May 7-8, 2019 | Westborough, MA

1. May 7-8, 2019 | Westborough, MA Deborah Cooke Principal Analyst Clarifying Tariff revisions Static De-List and Export Bid data submittals Nested Export-Constrained Capacity Zones

2. Project Title: Summary WMPP ID: 135 Proposed Effective Date: October 2019 (for Capacity Commitment Period 14 submittals) A nested export-constrained Capacity Zone may be modeled for the Capacity Commitment Period (CCP) beginning June 1, 2023 (CCP 14) • Details contained in FCA 14 Transmission Transfer Capabilities and Capacity Zone Developmentpresentedat the March 20, 2019 Reliability Committee No market design changes are required Certain Tariff provisions for the Forward Capacity Market must be clarified to describe their application to nested constrained zones • Must be effective for the composite offer submittal and self-supply designation windows in October 2019

3. Additional Tariff revisions unrelated to nested export-constrained Capacity Zones included in this project • Tariff revisions to clarify data submitted for Static De-List and Export Bids • Stakeholder request at the March 2019 Markets Committee • Minor Tariff corrections

4. Clarifying Tariff Changes to Accommodate Nested Export-Constrained Capacity Zones Six areas requiring clarifying Tariff changes Offers Composed of Separate Resources Pivotal Supplier Test Forward Capacity Auction Substitution Auction Cost Allocation Specifically Allocated Capacity Transfer Rights

5. Revisions to the Tariff needed to differentiate between the “nested” and “parent” Capacity Zone • A note on terminology in this presentation: • “Parent” refers to the export-constrained Capacity Zone which contains the nested Capacity Zone (e.g., Northern New England) • “Nested” references the nested Capacity Zone (e.g., Maine) • Most of Section III.13 of the Tariff (Forward Capacity Market) already accommodates nested Capacity Zones • Many sections of Section III.13 are not specific to the type of Capacity Zone (for example, reconfiguration auctions and much of the settlement provisions) • Tariff revisions address those cases where it’s necessary to distinguish between the parent and nested zone • As an example, Capacity Clearing Price calculations differ slightly for the parent and nested zones (as discussed on the following slides)

6. Six areas of the Tariff require updates to accommodate a nested zone 1 2 3 4 5 6 Clarifying changes needed in the following areas: • Qualification: Offers composed of separate resources • Mitigation: Pivotal Supplier test • Primary Forward Capacity Auction (FCA): Round closing conditions and Capacity Clearing Prices Substitution Auction: Establishing clearing prices • Settlement: Valuation of specifically allocated Capacity Transfer Rights • Settlement: Zonal Capacity Obligation

7. Qualification: Clarify locational requirements for Offers Composed of Separate Resources 1 • Locational restrictions apply as the winter resource must provide equal or better reliability in the FCA. For example: • If the resource with higher summer capacity is located in an import-constrained zone, the winter partner must also be in the import-constrained zone • If the resource with higher summer capacity is located in an export-constrained zone, the winter partner can be located in that zone, in Rest-of-Pool, or in an import-constrained zone • Tariff provisions address locational restrictions for nested export-constrained Capacity Zones • If the resource located in a nested export-constrained Capacity Zone is the winter partner, the summer partner must also be located in that zone • If the resource in a nested export-constrained Capacity Zone is the summer partner, winter partner can be located in any Capacity Zone

8. Mitigation: Pivotal Supplier Test 2 • At the system level, the Installed Capacity Requirement is compared to the sum of qualified capacity that could be provided from each Capacity Zone • Considers both internal (Local Sourcing Requirement, Maximum Capacity Limit) and external interface limits • Tariff revisions • Incorporate the contribution of capacity in a nested export-constrained zone in the determination of the relevant requirement • Exclude the contribution of capacity in a nested export-constrained zone from the determination of the contribution from the parent export-constrained Capacity Zone (avoid double-counting)

9. Forward Capacity Auction: Round-closing conditions for a nested Capacity Zone 3 • There is an existing hierarchy for concluding the descending clock auction for each Capacity Zone: • Tariff revisions • Add the nested export-constrained Capacity Zone in the hierarchy for closing the auction

10. Forward Capacity Auction: Clearing price determination for a nested Capacity Zone 3 • Capacity Clearing Price calculations use inputs from other Capacity Zones, for example: • Export-constrained zone price = MAX [Rest-of-Pool Clearing Price + price specified by the demand curve for the constrained zone, highest price bid/offer awarded a Capacity Supply Obligation] • Tariff revisions • Add the Capacity Clearing Price calculation for the nested export-constrained Capacity Zone • Nested export-constrained zonal price = MAX [Parent Capacity Zone Clearing Price + price specified by the demand curve for the nested zone, highest price bid/offer awarded a Capacity Supply Obligation]

11. Substitution Auction: Interzonal clearing constraint will be defined for the nested Capacity Zone 4 • Interzonal trading in the SA cannot impact overall reliability of the system as determined by the primary auction • If a non-zero congestion price occurs in a constrained Capacity Zone interzonal trading is prohibited • Indicates a difference in the marginal reliability of capacity between the zone and the Rest-of-Pool • If the congestion price in a constrained Capacity Zone is zero, interzonal trading is allowed but may be limited • Cannot cause total zonal capacity to exceed the truncation point of the marginal reliability impact (MRI)-demand curve • Tariff revisions • Establish the threshold quantity for the nested export-constrained Capacity Zone • Add the substitution auction clearing price determination for the nested constrained Capacity Zone

12. Settlement: Clarify valuation of Specifically Allocated Capacity Transfer Rights for Pool-Planned Units 5 • Market Participants with specifically allocated Capacity Transfer Rights (CTRs) associated with Pool-Planned Units can either 1) receive compensation or 2) use the instruments to self-supply load outside of the Capacity Zone in which the resource is located • Compensation based on the difference in Capacity Clearing Prices in location of resource and location of Market Participant load • Tariff revisions • Clarify the value determination of Pool-Planned Unit CTRs to accommodate all Capacity Zone types

13. Settlement: Costs must be allocated correctly between the parent and nested Capacity Zones 6 * The ZCO is based on historic peak load contribution values • Recall: Under zonal cost allocation, costs are allocated to Capacity Zones using Zonal Capacity Obligation* and Capacity Clearing Prices • The nested zone will have a separate Zonal Capacity Obligation (ZCO) • Therefore, Tariff language must specify that the ZCO in the nested Capacity Zone is not included in the parent Capacity Zone ZCO (to avoid double-charges) • Tariff revisions • Clarify that the ZCO calculated for a parent export-constrained Capacity Zone is exclusive of ZCO values in a nested Capacity Zone

14. Other Clarifying Tariff Changes Changes to clarify data submittal of costs and revenues for Static De-List and Export Bids Minor Tariff corrections 7 8

15. Cost and revenue data supplied for Static De-List and Export Bids should reflect expected values 7 • Enables Market Participants to reflect the implications of future, changing market conditions in their cost and revenue data submittals • As discussed in the PSEG Proposed Amendments to ISO-NE Interim Compensation Treatment Proposal - Revision 1 at the March 5 Markets Committee Meeting • Will improve consistency between cost and revenue data submitted for Static De-List/Export Bids and Permanent/Retirement De-List Bids • Static/Export: Going forward costs, which include costs and revenues, currently based on historic data from recent Capacity Commitment Periods • Permanent/Retirement: Net present value of expected cash flows over the remaining economic life of the unit • Tariff revisions • Indicate that Net Going Forward Costs should reflect expected costs and revenues • Does not preclude using historical data to forecast expected values • Historical data can be requested from ISO New England

16. Materiality Threshold will be extended to Static De-List and Export Bids 7 • A 10% materiality threshold is applied to submitted Permanent and Retirement De-List Bids • If submitted de-list bid prices exceed the Internal Market Monitor (IMM) calculated de-list bid price by more than 10%, both the Lead Market Participant and IMM de-list bid prices are included in the Forward Capacity Auction filing to the Commission • This threshold is not currently applied to Static De-List and Export Bids • As expected – rather than historical – data will be used as the basis for the Static De-List and Export Bids, applying the materiality threshold is appropriate • Tariff revisions apply the 10% materiality threshold to submitted Static De-List and Export Bid prices

17. Revisions for Static De-List and Export bids will be effective for 2024-2025 Capacity Commitment Period (FCA 15) 7 • Static De-List and Export Bid submission window for FCA 14 is June 7 – 13, 2019 • Tariff changes will not be effective prior to that window • For FCA 14, going forward costs associated with Static De-List and Export Bids that are based on expected values can be submitted • As noted in the Internal Market Monitor memo dated February 28, 2019, “Including Revenue Projections in De-list bids” • Appropriate supporting documentation must be included to substantiate values

18. Other minor Tariff clean-up changes 8 • Minor revisions to clarify that values from previous FCAs can be used in the Qualified Capacity calculation for Existing Generating Capacity Resources • QC can be used in place of SCC for resources that had not achieved commercial operation • Cross-reference corrections • Punctuation corrections and formatting changes

19. Summary of Tariff Revisions

20. Summary of Proposed Tariff ChangesQualification: Offers Composed of Separate Resources 1

21. Summary of Proposed Tariff Changes Pivotal Supplier Test 2

22. Summary of Proposed Tariff Changes Forward Capacity Auction 3

23. Summary of Proposed Tariff Changes Substitution Auction 4

24. Summary of Proposed Tariff Changes Settlement: Cost allocation and specifically allocated CTRs 5 6

25. Summary of Proposed Tariff ChangesStatic De-List and Export Bids 7

26. Summary of Tariff ChangesMinor corrections 8

27. Conclusion • Clarifications are required in certain sections of the Tariff to accommodate a nested export-constrained Capacity Zone for the 2023/2024 Capacity Commitment Period • Changes must be effective prior to the composite offer and self-supply windows in October 2019 • Additional Tariff clarifications to require expected, rather than historical, values in the cost and revenue data submittals for Static De-List and Export Bids • Allows Market Participants to reflect the implications of future, changing market conditions • Effective for the 2024/2025 Capacity Commitment Period • Expected values (with appropriate supporting documentation) can be submitted for FCA 14

28. Stakeholder Schedule

30. Acronyms Used in this Presentation • CCP = Capacity Commitment Period • CSO = Capacity Supply Obligation • CTR = Capacity Transfer Right • FCA = Forward Capacity Auction • IMM = Internal Market Monitoring • MRI = Marginal Reliability Impact • SA = Substitution Auction • ZCO = Zonal Capacity Obligation

31. Appendix Forward Capacity Auction clearing example Concluding the Descending Clock Auction for a Capacity Zone Example of interzonal constraints in Substitution Auction clearing Simple cost allocation example

32. A simple example of the Forward Capacity Auction 3 Export Constrained Zone • The demand curve specifies a price for each Capacity Zone where the cleared quantity intersects the demand curve • At Q1 (no capacity cleared), demand curve price is set at P1 • At Q2, demand curve price is set at P2

33. What does it mean when the auction is concluded for a Capacity Zone? 3 • The Descending Clock Auction is concluded for a Capacity Zone when further actions by potential capacity sellers do not change the total Capacity Supply Obligation or the Capacity Clearing Prices in any zone • For example, if an action taken by a resource in zone A (such as a dynamic de-list) can impact CSO awards or Capacity Clearing Prices in zone B, the auctioneer would not close either zone A or B • Recall: the Descending Clock Auction collects information about offers and bids (in effect, building the supply curve) • Does not determine the Capacity Clearing Price or Capacity Supply Obligation awards

34. Illustrative example of an interzonal constraint in the SA using FCA 11 values 5 NNE cleared 8,344 MW in FCA 11 NNE zone truncation point occurred at 8,510 MW, meaning the zone could have cleared another 166 MW of supply in the FCA with a zero congestion price Due to the interzonal constraint, only up to 166 MW (maximum) of existing resources outside NNE could transfer obligations to new sponsored capacity in NNE in the SA Any additional sponsored capacity in NNE would need to clear against existing capacity in NNE in the Substitution Auction

35. Simple example of FCA cost allocation with a nested Capacity Zone 6 Inputs: Cost allocation: