Proposals for FCM: Standby Payments and Delist Bids

1. Proposals for FCM: Standby Payments and Delist Bids Pete Fuller NEPOOL Markets Committee December 11/12, 2012

2. Today’s Discussion • Continue discussion from October & November MC meetings • Focus on delist bids rejected for reliability: • Discuss on-going review of reliability need • More detail on the basis for paying a standby payment for resources with delist bids rejected for reliability, and a cancellation payment if released from its CSO • 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/accept a delist bid, and a time-dependent cancellation payment if ISO exercises the right to release the CSO

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 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

7. Approach #2 • As presented in previous meetings, implement a Standby Payment when the reliability determination is first made, and a Cancellation Payment if ISO reverses that determination • 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 • More detail in the following slides

8. As Previously Discussed • Costs and risks of being held for reliability subject to later release include: • Uncertainty in budgeting and planning for the Capacity Commitment Period and intervening periods: staffing, major maintenance, capital investment • Potential need to incur these costs prior to the ISO’s decision on need • Loss of opportunity to seek transactions to shed capacity obligations for intervening CCPs • Loss of opportunity to seek transactions to acquire capacity obligations (if delist bid is ultimately accepted) • Fundamental cost to the market of reliability actions suppressing clearing prices

9. The Cost of Uncertainty • Assume an existing resource (generation or DR) submits its price for taking on a CSO in the FCA (delist bid) • By definition, includes costs that would not be incurred if there was no CSO • Likely to include incremental costs that need to be incurred prior to the delivery year • Equipment upgrades, incremental capex, environmental compliance • Engineering, equipment orders, permits • Maintenance • Overhauls

10. Scenario #1 • FCA Clearing Price is higher than the existing resource offer (delist bid) price; resource takes on a CSO • The CSO is locked in • Only the resource owner has the right to reduce the CSO, through bilaterals or demand bids in a reconfiguration auction • Staffing, O&M, capex, hedging (fuel, FTRs, energy sales) can be managed without the risk of having the CSO involuntarily terminated

11. Scenario #2 • FCA Clearing Price is lower than the existing resource offer (delist bid) price and there is no reliability need; resource does not take on a CSO • Resource owner has the option to operate in the energy market or deactivate in the delivery year • If the resource plans to operate: • Multiple options are available to take on a CSO via bilateral or ARA, starting two months after the FCA (5 bilateral windows, 3 ARAs, plus monthlies) • Three-plus years to line up hedges and operational plans

12. Scenario #2, continued • If the resource does not plan to operate: • Staffing, O&M and capex budgets can be set with an explicit plan to deactivate the resource • O&M and capex may be avoided that would otherwise be needed to operate in the FCA delivery year • Long lead-time contract terminations (eg, labor, fuel supply, LTSA, etc) can be implemented in a timely manner • Resource owner can pursue bilaterals or ARAs in intervening years to accelerate the deactivation and reduce costs and risks

13. Scenario #3 • FCA Clearing Price is lower than the existing resource offer (delist bid) price but there is a reliability need; resource is assigned a CSO, subject to ISO obligation/right to review and release the CSO • Two outcomes are possible, over which resource owner has no control. Under current rules: • The resource might have a CSO for the delivery year and be paid its offer price • The resource might have no CSO for the delivery year and be paid nothing • Staffing, O&M and capex budgets need to be prepared for both possible outcomes

14. Scenario #3, continued • If the resource would only operate if it has a CSO: • Long-lead O&M and capex may need to be expended prior to ISO’s determination, and may therefore end up being unrecoverable • If the investment is considered too risky, resource faces unavailability penalties or additional costs to implement after the ISO’s determination (if even possible) • Long-lead contract terminations cannot be implemented prior to ISO’s determination, which may impose additional costs

15. Scenario #3, continued • Hedges cannot be locked in prior to ISO’s determination, and may become more costly • The resource cannot seek opportunities to shed its CSO for intervening years • If the resource would consider operating even if released from its CSO, opportunities to acquire CSO for the delivery year are substantially diminished after the ISO’s determination (3 bilateral windows and 2 ARAs have already occurred by the time ISO makes its determination 12 months prior to the delivery year)

16. Proposal • Standby Payment would accrue as soon as ISO rejects a delist bid for reliability reasons • Cancellation Payment would accrue upon notice from ISO reversing the reliability determination and releasing the resource from its CSO • Total payment for a resource held for reliability through the Capacity Commitment Period would be its delist bid price plus the Standby Payment • Total payment for a resource held for reliability and then released would be the sum of the Standby Payment and the Cancellation Payment • Payment might need to occur in the relevant CCP rather than at the time of the initial reliability determination or at the time of the release of the CSO

17. Proposal • Standby Payment • [20%] of the resource’s existing resource offer (delist bid) price • Compensates (even if imperfectly) for granting ISO the right to terminate the CSO • Cancellation Payment • [10%] of bid price if before June 1 immediately after the FCA (3 years prior to delivery year) • [35%] of bid price if before June 1 two years prior to delivery year • [70%] of bid price if before June 1 one year prior to delivery year • No cancellation after June 1 one year prior • Opportunity to file at FERC for prudently-incurred costs that exceed the Standby plus Cancellation Payment

18. 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

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

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

21. 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)

22. 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

23. 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

24. Thanks for your consideration.