Market Evolution Program

Market Evolution Program Regulatory Affairs Standing Committee Meeting September 11, 2003 1

Market Evolution Program agenda • Long Term Resource Adequacy • Day Ahead Market 2

Long-Term Resource Adequacy Overview • Today’s Discussion: • Recap from May 14 RASC meeting • Description of Paths • Recommendations from Feasibility Assessment • Long-Term Resource Adequacy Working Group Update • Next Steps 3

Long-Term Resource Adequacy • Recap from May 14 RASC meeting: • Long-Term Resource Adequacy Working Group Feasibility Assessment (June 2003) • LTRA Objectives • LTRA Evaluation Criteria • Barriers to Investment • LTRA Paths and Options 4

Long-Term Resource Adequacy Paths • Path A: Complete the initial market design and structures without an explicit Resource Adequacy Requirement (RAR) • Rely on results of improved energy and ancillary service markets alone (e.g. Pricing Team work, day-ahead market, multi-interval optimization, etc.) • Path B: Create Load Serving Entities (LSE) and assign a RAR to these entities • LSEs required to contract forward capacity requirements through bilateral contracts (different to bilateral contracts for energy) • IMO could administer a resource adequacy auction market (similar to NYISO and PJM) as a complementary element to LSE capacity contracts • Path C: Allow a central agency to procure adequate resources and allocate the resource acquisition costs to loads • IMO administers a resource adequacy auction market and secures forward capacity on behalf of loads (NYISO, PJM and ISO NE are developing) • As a mechanism of last resort (different to above), a government agency (e.g. OEFC) could contract forward capacity 5

Recommendations from Feasibility Assessment Fundamental recommendations relating to policy decisions: 1) Barriers to investment must be addressed to better ensure market entry to address long-term resource adequacy 2) The ‘market buyer’ must be defined (in particular, for small default electricity consumers) 3) Improvements to the current IMO-administered market design should be implemented, irrespective of the option to address long-term resource adequacy 4) Given the decision of who the market ‘buyer’ is, the ability and magnitude of spot prices to clear under shortage or near-shortage conditions must be addressed 5) The appropriate level of reliability must be decided 6

Recommendations from Feasibility Assessment Timeframe for making decisions: 6) An option to address long-term resource adequacy needs to be recommended no later than the end of this year • In order to address potential inadequate future supply • Recognizing sufficient lead-time required to develop new resources • Provide potential investors with required signals 7

LTRAWG Update • LTRAWG is in the final stages of completing a Strawman that builds on the recommendations and work from the Feasibility Assessment • LTRAWG has acknowledged that the 3 Paths may not be mutually exclusive • LTRAWG is examining what aspects of each Path could be workable and designed to work together within an integrated manner 8

Market Evolution Program agenda • Long Term Resource Adequacy • Day Ahead Market • DAM Chronology • DAM Features and Benefits • DAM Issues • Next Steps 9

Day Ahead Market - Reprise • January - commence work on Day Ahead Market (DAM) • Feb 18 MAC - established Day Ahead Market Working Group (DAMWG) • ~ 28 members from all industry sectors (generators, loads, transmitter, distributors, marketers, OEB and OEFC) • meet every ~10 days - 22 meetings this year • April - recommend development of a comprehensive DAM that performs 2 functions... • Market - allow participants to buy and sell energy and sell operating reserve and lock-in prices and quantities day-ahead • Reliability - process to commit resources to meet forecast demand • preferred by DAM WG members • more closely aligned with DAMs in neighbouring markets • May 14 - Regulatory Affairs Standing Committee update 10

Day Ahead Market - Progress since May 14 RASC • late May - DAM hi-level design summary released (strawman r1) • June 11 MAC - MAC members provide consensus on recommendation to continue develop comprehensive DAM design • June and July - hi-level design concepts prepared and discussed • mid-August - DAM hi-level design released (strawman r2) • DAM WG devoted 2 full days to its review 11

Day Ahead Market - Features Participation: • Participants with physical resources • Importers and Exporters • Virtual buyers and sellers - parties without physical resources • ‘virtual’ offer (bid) to sell (buy) in the DAM also implies an obligation to buy (sell) back in the real-time market (RTM) at RTM prices • Three-part offers/bids: • Separate fixed and variable components of energy offer/bid • Multi-pass dispatch and commitment engine: • DAM schedules are financially binding and consistent with transmission constraints • Optimized solution... • over 24-hour period (hourly granularity) • amongst three-part offer/bid components • energy and operating reserve markets solved simultaneously 13

Day Ahead Market - Features Pricing • DAM WG conclusion - a day-ahead market under a uniform pricing regime would be costly to implement and maintain, complex and confusing, and is not recommended. • Strawman positions: • Nodal pricing should be implemented in the DAM to reflect the actual cost of serving load at each location • Suppliers and selected customers subjected to nodal prices • selected customers include appropriately metered loads that opt to pay nodal price and dispatchable loads • Remaining (most) loads would pay a ‘uniform’ price - weighted average of nodal prices • A system of internal transmission rights will allow participants to hedge nodal price differences • Note - requires that nodal pricing also be applied to the real-time market to maintain pricing consistency between markets 14

Day Ahead Market - Benefits • DAM provides an improved point of convergence for forward products • DAM prices are transparent and predictable • DAM less volatile than RTM • greater liquidity in DAM • nodal pricing assigns value to congestion efficiently • DAM prices converge to RTM prices • DAM allows participants to reduce exposure to real-time volatility • price certainty - participants have financial commitment for quantities bought/sold in DAM • operational certainty - DAM results allow participants to make critical operating decisions in advance of real-time 15

Day Ahead Market - Benefits • DAM improves reliability • Allows for direct participation of loads in market • additional opportunity for demand side responses - allows price-sensitive loads to participate in market without being dispatchable on 5-minute basis • Improved commitment process for all resources (generators and loads) • Intertie transactions implemented and priced day-ahead • moves transactions to DAM from real-time market • reduces uncertainty associated with intertie trading • should reduce the number of failed intertie transactions and IOG payments in real-time market 16

Day Ahead Market - Issues • For a DAM to be effective: • Pricing Issues must be addressed... • Both the RTM and DAM prices need to represent the actual costs of serving loads as reflected by competitive market prices. • Each of the mechanisms that currently distort market prices must be corrected. • Structural Issues must be addressed... • Buy-side - ‘market-buyers’ required for default supply customers • Supply-side - market power issues need to be addressed 18

Day Ahead Market - Next Steps • In the coming months... • Complete final elements of high-level design • Complete significant parts of the detailed design • Begin writing market rules • Expecting significant interaction with and contributions from stakeholders: • DAM WG • MAC - October 8 • RASC, MOSC, ITSC • ad hoc meetings with stakeholder groups 20

-- END -- 21

Supplemental Slide 1 - ‘Market-Buyer’ proposals • A number of industry organizations and stakeholders have recently put forth proposals to increase load participation in the market, particularly for default supply customers... EDA - Beyond Bill 210 • Contemplates an aggregator that will facilitate a contract-based approach to default supply • All consumers, large or small, should have option of entering in to fixed price contracts or taking spot price • The security of long term contracts will provide incentives for investment in new sources of supply AMPCO - DAM Position Paper • OEB should allow LDCs to procure SSS energy through the DAM • Dispatchable load participation will be enhanced by providing similar reciprocal treatment, as for generators, for commitment costs, and market payments for demand reduction 22

Supplemental Slide 2 - ‘Market-Buyer’ proposals Toronto Board of Trade - A Healthy Electricity Market • SSS should introduce default suppliers, selected through a competitive bidding process, to provide multi-year fixed price supply • Change should be implemented immediately; • in the short-term to reduce subsidy to finance price freeze, • in the long-term will provide stable prices for transition to eliminating price-cap in 2006 • Customer education at all levels is required to restore confidence in a market-based electricity system -- OEB should take leadership role • Enhances investment in new sources of supply 23

Market Evolution Program