Patton Report Workshop ISO New England Inc. NEPOOL Participants DoubleTree Hotel Waltam, MA

1. Patton Report Workshop ISO New England Inc. NEPOOL Participants DoubleTree Hotel Waltam, MA 12/18/01

2. Workshop Agenda Opening Remarks Seek Improvements in Transaction Rules Modify ECP Eligibility Rules Reserve Market Reform Wrap-up

3. Opening Remarks

4. Workshop Objective “To receive input from the NEPOOL Participant group and reach consensus regarding the appropriate market rule and procedure changes to be implemented by ISO-NE prior to the start of Summer 2002 in response to David Patton’s Study recommendations.”

5. Key Patton Report Recommendations • 1. Implement SMD as soon as possible. • Provide option to self-schedule resources after the commitment process once the multi-settlement process under SMD is implemented • 2. Seek improvements in transaction rules and procedures with NYISO and ISO-NE • 3. Modify ECP eligibility rules for peaking units and units committed during reserve shortages • 4. Reserve Market Changes • - Include real-time replacement reserves in reserve markets • - Include Opportunity Cost payments for reserves • 5. Seek improvements in congestion management procedures

6. Schedule Customer Forum with David Patton on December 19, 2001. Additional workshop will be scheduled in early January 2002. Solutions and major rule changes will be presented for vote at January 15, 2002 NEPOOL Markets Committee meeting. ISO-NE will present final rule changes to NPC at January 18, 2002 meeting. ISO-NE will finalize rules to enable filings of rule changes by early February 2002.

7. Seek Improvements in Transaction Rules

8. Seek Improvements in Transaction Rules Patton Recommendation: Identify and implement solutions that would facilitate efficient trading with adjacent markets prior to next summer

9. Seek Improvements in Transaction Rules • Short Notice External Transactions (SNT) • Modify the Unit Commitment rule governing transactions to increase the number of SNTs • SNT Definition: • Either a System Contract for the purchase or sale of Energy 1 or a System Contract for the sale of Energy 2; • and submitted to the ISO after the Daily Trading Deadline has passed for the Scheduled Dispatch Period in which the transaction is to begin

10. Seek Improvements in Transaction Rules Short Notice External Transactions (SNT) SNTs will be supported by Unit Commitment SNTs cannot be withdrawn by the Participant ISO-NE will only support SNTs up to the Replacement Reserve requirement Internal resources can self-schedule after the trading deadline to support SNTs (current rule)

11. Seek Improvements in Transaction Rules • Short Notice External Transactions (SNT) • Counterintuitive flows (high price to low price) will be monitored by ISO’s Market Monitoring & Mitigation group • Out-Service: • Rationing of available Out-Service under Tariff • Elimination of Out-Service charge for hourly SNTs (being considered)

12. Modify ECP Eligibility Rules

13. Modify ECP Eligibility Rules Patton Recommendation: Allow all units committed intraday and dispatched at LOL in reserve shortage situations to contribute to setting energy clearing prices Allow peaking generators (generally gas turbines) to set the energy clearing price when they are dispatched for reasons other than congestion relief or voltage support

14. Modify ECP Eligibility Rules All Units Committed Intraday and Dispatched at LOL in Reserve Shortage Situations There would be very few units with more than 1-hour minimum run or minimum down time committed intraday Since this would presumably be during OP4, units with long start times would already have been called upon and would be above LOL (unless constrained down to provide Reserve due to External Floor Price and paid OC). Reductions in anticipation of OP4 covered by Posturing Rule and notices to Market

15. Modify ECP Eligibility Rules • Peaking Units and External Dispatchable Transactions • Policy • If there is insufficient discretional (less expensive) energy to replace unit or transaction, then unit or transaction is eligible to set 5 minute RTMP • Summary • Peaking Units definition • Different methodology for “non-OP4” and “OP4” conditions • Software implementation to ensure consistency

16. Modify ECP Eligibility Rules • Peaking Units and External Dispatchable Transactions • Peaking Unit Definition • Minimum run time < 1 hour • Minimum down time < 1 hour • Startup notification < 30 minutes • Dispatchable via RIGs • Objective is to allow flexible energy to set RTMP • Peaking Units will be “flagged” as eligible • Peaking Units flagged for transmission not eligible

17. Modify ECP Eligibility Rules • Peaking Units and External Dispatchable Transactions • External Dispatchable Transactions limited to 100 MW blocks at single energy bid price • Reduces large swings in RTMP and inter-control area schedules based on acceptance and non acceptance of large block loads on an all or nothing basis • Externals not eligible to set RTMP will be eligible for NCPC

18. Modify ECP Eligibility Rules • Peaking Units and External Dispatchable Transactions • Non-OP4 Conditions • System operator has not declared “OP4 Conditions” • Two “tests” to determine eligibility • Capacity Test • Energy Test • Capacity Test - Available energy in excess of ten minute spinning reserve requirement will be evaluated • Energy Test - If there is enough energy available from on-line resources that is less expensive than the energy price of a Peaking Unit (at LOL) or External Transaction to allow the LOL or External Transaction block not to be taken, then energy is not eligible to set price

19. Modify ECP Eligibility Rules • Peaking Units and External Dispatchable Transactions • Capacity Test • Available energy in excess of ten minute spinning reserve requirement will be evaluated • EMS system will calculate excess ten minute spinning reserve as: • Actual TMSR minus Required TMSR • This quantity limits amount of energy to be evaluated • Example • Actual TMSR = 900 MW • Required TMSR = 700 MW • All energy from Peaking Units and/or Externals except the last 200 MW to be evaluated

20. Modify ECP Eligibility Rules • Peaking Units and External Dispatchable Transactions • Energy Test • If there is enough energy available from on-line resources that is less expensive than the energy price of a Peaking Unit (at LOL) or External Transaction to allow the LOL or External Transaction block not to be taken, then energy is not eligible to set price • Peaking Units and External Dispatchables will be ranked by energy price and MW blocks from highest to lowest • On-line energy available will be ranked by energy price and MW blocks from lowest to highest • Software will “clear” and “flag” resources as eligible to set RTMP constrained by Capacity Test • R/T SPD will determine RTMP for 5 minute cycle

21. Modify ECP Eligibility Rules • Peaking Units and External Dispatchable Transactions • Example • Excess spinning reserve = 200 MW • Last RTMP = $160 • $179 Unit flagged as eligible to set RTMP

22. Modify ECP Eligibility Rules • Peaking Units and External Dispatchable Transactions • Other Rules • Evaluation completed prior to each R/T SPD execution • All eligible resources evaluated • No eligible resources “skipped” • Tie Breaker - Largest MW block at energy bid price • Time horizon for replacement energy is 5 minutes

23. Modify ECP Eligibility Rules • Peaking Units and External Dispatchable Transactions • OP4 Conditions • OP4 conditions defined as at or near capacity deficiency (unable to meet energy plus OP8 Reserves - replacement reserves excluded) • OP4 will be defined by System Operator by setting “OP4 Flag” • Under OP4 conditions, all Peaking Units and External Dispatchable Transactions will be eligible to set RTMP

24. Reserve Market Reform

25. Reserve Market Reform Patton Recommendation: If replacement reserves in the real-time are required to meet the NERC reliability requirements, ISO should adjust its reserve requirements to allow the ISO to procure these reserves in the reserves markets, and compensate suppliers accordingly Provide for payment of opportunity costs to generators designated for reserves

26. Reserve Market Reform 1. Increase the amount of reserves cleared in the TMOR Market by the real-time supplemental reserve requirement 2. Revise pricing and payment in the reserve market to be consistent with New York’s Reserve Markets 3. Require units to bid their low operating limits at their physical low operating limit, with an allowance for economic efficiency and emission characteristics

27. Reserve Market Reform 1. Replacement Reserves in TMOR Requirement Replacement Reserves (RR) defined as 1/2 second largest contingency RR will be added to existing 30 minute requirement for purposes of real-time designation and market clearing RR will not be in capacity analysis for purposes of declaring OP4 conditions

28. Reserve Market Reform • 1. Replacement Reserves in TMOR Requirement • Example: • Existing Conditions • Largest Contingency = 1400MW • 2nd Contingency = 1150 MW • Today • TMSR Requirement = 1/2 LSC = 700 MW • TMNSR Requirement = 1/2 LSC = 700 MW • TMOR Requirement = 1/2 2nd Contingency = 575 MW • Proposed • TMSR Requirement = 1/2 LSC = 700 MW • TMNSR Requirement = 1/2 LSC = 700 MW • TMOR requirement = 2nd Contingency = 1150 MW

29. Reserve Market Reform 2. Revised Pricing/Payment in the Reserve Market A. Floor Price for Reserves will be $ 0.00 B. Hourly Reserve Prices will be capped at Hourly Energy Price C. Final Reserve Prices will be cascaded at 5 minute dispatch D. TMNSR and TMOR Reserve Availability Bids will be capped at $ 2.52 E. 5 Minute Reserve Clearing Prices will include opportunity costs

30. Reserve Market Reform 2. Revised Pricing/Payment in the Reserve Market A. Reserve Floor Price of $0.00 Proposal is a clarification of existing Rules Today when in excess generation, and hourly ECP is negative, reserve prices are administered to $0.00 Proposal would clarify intent and set floor price for reserves at $ 0.00

31. Reserve Market Reform 2. Revised Pricing/Payment in the Reserve Market B. Hourly Reserve Prices capped at Hourly ECP Restatement of existing “Interim Bid Cap Rule” No change is being proposed

32. Reserve Market Reform • 2. Revised Pricing/Payment in the Reserve Market • C. Reserve Clearing Prices to be Cascaded • Reserve Clearing Prices at 5 minute dispatch will be cascaded such that: • TMSRCP > TMNSRCP > TMORCP • Cascading will occur after Reserve Clearing Prices determined

33. Reserve Market Reform 2. Revised Pricing/Payment in the Reserve Market D. TMNSR and TMOR Availability Bids to be Capped TMNSR and TMOR availability bids will be capped at $ 2.52 $ 2.52 is the same as the NYISO cap

34. Reserve Market Reform • 2. Revised Pricing/Payment in the Reserve Market • Revision to TMSR Clearing Price • Resources will be designated for TMSR by R/T SPD based on existing Market Rules • Once the TMSR designations are complete, the TMSRCP will be determined based on: • Maximum [Final RTMP minus Dispatch RTMP; BidPriceCleared], • Where Final RTMP is the final RTMP as determined by R/T SPD from the maximum of the dispatch RTMP and the external floor price, • BidPriceCleared is the sum of the TMSR Bid Price plus the TMSR OC as determined by R/T SPD

35. Reserve Market Reform • 2. Revised Pricing/Payment in the Reserve Market • Revision to TMSR Clearing Price • Example #1 (As today) • Final RTMP (Floor Price) 45.66 • Dispatch RTMP 45.66 • TMSRCP (R/T SPD today) 0.55 • TMSRCP (proposed) 0.55 • Example #2 (Final > Dispatch) • Final RTMP 44.97 • Dispatch RTMP 43.87 • TMSRCP (R/T SPD today) 0.55 • TMSRCP (proposed) 1.10

36. Reserve Market Reform • 2. Revised Pricing/Payment in the Reserve Market • Revision to TMSR Clearing Price • Example #3 (TMSR OC) • Final RTMP (Floor Price) 87.32 • Dispatch RTMP 52.30 • TMSRCP (R/T SPD today) 39.12 • TMSR Bid (1.10, unit backed down to 49.30 [87.32-49.30=38.02] • TMSRCP (proposed) 39.12 • No change in TMSR CP calculation

37. Reserve Market Reform • 2. Revised Pricing/Payment in the Reserve Market • Revision to TMNSR and TMOR Clearing Price • Resources will be designated for TMNSR/TMOR based on existing Market Rules • Once the TMNSR/TMOR designations are complete, the Clearing Prices will be determined based on: • Maximum [Bid plus Opportunity Costs] of designated resources • This OC is not the same as OC for TMSR

38. Reserve Market Reform • 2. Revised Pricing/Payment in the Reserve Market • Revision to TMNSR and TMOR Clearing Price • Opportunity Costs defined: • On-line resource: • Final RTMP minus Energy Bid Price for the next MW above DDP • Off-line resource: • Final RTMP minus [(Startup Costs/[max(min run, 1hour)]/LOL) + No Load Costs/LOL + Energy Bid Price at LOL]

39. Reserve Market Reform • 2. Revised Pricing/Payment in the Reserve Market • Revision to TMNSR and TMOR Clearing Price • Example # 1 (On-line Resource designated in TMNSR) • Final RTMP 65.45 • Unit HOL/LOL 100/30 • Energy Bid 30@ $25.00, 40@ $50.00, 30@ $80.00 • Energy DDP 70 MW • Designated TMNSR 10 MW (MRR=1MW/min) • TMNSR Bid $1.50/MW • OC = $65.45 minus $80.00 = -$15.45 -> No OC • TMNSR CP = $1.50 (Bid) • No Change in Clearing Price calculation from today

40. Reserve Market Reform • 2. Revised Pricing/Payment in the Reserve Market • Revision to TMNSR and TMOR Clearing Price • Example #2 (Off-line Resource designated for TMNSR) • Final RTMP 65.45 • Unit HOL/LOL 15/10 • Energy Bid $60.00/MW • Startup and NoLoad Costs $500 and $25 • TMNSR Bid $1.10/MW • Min Run 1 hour • OC = Final RTMP minus [S/U+NL+Energy] • OC = $65.45 minus [$500/10 + $25/10 + $60] = -$47.05 • TMNSR CP = $1.10

41. Reserve Market Reform • 2. Revised Pricing/Payment in the Reserve Market • Revision to TMNSR and TMOR Clearing Price • Example #3 (Off-line Resource designated for TMNSR) • Final RTMP 65.45 • Unit HOL/LOL 15/10 • Energy Bid $60.00/MW • Startup and NoLoad Costs $0 and $0 • TMNSR Bid $1.10/MW • OC = Final RTMP minus [S/U+NL+Energy] • OC = $65.45 minus [$0 + $0 + $60] = $5.45 • TMNSR CP = $1.10 + $5.45 = $6.55

42. Reserve Market Reform 3. Bidding Physical LOL Bidding physical LOLs for resources promotes additional operational dispatch flexibility, increases available reserves and may reduce uplift Units will be required to bid LOLs at their physical low operating limits, with an allowance for economic efficiency and emission characteristics ISO’s Market Monitoring and Mitigation group will identify “audit” requirements

43. Wrap-up