What Does the Recent LICAP Settlement Mean for New England?

1. What Does the Recent LICAP Settlement Mean for New England? Electricity Restructuring Roundtable April 26, 2006 Tim Brennan Manager, Wholesale Markets, National Grid

2. More Time to Spend with Friends & Family(and to work on other market improvements): • FERC April 25, 2003 Order - “we will direct ISO-NE to file no later than March 1, 2004 for implementation no later than June 1, 2004, a mechanism that implements location or deliverability requirements in the ICAP or resource adequacy market as discussed in the September 20 Order...” • NEPOOL Markets Committee Meeting – Friday, 2/13/2004 • NEPOOL Participants Committee Meeting – 2/20/2004 • ISO-NE March 1, 2004 Locational ICAP Proposal filed • March 22, 2004 Protests • Answers, supplemental comments, motions to lodge, answers to answers, etc., etc. • FERC June 2, 2004 Order – hearing established; LICAP implementation deferred until January 1, 2006. • 24 days of hearing between 2/23/05 and 3/31/05 • June 15, 2005 Initial Decision from the Presiding Judge • FERC August 10, 2005 Order Granting Oral Argument and Delaying Implementation – “The implementation date for the LICAP mechanism, if adopted, will be no earlier than October 1, 2006” • Oral Arguments held on September 20th – “NELRAM”/ “NERAM” alternative

3. More Time … (cont’d) • FERC October 21, 2005 Order –“The requests for additional procedures to pursue a settlement on an alternative to the LICAP mechanism are hereby granted…” • more than 30 days of Settlement “discussions” • more than 175 parties • January 31, 2006 - Administrative Law Judge Lawrence Brenner (the “Settlement Judge”) reported that “most of the parties have reached an agreement in principle on a settlement that, if accepted by the Commission, will resolve all issues in this proceeding • March 6, 2006 – Settlement Agreement, with Explanatory Statement, filed by the Settling Parties • Requests approval, without modifications, by June 30, 2006 • Forward Capacity Market, with Transition payments to begin December 2006

4. No More Fighting Over Which Administratively Determined Demand Curves to Administer:

5. Greater Certainty for All: Final ___% Win ___% Win ___% Remand ___% Appeal 100% Late 2007 2009 No earlier than Oct. 1, 2006 [Stay – low probability] Lose ___% Lose ___% Implement LICAP___% [With or without Shortage Hours and/or better curve] Final 0% Jan. 31, 2006 No Settlement Appeal ___% Commission Decides ___% Win or Acceptable Modification ___% Final ___% File Contested Settlement 2006 2007 Remand To ALJ ___% Commission Decides [chance of success depends on signatories] Lose – Go To LICAP ___% Appeal 100% [See Above] Interim Payments Begin October 2006? Yes ___% No ___%

6. A Better Market Solution to Resource Adequacy: • Competitive Auction • Descending clock, competitive auction finds market price of new entry • Not dependent on administratively determined curves/parameters • Locational auctions held when required to satisfy LSRs • Forward Procurement • 3 year planning horizon allows competition from new entry • valuable information for system planners and regulators • Meaningful Commitments • 1 year minimum commitments to/from capacity resources • Current capacity market provides no greater than 1 month • Economic Outages not permitted • Purchase Only the Capacity Needed • FCM purchases 100% of Installed Capacity Requirement (“ICR”) • I.D. curve targeted 105.4% and continued payments to 115%

7. A Better Market Solution … (cont’d) • Improved Performance Incentives • FCM payments/penalties depend on availability/performance during “Shortage Events” • Current Market (and Initial Decision) based on average of performance over all hours • Protections From Market Power • PER deductions, based on strike price of hypothetical proxy unit, remove incentive for capacity suppliers to force higher prices spikes in energy market; hedge for load • Monitoring of Bids (e.g., de-list bids from existing resources above 0.8 CONE) • Protections against Insufficient Competition/Inadequate Supply of new entry also included

8. Greater Opportunity for Demand Response and Efficiency Programs: “During the Transition Period, new…demand side management installations (both energy efficiency and demand response…) undertaken as part of merchant, utility, or state sponsored programs will be considered as qualified capacity and subject to the ISO review of the verification process.” “For the Forward Capacity Market, a distinct method shall be developed to allow energy efficiency and demand response resources…to be fully integrated as Qualified Capacity in the Forward Capacity Market.” • Having a defined value stretching over years via the transitional capacity payments allows investment in real time metering infrastructure and marketing needed to grow this valuable resource adequacy tool • Proper market revenue stream may enable longer payback measures to become cost effective, particularly measures that enable short notice demand response • Based on experiences with the supplemental program last winter, potential exists for up to 1000 MW of 30 minute demand response assets enrolled in New England by the end of 2008 • There will be associated economic benefits created by the demand response enabling technologies that will be developed as a result • Over time, communication systems will decline in cost so smaller customers with backup systems may be able to participate • Important supplement to existing SBC funding • Market support will create opportunities in the area of residential demand response (water heater and a/c control etc.), a potentially huge resource that is currently untapped in National Grid service areas

9. Greater Information for System Planning: • “a forward-looking capacity market will assist the ISO to prioritize system planning work and to address transmission and resource capacity needs along the horizon” • Greater notice of expected generation additions and retirements • Capacity price information, along with other information, feeds into Regional System Planning. • ISO-NE analysis of system constraints • Identification of reliability and market efficiency upgrades • Goal: reduce delivered cost of energy to consumers by identification of additional transmission to facilitate the market.

10. Significant Savings for Consumers: • Near-term savings in transition period estimated to be approx. $3.8 billion or 45% • Long-term savings expected from stable and competitive markets that will seek to support the most efficient new entry

11. A Market for Resource Adequacy Assurance; A Market Worthy of Implementation, Monitoring, & Future Improvements (as necessary): “No later than 180 days after the second FCA is conducted, the ISO’s Internal Market Monitoring Unit (“Market Monitor”) shall file with FERC and post to the ISO’s website a full report analyzing the operations and effectiveness of the Forward Capacity Market. Thereafter, the Market Monitor shall report on the functioning of the Forward Capacity Market in its annual markets report submitted to FERC pursuant to Section 11.3 of Appendix A to Market Rule 1.”