September 10-11, 2013 | Westborough, ma

1. September 10-11, 2013 | Westborough, ma Andrew Gillespie Market developmentagillespie@iso-ne.com (413) 535-4088 Concept Resources Retained for Reliability

2. What is the issue? • Not all constraints and requirements can be modeled in the FCA. While the ‘granularity’ of system constraints within the FCA may increase with additional capacity zones, there remains the possibility that some local reliability needs, not modeled in the auction, will require the rejection of a de-list bid or retirement request • Constraints and requirements that are modeled in the auction are implicitly included in the ICR/LSR/MCL limits • These constraints and requirements are satisfied by resources procured in the FCA, and the obligation and compensation for meeting these requirements is achieved using the Capacity Supply Obligation construct

3. What is a local reliability need? • The term ‘local reliability need’ essentially refers to constraints and requirements that are not modeled in the auction. These constraints and requirements are fundamentally no different than those that are modeled in the auction; however, these limits tend to be for smaller areas within a capacity zone • System requirements modeled in the auction can be satisfied by resources located in broader portions of the system (e.g., across an entire capacity zone) • Local requirements not modeled in the auction can only be satisfied by a resource or resources located in specific and much smaller portions of the system • The problem. Resources that are not economic in satisfying the system requirement may be identified as needed to meet a local requirement

4. What happens when a resource is identified as being needed to meet a local requirement? • All resources attempting to exit the capacity market via a de-list bid or retirement request are reviewed to determine if the resource is satisfying a system and/or local reliability need • If the resource is contributing towards satisfying a local reliability need, the de-list/retirement* request is rejected and the resource’s capacity remains in the auction • The resource will be awarded a Capacity Supply Obligation and the compensation will be specific to the attempted exit (more on next slide)*Assuming the resource decides not move directly to retirement • In this construct, the resource is retained to meet both the system/zonal need as well as the local need

5. This construct impacts the Forward Capacity Auction • When a de-list or retirement request is rejected because of a local reliability constraint, the resource is retained to meet the local need, but it is also counted towards meeting the system/zonal need • The MW contribution of a rejected de-list bid/retirement request towards meeting the system/zonal need is uneconomic; this capacity costs more than the clearing price - if it were not for the local need this resource would have exited the auction • This effects price formation: • This capacity is kept in the auction (similar to a ‘price-taker’) • This shifts the supply curve to the right, tending to lower the clearing price • Any rejected de-list bid or retirement request accepted after the FCA cannot undo this effect When an ‘out-of-market’ resource is retained to meet the system requirement it can displace both new and existing ‘in-market’ resources

6. Compensation depends on the attempted method to exit the capacity market Because the local reliability need is not fundamentally different than the system or zonal need, compensation is based on the current de-list bid structure – i.e., based on avoided costs (pre-FCM Performance Incentive de-list bid structure) • A rejected Static De-List Bid, Export Bid, Administrative Export De-List Bid, Dynamic De-List Bid, or partial Permanent De-List Bid would receive the resource’s de-list bid price • A rejected Permanent De-List Bid for the entire resource would receive either the resource’s de-list bid price or may pursue a cost-of-service agreement • A rejected Non-Priced Retirement Request would receive either the FCA clearing price or may pursue a cost-of-service agreement, or retire despite the reliability need

7. What is changing in the de-list bid structure? • Currently, de-list bids are fundamentally based on a resource’s avoided costs • With the implementation of FCM Performance Incentives (FCM PI), de-list bids will also now include: • An performance component to account for the expected performance credits and charges that would occur during periods of system scarcity • A modified ‘risk’ premium to account for the possibility of real losses

8. What is the effect? The FCM PI de-list bid structure, if used as a basis for compensation for resources retained for reliability: • May exacerbate the displacement of otherwise in-market resources in the FCA • FCA prices are expected to be higher under FCM PI • Consequently any resource retained for reliability under FCM PI will accordingly be priced higher • Attenuates some of the objectives of FCM PI • Resources attempting to exit the market based on low expected performance, but retained for reliability, would tend to displace resources with higher expected performance (as reflected in the lower offer price) • The opposite of what is desired under FCM PI • Provides compensation based on a different obligation • The de-list bid price is determined based on the obligation to fulfill a system need (via the Capacity Supply Obligation) – accounting for system performance metrics and performance credits and charges • The resource is being retained for the local need, not the system/zonal need – yet the obligation and compensation would be based on satisfying the system/zonal need

9. Alternative treatment for resources satisfying a local reliability need - concept • Maintain the current structure but separate this from a CSO. • A resource needed for local reliability would not get a CSO, but would get a local reliability obligation (LRO)* – this avoids the impact on the fca and the attenuation of the fcm performance incentive objectives *‘LRO’ is not a current term, but created for discussion purposes • The compensation for an LRO would be based on the resource’s GFCs, very similar to the current de-list bid structure – this avoids the compensation disparity • The current mechanisms to identify resources that are exiting the capacity market but that are contributing towards satisfying a local reliability need would remain, and the terms and administration would likewise be similar to the current terms, for example: • There would be an offer requirement • The LRO would be reviewed with the Reliability Committee

10. Schedule – Markets Committee dates • 1st Markets Committee – September 2013 • 2nd Markets Committee – October 2013 • 3rd Markets Committee – November 2013Associated changes to Attachment K to be reviewed by Transmission Committee • 4th Markets Committee & tariff red-lines – December 2013 • 5th Markets Committee vote – January 2013 • Participants Committee vote – February 2013 • Filing – March 2014 • Effective Date – May 2014 (before existing qualification deadline for FCA 9)