NEPOOL Manual 6 Financial Transmission Rights Technical Review Session Session Content

1. NEPOOL Manual 6Financial Transmission RightsTechnical Review Session Session Content January 23, 2002 Douglas James, ISO New England

2. Financial Transmission Rights Manual • Introduction • Section 1 - Financial Transmission Rights Overview • Section 2 - Reserved • Section 3 - FTR Auction • Section 4 - FTR Secondary Market • Section 5 - FTRs & Market Settlements • Section 6 - FTR Auction Example • Section 7 - FTR Auction Revenue Settlement • Section 8 - Incremental ARRs • Section 9 - ARR Allocation Example (under development)

3. FTR Technical Session Content • Part 1 - FTRs and the FTR Auction (Doug James) • Introduction to Manual 6, Financial Transmission Rights • Section 1 - FTR Overview • Section 3 - FTR Auction • Part 2 - FTR Auction Example (John Lally) • Introduction to FTR Auction, 5-Bus Model & Participants • Annual and Monthly Auction Examples • Constrained Day-Ahead Energy Market Example • Settlement of FTRs • Part 3 - Secondary Trading & Settlements (Doug James) • Section 4 - FTR Secondary Market • Section 5 - FTRs & Market Settlements • Sections 7,8 & 9 - FTR Auction Revenue Settlement, Incremental ARRs & ARR Example

4. NEPOOL Manual 6Financial Transmission RightsTechnical Review Session Part 1 - FTRs and the FTR Auction January 23, 2002 Douglas James, ISO New England

5. Introduction • About This Manual • Target Users • References • NEPOOL Manual for Billing • NEPOOL Manual for Agreement Accounting • NEPOOL Manual for Definitions and Abbreviations • FTR Auction Users Guide • NEPOOL Open Access Transmission Tariff: Schedule 14 - FTRs Schedule 15 - ARRs • What You’ll Find In This Manual

6. Section 1 – FTR Overview • Overview section provides brief overview of FTR concepts • Definition and purpose • Valuation • Requirements to participate • Actions: who does what

7. Definition and Purpose • Definition and purpose of FTRs • Financial instrument to manage congestion risk • Entitles holder to share of Congestion Charges that arise during periods of congestion • Settled hourly against differences in Congestion Compo- nent of Day Ahead Energy Market LMPs (Section 5) • Defined in MW from point of receipt to point of delivery • Unidirectional • Acquisition and Disposal • Created/Sold in ISO administered FTR Auction (Section 3) • Traded in Secondary Market (Section 4)

8. FTR Valuation, Participation • Valuation of FTRs • Benefit when FTR designation is in same direction as congested flow • CC of DA LMP higher at point of delivery • Liability when FTR designation is opposite congested flow • Any actual deliveries opposing the congested flow would receive congestion credit offsetting such liability • Requirements to participate • FTR Auction, Registered secondary trading • Eligibility requirements to be established • Criteria based on financial assurance • Unregistered secondary trading • No requirements, settle with registered holder

9. Actions • Actions: who does what: ISOBidder/Holder Provide registration Register Initiate, conduct auction Submit bids/offers Post auction results Maintain record of FTRs Manage FTR portfolio Provide secondary market in eFTR: post, accept, confirm,reject quotes Include FTRs in monthly settlements Determine FTR Auction settlement

10. Section 2 - Reserved

11. Section 3 - FTR Auction • Overview • eFTR: the Market User Interface • Simultaneous Feasibility Test (SFT) • Determining Winning Quotes • Auction Timeline • Auction Business Rules

12. FTR Auction Overview • Auction: opportunity to acquire and sell FTRs • only way to create an FTR (may later subdivide) • Long and short term auctions • 2 six month auctions; 10 then 25 % of capability • then annual for five years; 50% of capability • monthly; remainder of transmission capability • On-peak and off-peak auctions • On-peak period: weekday hours ending 0800 - 2300 • Off-peak period: weekday hours ending 2400 - 0700, weekends, NERC holidays

13. FTR Auction Overview (Continued) • FTR Characteristics • Available between any Locations for which LMP is calculated and posted: Hub, Load Zone, Node, External Node • Designated as injections/withdrawals from Locations within and external to NEPOOL • Magnitude to nearest 0.1 MW • Provides hedge for deliveries consistent with FTR • Do not hedge against losses • FTR Auction is a Reconfiguration Auction • enables purchase of FTRs that are different from those offered for sale in the auction

14. eFTR • eFTR: Internet based; provides user interface with FTR Auction and related functions • FTR bids/offers submitted, validated, entered • Observe auction results, manage FTR portfolios • Other subsystems: determine, record highest valued bid-based feasible set of FTRs • establish base case for auction • iterate between evaluating quotes and SFT • determine FTR clearing prices • record results for posting on MUI • bridge to settlement and billing subsystems

15. Simultaneous Feasibility Test (SFT) • Preserves economic value of awarded FTRs • must collect sufficient Congestion Charges to cover FTR credits (revenue adequacy) • requires transmission system to support awarded set of FTRs during normal conditions • Power Flow: quotes modeled as generation and load at injection/withdrawal Locations • model expected network topology for period • thermal ratings, interface limits • loop flows from other Control Areas • normal conditions and single contingency events • market feasibility test; not a reliability analysis

16. Determining Winning Quotes • Winning Quotes: • Set of simultaneously feasible FTRs with highest total value • determined by bid and offer prices • Steps: • download bids/offers from database • solve linear programming problem (LP) • check simultaneous feasibility (SFT) • iterate LP/SFT • upload results

17. Auction Timeline • ISO initiates, directs, oversees FTR Auction • Annual (initially, semi-annual) auction • six business day quoting window ends first day of month before FTRs are effective • results posted within six business days (intended to be before monthly auction window opens) • Monthly auction • five business day quoting window opens 15 business days before start of auction month • results posted within four business days

18. FTR Auction Timeline

19. Auction Business Rules • Bids and Offers: • Must be Eligible FTR Bidder to buy/FTR Holder to sell • To sell, must own for entire auction period duration • Rejected quotes may be resubmitted in quoting period • Bids: are for purchases up to the specified quantity (no minimum quantity may be specified) • Offers: are for sales up to the specified quantity (no minimum); may specify a reservation price • Outstanding FTRs modeled as fixed injections • Awarded FTRs may be acquired from FTR Holders in secondary market: registered/unregistered FTRs

20. Questions?

21. NEPOOL Manual 6Financial Transmission RightsTechnical Review Session Part 2 - FTR Auction Example January 23, 2002 John Lally, ISO New England

22. NEPOOL Manual 6Financial Transmission RightsTechnical Review Session Part 3 - Secondary Trading and Settlement January 23, 2002 Douglas James, ISO New England

23. Section 4 – FTR Secondary Market • Overview • eFTR Secondary Trading Center • FTR Secondary Trading Business Rules

24. FTRSecondary MarketsOverview • FTRs are originally awarded in the NEPOOL FTR Auctions • FTRs may be freely traded on the secondary market • NEPOOL FTR secondary trading market facilitates trade of existing FTRs between FTR Holders • Allows trading of existing FTRs only • Transfer of ownership is automatically registered with the ISO for FTR trades made through eFTR • FTRs can be traded independently of eFTR, however they can only be registered to the ISO via eFTR • FTRs cannot be reconfigured in the secondary market; may be subdivided in time and quantity

25. eFTR Secondary Trading Center • FTR Holders can buy and sell FTRs directly with other FTR Holders through the Secondary Trading Center • eFTR Secondary Trading Center allows users to: • View FTR Postings • Post FTRs for Resale • Buy and Sell FTRs • The NEPOOL FTR Auction User’s Guide will have detailed instructions for participating in the secondary market (Guide is currently under development)

26. Secondary Trading Business Rules • An FTR can be split into multiple FTRs: • They may have different MW amounts, start and end times than the original FTR • However, an FTR cannot be reconfigured into FTRs with a larger MW value, earlier start time, later end time, or different from/to Locations • FTR MW values can be split in 0.1 MW increments • Deadline for all FTR trades for the Operating Day is the end of the previous Operating Day • Once per day, updated FTR information reflecting the previous day’s trades is sent from the eFTR database to ISO NE’s settlement systems

27. Section 5 - FTRs & Mkt Settlements • Transmission Congestion Credit Target Allocations • Transmission Congestion Credit Calculation • Excess Transmission Congestion Revenues Distribution

28. Tsm Congestion Credit Target Allocations • Monthly Transmission Congestion Credit Target Allocations calculated with Hourly Positive and Negative FTR Target allocations summed separately for each FTR Holder • Positive FTR Target Allocations are compensated as Transmission Congestion Credits • Negative FTR Target Allocations are added to the Congestion Revenue for the month; FTR Holder is charged this amount • Congestion Revenue available for a month is equal to: • Total Congestion Charges collected in the month, plus • FTR Negative Target Allocations for the month, plus • Any Congestion Revenue Excess from previous month

29. Transmission Congestion Credits • The ISO compares the total of all monthly Positive FTR Target Allocations to the total Transmission Congestion Revenues Available • If total Positive FTR Target Allocation is <= Transmission Congestion Revenue, • FTR Holders receive Tsm Congestion Credit equal to Positive FTR Target Allocation • If total Positive FTR Target Allocation is > Tsm Congestion Revenue, • FTR Holders receive shares of the Monthly Tsm Congestion revenues in proportion to their Positive Target Allocations

30. Excess Tsm Congestion Revenues • If there is any Excess Transmission Congestion Revenue remaining at year end, then: • Stage One: Excess Transmission Congestion Revenue allocated in proportion to, but not greater than, any unpaid monthly Transmission Congestion Credit Target Allocations • Stage Two: Any remaining Transmission Congestion Revenue is distributed pro-rata to entities who paid Transmission Congestion Charges in that calendar year

31. Sections 7,8,9-Auction Revenue Distribution • Today • ARR Overview • Incremental ARR Overview • Future Technical Session • ARR Details • Incremental ARR Details • ARR Example

32. Section 7 - ARROverview • FTR Auction revenues are distributed to: • Sellers of FTRs in the Auction • Certain entities paying for new transmission upgrades (holders of Incremental ARRs) • Entities that pay Congestion Charges (ARRs are awarded through the 4-step process described in Schedule 14 of NOATT)

33. Section 7 - ARROverview (Cont’d) • FTR Auction revenues are settled monthly • Monthly Auctions: in second month following the auction, using data for the month in which the auctioned FTRs are effective • Six-Month/Annual Auctions: as for the monthly auctions, in monthly increments (for each year of annual auctions) • Auction revenues are collected and distributed concurrently with that second month’s settlement

34. Section 8- Incremental ARR Overview • IncARRs and Eligibility for Awards • Awarded for new transmission upgrades that make additional FTRs possible • Upgrades paid by RNS rate do not qualify • Share costs, share IncARRs proportionately • IncARRs continue with cost support/upgrade life • In MW, unidirectional, from Location/to Location • A claim on auction revenue, not an FTR • Multi-step process offering customer choice

35. Questions?