Proposals for FCM: Standby Payments (and Delist Bids)

1. Proposals for FCM: Standby Payments (and Delist Bids) Pete Fuller NEPOOL Markets Committee January 9, 2013

2. Today’s Discussion • Continue discussion from 2012 MC meetings • Focus on delist bids rejected for reliability: • Eliminate ISO’s right to accept delist bids after the primary auction, or • Possible methodology for setting a standby payment for resources with delist bids rejected for reliability • Touch base on new types of existing resource offers (delist bids) • Non-Priced Permanent Delist Request • Priced Retirement Request

3. Qualifier • NRG’s position is that, as currently structured and administered, FCM is deeply flawed: • Mitigation of existing resources should provide an opportunity for the marginal capacity resource to recover all of its annual fixed costs • A demand curve that recognizes the incremental value of additional capacity is essential, especially in the absence of a supply curve based on long-run costs • Reliability reviews of existing resource offers (delist bids) should be eliminated; all constraints that are to be enforced through planning or operability criteria should be specified in the auction requirements

4. Treatment of Delist Bids Rejected for Reliability

5. Fundamental Perspective • Every CSO assigned in an FCA should create firm reciprocal expectations for the 12-month delivery period: • the resource is obligated to perform according to the tariff; ISO is obligated to pay according to the tariff • This should be true whether the CSO arises in economic clearing or as a result of a reliability need • With this as the starting point, consider two approaches: • Affirm the reciprocal obligations by eliminating ISO’s current right, after FCA, to release the CSO of a resource whose delist bid was rejected for reliability; or • Introduce a standby payment in exchange for ISO’s right to later review and accept a delist bid

6. Approach #1 • Eliminate the ISO’s right to terminate the CSO of a resource retained in the FCA for reliability reasons • All CSOs assigned in an FCA have the same binding effect. All suppliers with CSOs have certainty in their obligation and in their revenue expectation. • ISO and suppliers have tools to adjust, commercially, if resources with CSOs want to shed them (CSO bilaterals, ARAs, monthly RAs) or are no longer needed by ISO (ARA3) • Ex-post reliability review was part of the FCM Settlement, which no longer governs • Eliminate price risk on consumers associated with replacing capacity released from reliability service

7. Replacing Delist Bids • Pursuant to Sec 13.2.5.2.5(d), “If the reliability need that prevented the de-listing of the resource is met … , the resource shall be de-listed, be relieved of its Capacity Supply Obligation … . The ISO shall enter bids at 2.0 times CONE to replace the capacity on behalf of load in subsequent annual reconfiguration auctions … ” • ISO’s reliability determination looks only at the local reliability issue, not at whether the region or the zone has sufficient resources to meet ICR or LSR • ISO would release capacity even if it creates a need to purchase replacement capacity

8. Approach #2 • As presented in previous meetings, implement a Standby Payment when the reliability determination is first made • Consistent with current treatment and with the Fundamental Perspective, above, the FCA confers a Capacity Supply Obligation • The Standby Payment creates the right to treat some resources differently, ie, to release them prior to the delivery year

9. Methodological Approach • ISO’s right to later accept a delist bid is not a classic financial option • Standard option valuation tools do not work in this context • The incremental costs of the uncertainty imposed on suppliers can be described conceptually (see 12/11/12 NRG presentation); creating a standardized estimate on a generic basis may be challenging • A potential method for developing proxy levels is described in the following slide • If there is agreement on this approach, request ISO/MMU to further develop the proposal. Otherwise, Approach #1 is preferable.

10. Cost-based Approach • As a proxy for the costs that would be incurred in the intervening years to ensure resource availability and performance in the delivery year, select the following categories from the delist bid workbook: • Maintenance - Contractor Services • Maintenance - Turbine/Generator • Maintenance - Steam Generator • Maintenance - Fuel Systems • Maintenance - Balance of Plant • Maintenance - Miscellaneous Maintenance • MMU, as the only party with access to delist bid workbooks, could develop a proxy rate ($/kW-mo or % of total delist bid price) • Alternatively (and less desirably) the rate could be unit-specific, based on the unit’s own delist bid cost data for these specified line items (or comparable, for DR)

11. Next Steps • Continued consultation with ISO and stakeholders • Develop and circulate market rule language • Further Markets Committee discussions • Vote at a future MC and PC • Rule changes should be effective prior to the start of Existing Resource Qualification for FCA8 (June, 2013) • in any event prior to the Non-Price Retirement Request date for FCA8 (October, 2013)

12. Changes to Available Existing Resource Offer (Delist Bid) Types

13. FCM Offering Options for Existing Resources * Should also consider continuation of CNRC rights – beyond the scope of this proposal

14. Gaps in the Current Structure • For any resource seeking to exit the market in its current configuration and retain maximum potential to repower in a new configuration: • If a Permanent Delist Bid is rejected for reliability, the resource is paid its bid price • PDBs reflect only a fraction of short-run cash costs, ensuring a financial loss • Low PDB price also increases likelihood of taking on a market-priced CSO, which may also be at a financial loss • Unconditional exit can only be secured with a Non-Price Retirement Request, which ensures termination of all interconnection rights • If NPRR is rejected for reliability, option to seek cost of service is wholly ineffective (as shown at Salem Harbor)

15. Summary • Why a Non-Price Permanent Delist Request? • Allow resource owners to position candidate repowering resources for development when the market rebounds • Allow resources to avoid risk of providing reliability service at a loss • Why a Priced Retirement Request? • Allow resource to establish a compensatory rate for potential reliability service in advance of the auction • Available to any existing resource

16. Next Steps • Continued consultation with ISO and stakeholders • Develop and circulate market rule language • Further Markets Committee discussions • Vote at a future MC and PC • Rule changes should be effective prior to the start of Existing Resource Qualification for FCA8

17. Thanks for your consideration.