Allocation of Loss Revenue NEPOOL Markets Committee August 12, 2003

1. Allocation of Loss RevenueNEPOOL Markets CommitteeAugust 12, 2003

2. Outline • Description of Allocation Approved on August 1 • Allocation Example • Example Highlighting Potential Gaming Strategy

3. Description of Approved Allocation

4. Loss Revenue Loss Revenue is sum for all Participants for all locations of : Locational Energy Position times Loss Component of LMP at that location

5. Four Possible Situations to Consider at Each Location in Which an Entity May Impact the Loss Revenue • Net Seller/Negative Loss Component (-) • Net Buyer/Negative Loss Component (+) • Net Buyer/Positive Loss Component (-) • Net Seller/Positive Loss Component (+) (Sign is significant in later slides)

6. Allocation Calculation • Step 1 – determine loss $ position at each location for each participant as: Participant loss position = Net position at location times loss component of LMP for that location

7. Allocation Calculation Cont’d • Step 2 – determine total loss position of each Participant as: Total Participant loss position equals sum of Participant loss positions at each location

8. Allocation Calculation Cont’d • Step 3 – Carry forward only those Participant total loss positions that are negative (net payers)

9. Allocation Calculation Cont’d • Step 4 – determine each Participant’s Loss Revenue share of total of all Participant’s total loss positions as: Participant total loss position (carried forward) Sum of all Participant’s total loss positions (carried forward)

10. Allocation Calculation Cont’d • Step 5 – determine each Participants Loss Revenue allocation as: Loss Revenue times Participant Loss Revenue Share

11. Allocation Example

12. Allocation Example Location A LC=-$1.00 P1 = +20 MW Location B LC= -$2.00 P2 = -30 MW Location C LC= $.50 P3 = +10 MW Location A LC=$3.00 P3 = -5 MW Loss $ Positions P1 position = (20)(-$1.00) = -$20 carry forward P2 position = (-30)(-$2.00) = $60 P3 position = (10)($.50) + (-5)($3.00) = -$10 carry forward

13. Allocation Example Cont’d Loss Revenue Share P1 share = -$20/-$30 = 66.67% P3 share = -$10/-$30 = 33.33%

14. Allocation Example Cont’d Loss Revenue Allocation Given Loss Revenue of $1,000 P1 Allocation = $1000(.667) = $667 P3 Allocation = $1000(.333) = $333

15. Allocation Example Cont’d • Allocation of DA portion of Loss Revenue based on DA positions (Day Ahead Locational Adjusted Net Interchange) and DA Loss Components • Allocation of RT portion based on RT positions (Real Time Locational Adjusted Net Interchange Deviation) and RT Loss Components

16. Example Highlighting Potential Gaming Strategy

17. Gaming Example Location A LC=-$1.00 P1 = +20 MW Location B LC= -$2.00 P2 = -30 MW Location C LC= $.50 P3 = +10 MW Location D LC=$3.00 P3 = -5 MW Participant 5 sells 20 MW to Participant 4 Location E LC=-$5.00 P4 = +20 MW Location E LC=-$5.00 P5 = -20 MW Loss $ Positions P1 position = (20)(-$1.00) = -$20 carry forward P2 position = (-30)(-$2.00) = $60 P3 position = (10)($.50) + (-5)($3.00) = -$10 carry forward P4 position = (20)(-$5.00) = -$100 carry forward P5 position = (-20)(-$5.00= $100

18. Gaming Example Cont’d Loss Revenue Share P1 share = -$20/-$130 = 15.4% P3 share = -$10/-$130 = 7.7% P4 share = -$100/-$130 = 76.9%

19. Gaming Example Cont’d Loss Revenue Allocation Given Loss Revenue of $1,000 P1 Allocation = $1000(.154) = $154 P3 Allocation = $1000(.077) = $77 P4 Allocation = $1000(.769) = $769

20. Gaming Example Cont’d Energy and OR Settlement for P4 and P5 Energy Settlement DA RT P4 20 MW X DALMP @ D 20 MW X RTLMP @ D P5 -20 MW X DALMP @ D -20 MW X RTLMP @ D (contract automatically carried into real-time – net settlement for P4 and P5 combined = $0) Operating Reserve Settlement DA RT P4 None – no DALO None – no deviations P5 None – no DALO None – no deviations

21. Energy and OR Settlement for P4 and P5 Conclusion P4 and P5 are, by acting in concert, able to extract a share of the Loss Revenue with no financial risk to themselves