Net-Benefits Test, Baseline Accuracy, and Proposed Design Changes

1. Net-Benefits Test, Baseline Accuracy, and Proposed Design Changes Henry Yoshimura, Director, Demand Resource Strategy Robert Laurita, Manager, Market Design ISO New England June 2011

2. Today’s Agenda • Estimating Threshold Prices Using the Federal Energy Regulatory Commission’s Net-Benefits Test • Scott Englander, Director, Charles River Associates • Analyzing of Baseline Accuracy and Bias • Miriam Goldberg, Senior Vice President - Sustainable UseKEMA Inc. • Addressing Baseline Bias from Consecutive Clearing and Estimating Baseline Integrity Prices • Scott Englander and Miriam Goldberg • Revised Components of the ISO’s Compliance Approach • Robert Laurita, Manager of Market Design, ISO New England

3. Background • In addition to tariff changes required by Order No. 745, ISO New England is required to file by July 22, 2011: • The analysis, associated data and the supply curves used to determine the monthly threshold prices for the last 12 months, that implement the net-benefits test. • The ISO retained Charles River Associates to conduct this analysis. • A review of our current measurement and verification requirements and develop whatever revisions are necessary to ensure that baselines remain accurate. • The ISO retained KEMA to conduct this review.

4. Revisions to Our Proposed Design • Upon further consideration, we will propose changes to our original design proposal in the following areas: • Only Real-Time Demand Response Assets that are part of a Resource with a CSO can participate in the transitional program. • We will continue using the ISO’s 90/10 baseline estimation method for the fully-integrated approach as well as for the transitional approach; • We will NOT calculate or use a Minimum Load Reduction Threshold for the fully-integrated approach or for the transitional approach; and • We will change the proposed methodology to calculate a Resource’s Adjusted Baseline for the fully-integrated approach. • Robert Laurita will provide further details later today.

5. Baseline Integrity Price Concept

6. Frequency of Demand Reduction Events and Baseline Bias • Problem: • Consecutive demand reduction events cause baseline bias. • As the frequency of demand reduction events increase, baseline bias increases. • Bias is caused by the baseline being calculated from data in one period (e.g., season), which is carried forward to calculate the baseline for the next period. • Solution: • A rule is needed to ensure that the baseline is refreshed using a sample of contemporary meter data.

7. Baseline Integrity Price Concept • The ISO proposed that the criteria for determining the inclusion of meter data in the baseline computation be based on a Baseline Integrity Price. • The Baseline Integrity Price is the LMP level at which the frequency of a Resource’s participation in the energy market does not result in an overly biased baseline. • The Baseline Integrity Price will be determined on a monthly basis at the same time as the net-benefits test threshold price. • The monthly Baseline Integrity Price will be greater than or equal to the monthly net-benefits test threshold price. • The Baseline Integrity Price will be established using historical data (same data as that used to determine net-benefits test threshold prices) to limit baseline bias to no more than 2 percent.

8. Application of the Baseline Integrity Price (“BIP”) • Actual metered loads will be included in the daily baseline calculation if: • The Resource was not scheduled/dispatched for a load reduction. • In the Day-Ahead Energy Market: • The Day-Ahead LMP ≤ BIP, • Demand-Reduction Offer Price ≤ BIP, and • The Resource was scheduled to reduce load in the Day-Ahead Energy Market.; or • In the Real-Time Energy Market: • The Real-Time LMP ≤ BIP, • Demand-Reduction Offer Price ≤ BIP, and • The Resource was dispatched to reduce load in the Real-Time Energy Market.

9. Advantages of a Baseline Integrity Price Approach • Gives demand-response resources advanced knowledge of how its offer price could impact its baseline. • Gaming the baseline computation through strategic bidding is made more difficult. • Encourages demand-reductions on high-priced days. Meter data on days when LMP > BIP are excludedfrom the baseline calculation regardless of offer price level. • Other approaches could discourage reductions at high LMPs. • Enables demand-response resources to be available to provide demand-reductions every day. • Other approaches could restrict availability. • Respects the net-benefits threshold price by not restricting offers below the BIP.

10. Proposed Market Design Changes

11. Design Changes • Based on Stakeholder feedback on 5/11 and 5/16, as well as the results of PJM’s Empirical Analysis of Demand Response Baseline Methods, the ISO proposes modifications in the following: • Only Real-Time Demand Response Assets that are part of a Real-Time Demand Response Resource with a CSO can participate in the transitional program. • The methodology used to calculate a Resource’s Mean Load in each interval to establish the Resource’s Baseline, • The use of a Minimum Load Reduction Threshold, and • The methodology used to calculate a Resource’s Adjusted Baseline.

12. Participation of Real-Time Demand Response Assets During the Transition • Original Design Proposal: • The ISO proposed that any Real-Time Demand Response Asset may participate during the transition period. The asset does not have to be part of a resource with a Capacity Supply Obligation (“CSO”). • Revised Design Proposal: • The ISO proposes to that participation during the transition period be limited to Real-Time Demand Response Assets that are part of a resource with a CSO. • Reason for Change: • The infrastructure in place to communicate interval meter data to the ISO in real time occurs through a Remote Terminal Unit associated with a Real-Time Demand Response Resource with a CSO. Assets that are not part of a Real-Time Demand Response Resource cannot communicate through a Remote Terminal Unit. • The fully-integrated solution will remove this constraint.

13. Mean Load Value • Original Design Proposal: • The ISO proposed to calculate a Resource’s Baseline (Mean Load), for each 5-minute interval, using loads in the most recent prior ten days of the same day type. • Revised Design Proposal: • The ISO proposes to retain the current methodology which calculates the Resource’s Baseline, for each 5-minute interval, as 90% of the prior day’s Baseline plus 10% of the current day’s load. (a.k.a., the 90/10 method). • Reason for Change: • PJM’s comprehensive DR baseline study found the ISO’s 90/10 method (symmetrically adjusted) to be as accurate and unbiased as the most recent 10-day method. • Software systems are currently in place to implement the 90/10 method. • There will be no change from the Transition Period to Full Integration.

14. Minimum Load Reduction Threshold • Original Design Proposal: • The ISO proposed the use of a Minimum Load Reduction Threshold to represent the minimum change in load (positive or negative) that can be measured with statistical significance relative to the Mean load in the interval. • Real-Time Load Reduction amounts that do not exceed the Resource’s Minimum Load Reduction Threshold will be set to 0 MW. • A Proxy Minimum Load Reduction Threshold was being considered for the Transition Period. • Revised Design Proposal: • The ISO proposes to remove the Minimum Load Reduction Threshold requirement from the Transition Period and Full Integration designs.

15. Minimum Load Reduction Threshold (cont) • Reason for Change: • The Minimum Load Reduction Threshold would have been calculated from the prior 10 day load data used in the baseline’s Mean Load calculation. • The change to using the 90/10 method to calculate the Mean Load does not allow us to compute this statistical metric. • While eliminating the Minimum Load Reduction Threshold may result in payment to Resources for load reductions during dispatch intervals that are “in the noise”, there will be also be charges to Resources for load increases during dispatch intervals that are “in the noise.” • If the Baseline methodology is accurate and unbiased, any “in the noise” payments or charges should be symmetrical and, over time, cancel each other out.

16. Adjusted Baseline • Original Design Proposal: • The ISO proposed to calculate a Resource’s Adjusted Baseline during the intervals in which it is dispatched for a load reduction, based on the Resource’s actual metered load immediately prior to the first interval the Resource is dispatched for a load reduction. • Revised Design Proposal: • The ISO proposes to calculate a Resource’s Adjusted Baseline during the intervals in which it is dispatched for a load reduction, based on the average of the Resource’s actual metered load in the time period 2 hours plus the Resource’s Startup Time immediately prior to the first interval the Resource is dispatched for a load reduction. • Reason for Change: • The change accounts for the expected reductions in load (i.e., ramping) during Resource’s Start-up Time. • The change is consistent with the ISO’s current baseline methodology, which PJM’s analysis found results in accurate and unbiased baselines when symmetrical adjustments are applied.

17. Links: • PJM’s Empirical Analysis of Demand Response Baseline Methods Study • Presentation: http://pjm.com/~/media/committees-groups/committees/mic/20110510/20110510-item-09-cbl-analysis.ashxReport: http://pjm.com/~/media/committees-groups/committees/mic/20110510/20110510-item-09a-cbl-analysis-report.ashxTables:  http://pjm.com/~/media/committees-groups/committees/mic/20110510/20110510-item-09b-cbl-analysis-report-supplemental-tables.ashx