Financial Assurance for New Demand Resources

1. Financial Assurance forNew Demand Resources Ad Hoc Group of Demand Resource Providers January 13, 2010

2. Introduction • Ad hoc coalition of DR Providers seeks to address certain Financial Assurance (FA) risks in the FCM • This presentation describes the issues, rationale, and some possible changes to mitigate those risks • Coalition seeks review and comments to our proposals, and plans to develop appropriate Market Rule changes based upon feedback

3. Financial Assurance Issues • Physical delivery requirement for a new resource with an FCM obligation-- there is no forgiveness of associated Financial Assurance (FA) if resource is not delivered even if owner completely covers the obligation via trade or reconfiguration • The resource delivered must be the same type (On Peak, Seasonal Peak, RTDR or RTEG) and in the same load zone or dispatch zone • Type and location limits are more strict for Demand Resources • Double FA coverage—if a new resource that is not yet commercial trades away all or a portion of its CSO, and acquiring resource is not commercial, then two FA’s will be posted for one obligation

4. FA Physical Delivery Issue Details • FA required for New Demand Resources that obtain a Capacity Supply Obligation (CSO) • FA will be forfeited if the responsible entity does not actually build the New Demand Resource within two years of original CSO due date • This remains true even if the market participant successfully covers the CSO (through trade or ARA) for all applicable periods of the obligation • Even an accepted permanent de-list in a later auction does not remove the FA requirement. At that point, there would be FA required without an obligation (and therefore no opportunity to earn FCM revenue) 4

5. FA Policy Background • During negotiation of FCM Settlement (winter 2005/2006), the ISO insisted that the FCM should be a physical market only • Did not want pure financial players taking positions in FCM with CSO, and subsequently selling those positions • Resulting agreement was to use a combination of Qualification and FA as the mechanisms to make it unattractive for anyone not fully intending to deliver a new resource • Independent of resource type

6. FA Policy Balancing • Appropriate FA policy must balance market risk with the imposed risks to the Market Participants (MP) for participation in the FCM

7. DR Industry Risks in FCM There are many inherent differences between developing DR and generation. With regards to FCM qualification and FA: • At the time of an Auction, the location of a future Generation Resource is known, while the exact location of a DR Resource is typically yet to be determined based on the success of the Customer Acquisition Plan • FCM Qualification for generation requires that the project sponsor already has site control.  (Section 13.1.1.2.2.1) • During build-out, DR Providers may have secured excess capacity in some load or dispatch zones and a deficit of capacity in others; DR Providers may also have excess capacity in a Demand Resource type and a deficit in another • These imbalances can be corrected through a Bilateral or Reconfiguration Auction (either internal or external), thereby providing the ISO with exactly the capacity, by Capacity Zone, that was committed to in the Auction • However, these trades do not unburden the DR Provider from their FA requirement, even if total amount of capacity is provided in the appropriate capacity zones • Demand Resources are more susceptible to risk of local economic conditions • Demand Resources are built in small increments. DR Providers are much more likely to deliver a portion of CSO, rather than none at all

8. Current Rules Prevent Market Hedging Disincentives Exist in Market Rules for Financial-Only Players • To date, financial players are not participating in the FCM • The rigorous Qualification Process strongly discourages financial-only players from applying, and gives ISO-NE an effective tool for screening out any that do • FCA1, 2, & 3 are done, as is 1st ARA for FCA1, results well understood, and there were no financial players • The potential financial liability for payment of 2 X CONE in an ARA if the financial play cannot be unloaded necessarily exceeds the potential revenue from a successful financial play by two to ten times. • A downside risk of two to ten times the potential gain will naturally discourage speculators

9. Potential Solutions • If a MP with a new resource successfully covers the non-commercial portion of a CSO for that resource for all commitment periods for which the new resource had a CSO, and subsequently permanently de-lists the non-commercial portion of the resource, FA would be returned • Market ends up in same place as case where the new resource was delivered, and subsequently permanently de-lists • More Flexibility in Bilaterals • Allow DR Providers to deliver full CSO amount within appropriate capacity zone, but with greater latitude between DR types and load/dispatch zones. • Limits on RTEG should remain in place (RTEG can only acquire an obligation in the primary auction. Can only shed obligation thereafter) • Allow FA return only if same MP delivers full amount of CSO (internal trades only) • Could restrict trade to only other new capacity resources that are qualified but as yet uncommitted

10. Potential Solutions, con’t Timing • Seeking a solution that applies to resources that cleared in FCAs 1, 2 & 3 • Mitigates existing risks, but does not address needed long-term flexibility • Is a size restriction (MW) needed for first three FCAs? • A similar solution could apply to all FCAs • Do we need to limit the timeframe between original CSO and accepted permanent de-list? 10

11. Questions?Suggestions?Feedback? Thank you for your time and consideration. 11