCA (§III.12.3) • Net CONE study will evaluate potential cost differences across region • If a new import-constrained capacity zone were formed, estimated costs for subarea would be used to determine zone’s Net CONE • New zone Net CONE filed for instant FCA if ≥115% of system Net CONE • April 28th Order accepting Capacity Zones process asked if local Net CONE estimate should be determinant of capacity zones (ER12-953, P 43) • ISO recommends Net CONE not be a factor in determining zones • Zones based on transmission studies (current process) identify areas with need for additional supply, based on low capacity levels, and then model the zone in the FCM to establish needed price signals • Zones based on expectation of higher cost of supply would inefficiently support costly resources when transmission limits don’t prevent more cost-effective resources outside the area from serving local requirements

6. Revise DCA application of LSR and MCL • DCA round closing conditions • Capacity zone closing conditions evaluate whether zone supply is less than or equal to quantity of demand specified by the capacity zone demand curve (rather than ≤ LSR, or ≤ MCL) • System-Wide Demand Curve is adjusted for purposes of evaluating system excess supply in auction rounds after an import-constrained zone has closed (FCA won’t purchase extra supply outside zone to cover unmet demand) • Update references to LSR and MCL, as appropriate, where capacity quantities are determined by zone demand curves

7. Administrative pricing rules Elimination of capacity zone administrative pricing

8. Capacity zone administrative pricing rules • Remove remaining administrative pricing rules applicable to capacity zones: • Inadequate Supply (IS), • Insufficient Competition (IC), and • the Capacity Carry Forward Rule • System IS and IC rules were removed with implementation of the system-wide demand curve for FCA9

9. Remove Inadequate Supply and Insufficient Competition pricing rules • Administrative provisions were intended to mitigate supplier market power • Sloped demand curves dampen price volatility and mitigate the exercise of market power by adjusting demand to price • Administrative triggers and pre-defined prices will not necessarily track with market fundamentals

10. Remove Capacity Carry Forward Rule • Originally implemented to prevent price suppression in subsequent auction after clearing excess capacity with a non-rationable (lumpy) resource needed to meet zone requirement • Excess may negate need for new entry in next year • Zone and system demand curves more effectively limit the magnitude of price suppression • Non-zero demand value at levels above LSR in import zones • Import zone price not less than rest-of-pool (based on system curve) • Demand curves decrease the likelihood of clearing excess MW • Example on next slide • When the auction must purchase 100% of LSR (vertical demand) a 300MW resource may be accepted to satisfy 1MW need • With sloped demand curves, the auction evaluates the relative gain or loss of clearing excess MW to satisfy demand and may not accept excess MW • Sloped demand curves will decrease excess MW which will further limit price suppressing effect of lumpy resources

11. Capacity Carry Forward Rule Example:Sloped demand curves decrease the likelihood of clearing excess MW • Single capacity zone sloped demand curve,and two ‘lumpy’ priced offers [A] and [B] • Not possible to clear at exact intersection ofsupply and demand (due to lumpy offers)- Lumpy offers must clear all or nothing • Auction maximizes social surplus; optimum will be achieved by either: Alternative (1) is to clear the lumpy marginaloffer [B]. Yields a lower price [P1] and more capacity [Q1]. Surplus loss of clearing [B] is caused by excess MW procured at price above demand (represented by red triangle) Alternative (2) is to not clear offer [B]. Yields a higher price [P2] and less cleared capacity [Q2]. Surplus loss of not clearing [B] is caused by foregoing capacity offered at prices below demand price (represented by green triangle) • Offer [B] clears if the green triangle is larger than the red triangle Alternative 2 [P2, Q2] Alternative 1 [P1, Q1]

12. Tariff Redlines Overview of tariff revisions for capacity zone demand curves

13. Overview of tariff revisions for capacity zone demand curves The posted tariff revisions include all necessary redlines to implement the ISO’s proposed capacity zone demand curves and conforming changes. Note: the tariff document also includes the revisions for demand curve related changes to Reconfiguration Auctions and CSO Bilaterals (WMPP #64)

14. Forward Capacity Auction

15. Administrative Pricing Rules

16. Related cleanup items

17. Summary and schedule Recap and next steps

18. Summary and schedule • Summary • Design changes for FCA10 include rules for conduct of FCA and removing administrative pricing rules • Proposed tariff revisions have been posted with October MC materials • Schedule • November – additional discussion (design and tariff) • December – MC vote • January 2015 – filing with FERC