December 9-10, 2014 | NEPOOL Markets Committee Westborough, ma

1. December 9-10, 2014 | NEPOOL Markets CommitteeWestborough, ma Winter Periods Prior to June 1, 2018 Winter Reliability Solution - Committee Discussion Andrew Gillespie Principal analyst Market development

2. background

3. Winter Reliability Program • In July of 2014, the ISO filed tariff revisions to aid in maintaining reliability during the winter 2014-2015 (the 2014-2015 Winter Reliability Program). • On September 9, 2014, the FERC accepted these changes, but also required the ISO to initiate a stakeholder process to develop a proposal to address reliability concerns for the 2015-2016 winter and future winters, as necessary.

4. Options to Address Winter Reliability Concerns As noted in the ISO’s compliance filing, the ISO will work with stakeholders to develop a proposal to address reliability concerns for future winters. Such a proposal could be: • To continue in some manner a form of the 2014-2015 Winter Reliability Program,- or- • Some other market-based mechanism to achieve the same, or perhaps broader, objectives.

5. prior discussion points and comments

6. What is the Concern? • Lessons learned from Winter 2013-2014: • Oil inventory was vitally important to reliability this past winter • Gas pipelines were constrained even without significant use by gas-fired generators • Unless the weather is mild, winters will be more challenging given retirements • Anticipated improvements for Winter 2014-15 and beyond: • Implementation of the “Offer Flexibility” project • Commission clarification regarding generator obligations • But, can the region meet the energy needs of a severe winter (like 2013-14 or 2003-2004), and fill the deficit resulting from the shutdown of Vermont Yankee and Salem Harbor? From Cold Weather Operations: New England Winter Readiness Seminar

7. From the Commission: • The Program’s unused fuel inventory design is closer to a market-based solution than last year’s design. • The Program is designed to help ensure fuel adequacy by creating incentives for resources to procure more fuel than they would have procured in the absence of the Program. • Given this objective, we find that ISO-NE reasonably limited participation in the Program to market participants that ISO-NE, as the system operator responsible for ensuring reliability in the region, determined will procure additionalfuel ahead of winter as a result of payments through the Program.

8. Summary of Participant Comments at Last Meeting: • Pursue a market-based solution which achieves a system reliability objective - the market option is the right route to the address the objectives. • Do not want an extension of the current winter reliability program to be the solution for all winter periods prior to FCM Performance Incentives. • Any further performance incentives for a winter period should be to a broader range of resources. • It is not necessarily difficult to implement a market-based solution. • We do not need a market-based solution as an interim solution - a market-based solution for next winter would not be supported. • Prefer the ISO continue with the current winter reliability program for the 3 year period prior to June 1, 2018 and spend the ISO development money on other projects. • Don’t lock-in anything specific without observing the effects of the energy market changes or this upcoming winter’s program. • To spend more time developing an incremental capacity performance product is not worth our time. No clear consensus

9. Lacking Consensus… • As a backstop measure if there is no consensus on an interim alternative solution, the ISO will propose to use the framework of the 2014-2015 winter program as an interim solution for future winters (through 2017-2018) • Possible changes and improvements to current program for future years: • Price indexing vs. fixed price • A total energy equivalent vs. fuel quantities • Extended duration vs. year-by-year

10. ISO Proposal • While hopeful that other market improvements would help address the region’s dependence on natural gas, other factors causes ISO-NE to conclude that a fuel adequacy program is necessary for future winters. • Retirements of non-gas generation will likely make the region more reliant on natural gas than before. • In the Winter 2013-2014 there were more natural gas pipeline constraints than expected, and resources had difficulty replenishing oil inventories. • ISO-NE anticipates the need for some form of a winter reliability program for each winter prior to the implementation of Pay-for-Performance (PFP).

11. Discussion of Market Based Option

12. Alternative Solution - Discussion Points • What incentive can be created and what opportunity is there for material improvement over status-quo? • Given other important issues, what is the value of diverting time and expenditure of limited resources to develop, file, and implement an alternative? • Development time (ISO and stakeholders) • Discussion, debate, and possible litigation • Software implementation (possibly supplanting other projects) • The degree of innovation – how complicated or simple • Are new constructs needed, or can current constructs be used? • Is new software needed, or can current software be adapted?

13. Participant Suggested Alternative: ‘Pilot PFP’ • A participant suggested that some type of pilot PFP program be considered, and to facilitate further discussion of this idea the following aspects/questions are presented. • Would this be voluntary? If so: • How would a scarcity condition be defined for the subset of participating resources? Who is under-performing and who is over-performing? • How would an appropriate balancing ratio be determined? • What is the MW amount procured? • Are there any qualification requirements? Any offer review/mitigation? • How would settlement work in lieu of sub-hourly functionality? • What would be the performance payment rate? • Would there be any exemptions? Any stop-loss mechanism? • How would payments (i.e., costs) be allocated? • NOTE: Full PFP infrastructure will not be in place by 2015.

14. Tentative Schedule for Proposed Alternative

15. Conclusion • As previously noted, if there is no consensus on an interim alternative solution the ISO will propose to use the framework of the 2014-2015 winter program as an interim solution for future winters (through 2017-2018). • Review what, if any, additional lessons learned during the upcoming winter. • Consider possible changes and improvements: • Price indexing vs. fixed price. • A total energy equivalent vs. fuel quantities. • Extended duration vs. year-by-year.