01/09/2013

1. 01/09/2013 Mario S. DePillis Economist, Internal Market Monitoring Proposed Changes to Mitigation to Align With Energy Market Enhancements Intra-Day Offers and Mitigation PRELIMINARY DRAFT FOR DISCUSSION

2. Synopsis, 1-3 • Synchronizing reference levels with the natural gas day: default reference levels using published fuel indices would start and stop at 10AM. • Mitigation duration: mitigation will stop at the end of the hour unless the minimum run time has not been reached, in which case mitigation will continue to the end of the minimum run time. • Matching dual-fuel use: participants will be able to select their current fuel type and reference levels will reflect the unit type, subject to demonstration of fuel burn and fuel availability risk.

3. Synopsis 2-3 • Participant-submitted fuel price adjustments: Allow participants to submit their own fuel price adjustments during the day through a new interface. Use fuel price adjustments to calculate new reference levels • Purpose of intra-day offers are to reflect intra-day fuel costs • There is little or not published information on the prices at which intra-day gas is bought and sold. • Safeguards: • Only prices increases within a statistically determined range would be accepted through interface • Submission of fuel price increase would trigger a tighter mitigation threshold • Regular audits of fuel price claims

4. Synopsis 3-3 • IMM ability to enter higher fuel price index: Extreme events causing highly unusual fuel prices--beyond what is covered by mitigation thresholds or by limit on self-submitted fuel prices.

5. Adjusting Fuel Prices In Reference Levels • Normal Conditions: Participant submits updated fuel price within range of observed day-to-day price increases • Unusual Conditions: During unusual days falling outside statistically determined range, IMM will allow reference prices for gas-fired units to reflect cost of LNG.

6. Determining “Normal” • Seasonal estimate of price differences between day-ahead and intra-day (or neighboring day as proxy) • IMM would update estimate periodically and publish the number in effect

7. Determining “Unusual” • Weather and pipeline conditions are two primary drivers of pipeline capacity margin • Weather: IMM proposes using 24 hour average temperature as independent variable • Example, 24 hour average is < x⁰ F • Primary concern is to capture conditions under which generation owners report higher prices or unavailability of gas. • Pipeline Conditions: publication of restricted capacity or direct communication with pipeline operators

8. Pricing During “Unusual” Conditions • IMM proposes to set gas price to LNG cost during “unseal” conditions. • As gas price rises, LNG sources become competitive • Gas prices should be limited by LNG costs

9. Timing and Consultation • Self-submitted fuel adjustments will be allowed both Day-Ahead and Real-Time • Determination of “Unusual” conditions will be made for both Day-Ahead and during Real-Time • Consultation opportunities will continue for participants with fuel costs they do not believe are captured under the two “normal” or “unusual” scenarios.

10. A Tighter Threshold For Self-Submitted Fuel Adjustments • Participant will have opportunity to submit market-based fuel estimate to be used for reference price calculation • Subject to a maximum limit on size of price increase that reflects normal gas price variation • Subject to Audit • Participant-submitted fuel prices increases will be subject to 10% conduct threshold. • 10% covers remaining measurement error • Conduct threshold would result in mitigation if resource fails either the constrained area or general area impact test

11. Audits of Self-Submitted Fuel Adjustments • All self-submitted fuel adjustments may be audited. • A pattern of misrepresentation of self-submitted fuel adjustments will trigger loss of ability to self-submit fuel adjustments for a period of XX months.