JULY 10, 2013 | NEPOOL MARKETS COMMITTEE

1. JULY 10, 2013 | NEPOOL MARKETS COMMITTEE Ben Ewing MARKET DEVELOPMENTBEWING@ISO-NE.COM413.535.4361 Analysis of out-of-merit compensation under Offer Flexibility NCPC design. And alternate NCPC credit methodology requested by Markets Committee. NCPC Payments Major Initiative Impact Analysis Results Matt Brewster MARKET DEVELOPMENTMBREWSTER@ISO-NE.COM413.540.4547

2. Background Overview of the purpose for the Impact Analysis and high-level assumptions utilized in the analysis

3. Impact analysis provides qualitative and quantitative results for proposed changes • The NCPC Payments project is a major initiative • In accordance with the Framework for Evaluating Major Initiatives, the ISO has prepared a quantitative impact analysis using the methods previously discussed with stakeholders • The impact analysis is intended to demonstrate impact of ISO’s proposed NCPC rules for Offer Flexibility on resource credits for being scheduled out-of-merit • Compare historical resource credits under the existing design to credits under proposed design • Out-of-merit resources receive 94% of historical NCPC credits

4. Assumptions used for Impact Analysis • Study period: 2010 – 2012 calendar years • Resource credits calculated under the Offer Flexibility NCPC rules are based on historical energy market data • DA and RT commitment Decision Intervals are modeled using available data (e.g., day-ahead or RT schedule, min run time) • Self-scheduled resources are treated as energy offer of floor price ($0/MWh) at requested dispatch level, No Load and Start-Up fees of $0 • Default commitment reason is 1st contingency (“economic”) when unspecified

5. Participants requested alternative analyses • As part of major initiative process, participants may propose alternative analyses to perform. The ISO received two such requests: • Examine upper bound on NCPC Credits • Use of hourly accounting periods • Consider Start-Up and No Load costs in DA NCPC.

6. Out-of-MERIT NCPC CREDITS UNDER Offer Flexibility DESIGN PROPOSAL RESULTS Offer Flexibility NCPC credit estimates are directionally consistent with expectations: decreased DA NCPC; increased RT NCPC particularly for flexible resources; and overall increase in NCPC payments

7. NCPC Credits increase by 28% across the three year study period *Actual historical credits Dollar values shown in millions

8. Resources dispatched out-of-merit are a small percentage of RT Credits Dollar values shown in millions

9. NCPC Credits increase total Energy Market cost by less than 1% annually Dollar values shown in millions

10. DA decrease and RT increase are consistent with the Offer Flexibility NCPC design • Day-ahead NCPC credits decrease • No Load and Start-Up fees are not considered (only cost of energy) • Real-time NCPC credits increase • Credit formulation compensates for difference in value when the resource’s best alternative would be more profitable than following ISO commitment or dispatch instruction • Existing design determines only break-even payments • Separate accounting periods for each resource schedule within the day (profitable run does not offset loss for another) • Existing design nets all profits/losses across entire day • Total RT cost (Start-Up, No Load, Energy) is compared to RT revenue • Existing design evaluates only additional RT cost and revenue above what cleared DA

11. Flexible resources account for large percentage of increased NCPC Credits Start Time (hours) = Cold Notification time + Cold Startup time Dollar values shown in millions

12. Credits increase across cost allocation categories Values are across 2010-2012 Dollar values shown in millions

13. Accounting period and hourly credit allocation impact changes among NCPC categories • NCPC design for Offer Flexibility introduces two changes that influence the credits assigned to cost allocation categories • Separate accounting periods significantly reduce the blending of NCPC costs across commitment reasons • Distinct periods of operation generally have a single reason • NCPC credits are allocated pro rata to hours of net loss • Refer to explanation of Hourly NCPC Credit within June 2013 MC presentation beginning at slide 5 • Both mechanisms more directly align NCPC cost with the reason for out-of-merit operation

14. ALTERNATE METHOD 1 RESULTS Analysis to estimate an upper-bound on NCPC credit increase as a result of sub-daily accounting periods

15. Results demonstrate that sub-daily accounting periods increase NCPC Credits • Modified assumptions for this analysis: • Resource Minimum Run Time treated as a single accounting period, with each subsequent hour as a separate accounting period • In each hourly accounting period with a net loss, resource paid to break-even on cost (crude best-alternative formulation) Dollar values shown in millions

16. Alternative Method 2 Results Uses a compensation methodology where Start-Up and No Load fees for DA schedules are considered for DA Credit

17. Compensating fixed costs in DA Credit results in lower total NCPC credits • Modified assumptions for this analysis: • Resources compensated in DA NCPC for Start-Up and No Load fees • Costs paid DA are not considered in RT Credit (same as existing design) • Consistent with Offer Flexibility proposal, the DA credit calculated as amount necessary to be no worse off for clearing DA (break-even) Dollar values shown in millions

18. Historical Start-Up and No Load fees considered for DA NCPC in excess of incurred RT costs are small • Method for determining these values: • DA schedule start not matched by RT actual start means the Start-Up cost considered in DA NCPC was not incurred RT • DA scheduled hours not matched by RT actual operation means the No Load cost considered in DA NCPC was not incurred RT Dollar values shown in millions