Market Rule and Procedure Changes in Response to Summer 2001 Period in New England

1. Agenda Item #5 1/15&16/02 MC Mtg. Market Rule and Procedure Changes in Response to Summer 2001 Period in New England ISO New England Inc. NEPOOL Markets Committee January 15-16, 2002

2. Background During Summer 2001, ISO-NE experienced several days of high loads, setting successive peaks. Prices during some of those days, Particularly 8/9/01, appeared inconsistent with the level of load. ISO-NE Board asked David Patton, its Market Advisor, to review these events and produce a report. This report produced a number of recommendations. The ISO has developed a number of market rule changes to implement those recommendations.

3. Key Patton Report Recommendations • 1. Implement SMD as soon as possible. • Provide option to self-schedule resources after the commitment process once the multi-settlement process under SMD is implemented • 2. Seek improvements in transaction rules and procedures between NYISO and ISO-NE • 3. Modify ECP eligibility rules for peaking units and units committed during reserve shortages • 4. Reserve Market Changes • - Include real-time replacement reserves in reserve markets • - Include Opportunity Cost payments for reserves • 5. Seek improvements in ISO-NE’s internal procedures for managing transmission congestion.

4. Schedule Rule changes will be presented at January 15 - 16, 2002 NEPOOL Markets Committee meeting. A tentative meeting has also been set for 1/29/02 to discuss these changes. ISO-NE will present final rule changes to NPC at February 8, 2002 meeting. ISO-NE will finalize rules to enable filings of rule changes in February 2002.

5. Seek Improvements in Transaction Rules Objective: Address major seams issue with New York Identify and implement solutions that would facilitate efficient trading with adjacent markets prior to next summer. In-Day trading is area needing improvement.

6. Seek Improvements in Transaction Rules Current Rules and Procedures for Short Notice External Transactions (SNTs) ISO-NE does not accept in-day transactions (Short Notice Transactions) if they will cause commitment or de-commitment of resources SNTs are transactions submitted up until 90 minutes prior to the hour in which they are scheduled to flow. Transaction can be terminated hourly by the participant.

7. Seek Improvements in Transaction Rules Proposed Changes to Short Notice External Transactions SNTs will no longer be terminated if they affect Unit Commitment To enable this change, SNTs, once submitted, cannot be withdrawn by the Participant ISO-NE will not use replacement reserve or operating reserve to support SNTs Current rule permitting internal resources to self-schedule to support SNTs after the trading deadline remains

8. Seek Improvements in Transaction Rules External Dispatchable Transactions limited to 100 MW blocks at single energy bid price • Reduces large swings in RTMP and inter-control area schedules based on acceptance and non acceptance of large block loads on an all or nothing basis • Externals not eligible to set RTMP will be eligible for uplift

9. Seek Improvements in Transaction Rules • Short Notice External Transactions (SNT) - Issues Out-Service: Rationing of available Out-Service under Tariff may restrict SNTs Elimination of Out-Service charge for hourly SNTs is being considered Because ISO-NE still has a single settlement system, concern about possibility of generation sellers using SNTs to increase price in New England. A mitigation measure that would restrict an entity from engaging in those practices from submitting SNTs will be included in the rules.

10. Modify ECP Eligibility Rules Patton Recommendations: Allow all units committed intra-day and dispatched at LOL in reserve shortage situations to contribute to setting energy clearing prices Allow peaking generators (generally gas turbines) to set the energy clearing price when they are dispatched for reasons other than congestion relief or voltage support and are the source of incremental energy

11. Modify ECP Eligibility Rules The response to these two recommendations will be consolidated. They will be addressed by changes in the eligibility of peaking units to set the ECP for the following reasons: Few units with more than 1-hour minimum run or minimum down time are committed intra-day Since these events are most likely in OP4, units with long start times would already have been called upon and would be operating above LOL. Consequently, peaking units are the units committed intra-day in capacity tight situations.

12. Modify ECP Eligibility Rules • Proposed Treatment of Peaking Units and External • Dispatchable Transactions Market Design Principle: • If the unit or external transaction is the incremental source of energy or is needed to avoid a reserve shortage condition, then unit or transaction is eligible to set 5 minute RTMP Definition of a reserve shortage situation will be when the ISO is short of Operating Reserve, as measured by the EMS system.

13. These proposals would change the eligibility tests currently in place that require that an external contract set a floor price any time it is dispatched. They will also allow peaking units running at LOL to set the ECP in certain conditions. Under these proposals, External Contracts and Peaking Units that are at LOL will be treated differently in normal conditions than in reserve shortageconditions. In normal conditions, the external contract or peaking unit at LOL will set the floor price when it is the incremental source of energyon the system In reserve shortage conditions, they will eligible to set a floor price at all times. The floor price will be evaluated every five minutes. Modify ECP Eligibility Rules Changes to Current Rules - Summary

14. Modify ECP Eligibility Rules • Peaking Units and External Dispatchable Transactions Peaking Unit Definition • Minimum run time < 1 hour • Minimum down time < 1 hour • Startup notification < 30 minutes • Dispatchable via Remote Intelligence Gateways (RIGS) Objective is to allow flexible energy to set RTMP Peaking Units will be “flagged” as eligible

15. A. A set of peaking units and external transactions are on-line at this instant in time. The reliability and economic tests will be applied to these resources to determine the eligibility to set the next 5 minute RTMP. B. The EMS system has determined that at this specific time interval, there is 210 MW of capacity on-line and available within 10 minutes in excess of the energy and spinning reserve requirements. C. The RTMP from the previous 5 minute SPD execution is $160.00, and the peaking units or external transactions were not eligible to set the RTMP. D. The characteristics of the peaking units and external transactions are as follows: Modify ECP Eligibility Rules I. Eligibility Test - Initial Conditions

16. The above table shows the following information: 1. LOL is the LOL of the peaking resource and Block is the MW block size of the external transaction 2. Energy $ is the energy bid price of the block of energy being evaluated 3. The Label is an arbitrary assignment for discussion purposes Modify ECP Eligibility Rules Peakers/ET

17. The above table shows the following information: 1. Size is the block size of energy above the last R/T SPD DDP that is available within 5 minutes 2. Energy $ is the corresponding energy price of the MW block. If there are multiple energy prices from a resource available in 5 minutes, each will be evaluated independently. (See OL2a/b) 3. The Label is an arbitrary assignment for discussion purposes Modify ECP Eligibility Rules On-Line Energy

18. A. As stated, there are two separate tests to be performed to determine the eligibility status of peakers and external transactions to set the RTMP. These tests will be performed prior to each execution of R/T SPD, and the eligibility status will apply to the next execution of R/T SPD. B. The “Reliability Test” seeks to answer the question “Is this resource needed to create or preserve reserve while meeting the energy requirements of the system?” Modify ECP Eligibility Rules II. Evaluation Tests

19. C. The “Energy Test” seeks to answer the question “Is there less expensive on-line energy available within 5 minutes that can be replace the energy associated with the peaker or external transaction, and, if so, then the energy associated with the peaker or external transaction is not needed at this point in time and therefore should not be eligible to set the RTMP?” D. The two tests will be performed independently and the results combined to determine which, if any, peakers or external transactions will be eligible to set the RTMP for the next execution of R/T SPD. Modify ECP Eligibility Rules II. Evaluation Tests - (continued)

20. A. The criteria to be used to evaluate resources for the Reliability Test will be the amount of excess 10 minute spinning reserve on the system as determined by the ISO EMS system. For the purposes of this discussion, that amount is defined to be 210 MW. B. The Reliability Test will determine which of the eligible resources could otherwise be de-committed and not cause the spinning reserve criteria to be violated. Using the eligible list of resources from I.D. above, resources P1 and P5 (total MW of these resources is 205MW) could be decommitted without violating the criteria. Modify ECP Eligibility Rules III. Reliability Test

21. C. Therefore, the Reliability Test would designate resource P6 through P7 as necessary to meet criteria and these resources (absent the Energy Test) would be eligible to set the RTMP is the next R/T SPD execution. Modify ECP Eligibility Rules III. Reliability Test - (continued)

22. A. As stated above, the criteria for the Energy Test is “Is there on-line energy available in 5 minutes that is less expensive than the energy associated with the peakers and external transactions?” B. Using this criteria, the peakers and external transactions are placed into an energy stack by MW block from most expensive to least expensive. Likewise, the on-line energy available is placed into an energy stack by MW block from least expensive to most expensive. C. Functionally, the Energy Test will start with the most expensive peaker or external transaction block and determine if this block of energy can be replaced by a less expensive block of energy from an on-line unit. Modify ECP Eligibility Rules IV. Energy Test

23. D. From the examples above, the 10 MW block of energy at $200 from unit P1 can be replaced by 10 MW block of energy at $161 from the 20 MW block of unit OL1. E. The 100 MW block of energy at $190 from ET1 can be replaced by 10 MW from OL1 (at $161), 20 MW from OL2a (at $163), 25 MW from OL3 ($164), 15MW from OL4 (at $165), 20 MW from OL2b (at $166), and 10 MW from OL5 (at $170). F. Continuing with this evaluation, the energy from P2 can be replaced with the energy from OL5, P3 can be replaced from OL5 and OL6, P4 can be replaced from OL6 and OL7, P5 can be replaced from OL7, and P6 can be replaced from OL7 and OL8. G. The energy from ET2 has an energy price of $170. Based on the energy price bands of the remaining on-line resources (OL8 and OL9), the energy from ET2 is more economic than additional on-line energy, therefore, ET2 would be eligible to set the RTMP for the next execution. Modify ECP Eligibility Rules IV. Energy Test - (continued)

24. A. The final analysis is to combine the results of the Reliability and Energy test in order to determine the most restrictive set of peakers and/or external transactions that should be eligible to set the RTMP for the next execution. B. From III.C. above, the Reliability Test has indicated that resources P6, ET2 and P7 are required resources. C. From IV.G, above, the Energy Test has indicated that resources ET2 and P7 have more economic energy bands than the remaining on-line energy bands, therefore, these resources should be eligible to set the RTMP in the next R/T SPD execution. D. The final analysis would “flag” resources P6, ET2 and P7 as eligible to set the RTMP in the next execution of R/T SPD, and presuming no other changes in system demand, resource availability and/or energy pricing occurred, the Final RTMP would be computed as $175 and would be set by peaker P6 operating at LOL. Modify ECP Eligibility Rules V. Final Analysis

25. Modify ECP Eligibility Rules • Peaking Units and External Dispatchable Transactions Other Rules • Evaluation completed prior to each R/T SPD execution • All eligible resources evaluated • No eligible resources “skipped” • Tie Breaker - Largest MW block at energy bid price • Time horizon for replacement energy is 5 minutes

26. The more restrictive definition was developed because the loss of 10 minute reserve is a better measure of true scarcity. Entering OP-4 because of loss of 30 minute reserve is anNPCC requirement, not a NERC requirement. NPCC allows some flexibility in operating without 30 minute reserve. Since this reliability requirement is not as hard and fast as the ten-minute reserve requirement, it is not appropriateto abandon incremental energy pricing upon a shortage of thirty minute reserve. Modify ECP Eligibility Rules

27. Reserve Market Reform Patton Recommendation: If replacement reserves in the real-time are required to meet the NERC reliability requirements, ISO should adjust its reserve requirements to allow the ISO to procure these reserves in the reserves markets, and compensate suppliers accordingly Provide for payment of opportunity costs to generators designated for reserves

28. Reserve Market Reform 1. Increase the amount of reserves cleared in the TMOR Market by the real-time supplemental reserve requirement 2. Revise pricing and payment in the reserve market to be consistent with New York’s Reserve Markets 3. Require units to bid their low operating limits at their physical low operating limit, with an allowance for economic efficiency and emission characteristics

29. Reserve Market Reform 1. Replacement Reserves in TMOR Requirement Replacement Reserves (RR) defined as 1/2 second largest contingency RR will be added to existing 30 minute requirement for purposes of real-time designation and market clearing RR will not be in capacity analysis for purposes of declaring OP4 conditions

30. Reserve Market Reform • 1. Replacement Reserves in TMOR Requirement • Example: Existing Conditions • Largest Contingency = 1400MW • 2nd Contingency = 1150 MW Today • TMSR Requirement = 1/2 LSC = 700 MW • TMNSR Requirement = 1/2 LSC = 700 MW • TMOR Requirement = 1/2 2nd Contingency = 575 MW Proposed • TMSR Requirement = 1/2 LSC = 700 MW • TMNSR Requirement = 1/2 LSC = 700 MW • TMOR requirement = 2nd Contingency = 1150 MW

31. Reserve Market Reform 2. Revised Pricing/Payment in the Reserve Market A. Floor Price for Reserves will be $ 0.00 B. Hourly Reserve Prices will be capped at Hourly Energy Price C. Final Reserve Prices will be cascaded at 5 minute dispatch D. TMNSR and TMOR Reserve Availability Bids will be capped at $ 2.52 E. 5 Minute Reserve Clearing Prices will include opportunity costs

32. Reserve Market Reform 2. Revised Pricing/Payment in the Reserve Market A. Reserve Floor Price of $0.00 Proposal is a clarification of existing Rules Today when in excess generation, and hourly ECP is negative, reserve prices are administered to $0.00 Proposal would clarify intent and set floor price for reserves at $ 0.00

33. Reserve Market Reform 2. Revised Pricing/Payment in the Reserve Market B. Hourly Reserve Prices capped at Hourly ECP Restatement of existing “Interim Bid Cap Rule” No change is being proposed

34. Reserve Market Reform • 2. Revised Pricing/Payment in the Reserve Market • C. Reserve Clearing Prices to be Cascaded Reserve Clearing Prices at 5 minute dispatch will be cascaded such that: • TMSRCP > TMNSRCP > TMORCP Cascading will occur after Reserve Clearing Prices determined

35. Reserve Market Reform 2. Revised Pricing/Payment in the Reserve Market D. TMNSR and TMOR Availability Bids to be Capped TMNSR and TMOR availability bids will be capped at $ 2.52 $ 2.52 is the same as the NYISO cap

36. Reserve Market Reform • 2. Revised Pricing/Payment in the Reserve Market • Revision to TMSR Clearing Price Resources will be designated for TMSR by R/T SPD based on existing Market Rules Once the TMSR designations are complete, the TMSRCP will be determined based on: • Maximum [Final RTMP minus Dispatch RTMP; BidPriceCleared], • Where Final RTMP is the final RTMP as determined by R/T SPD from the maximum of the dispatch RTMP and the external floor price, • BidPriceCleared is the sum of the TMSR Bid Price plus the TMSR OC as determined by R/T SPD

37. Reserve Market Reform • 2. Revised Pricing/Payment in the Reserve Market • Revision to TMSR Clearing Price Example #1 (As today) • Final RTMP (Floor Price) 45.66 • Dispatch RTMP 45.66 • TMSRCP (R/T SPD today) 0.55 • TMSRCP (proposed) 0.55 Example #2 (Final > Dispatch) • Final RTMP 44.97 • Dispatch RTMP 43.87 • TMSRCP (R/T SPD today) 0.55 • TMSRCP (proposed) 1.10

38. Reserve Market Reform • 2. Revised Pricing/Payment in the Reserve Market • Revision to TMSR Clearing Price Example #3 (TMSR OC) • Final RTMP (Floor Price) 87.32 • Dispatch RTMP 52.30 • TMSRCP (R/T SPD today) 39.12 • TMSR Bid (1.10, unit backed down to 49.30 [87.32-49.30=38.02] • TMSRCP (proposed) 39.12 No change in TMSR CP calculation

39. Reserve Market Reform • 2. Revised Pricing/Payment in the Reserve Market • Revision to TMNSR and TMOR Clearing Price Resources will be designated for TMNSR/TMOR based on existing Market Rules Once the TMNSR/TMOR designations are complete, the Clearing Prices will be determined based on: • Maximum [Bid plus Opportunity Costs] of designated resources • This OC is not the same as OC for TMSR

40. Reserve Market Reform • 2. Revised Pricing/Payment in the Reserve Market • Revision to TMNSR and TMOR Clearing Price Opportunity Costs defined: • On-line resource: Final RTMP minus Energy Bid Price for the next MW above DDP • Off-line resource: Final RTMP minus [(Startup Costs/[max(min run, 1hour)]/LOL) + No Load Costs/LOL + Energy Bid Price at LOL]

41. Reserve Market Reform • 2. Revised Pricing/Payment in the Reserve Market • Revision to TMNSR and TMOR Clearing Price Example # 1 (On-line Resource designated in TMNSR) • Final RTMP 65.45 • Unit HOL/LOL 100/30 • Energy Bid 30@ $25.00, 40@ $50.00, 30@ $80.00 • Energy DDP 70 MW • Designated TMNSR 10 MW (MRR=1MW/min) • TMNSR Bid $1.50/MW OC = $65.45 minus $80.00 = -$15.45 -> No OC TMNSR CP = $1.50 (Bid) No Change in Clearing Price calculation from today

42. Reserve Market Reform • 2. Revised Pricing/Payment in the Reserve Market • Revision to TMNSR and TMOR Clearing Price Example #2 (Off-line Resource designated for TMNSR) • Final RTMP 65.45 • Unit HOL/LOL 15/10 • Energy Bid $60.00/MW • Startup and NoLoad Costs $500 and $25 • TMNSR Bid $1.10/MW • Min Run 1 hour OC = Final RTMP minus [S/U+NL+Energy] OC = $65.45 minus [$500/10 + $25/10 + $60] = -$47.05 TMNSR CP = $1.10

43. Reserve Market Reform • 2. Revised Pricing/Payment in the Reserve Market • Revision to TMNSR and TMOR Clearing Price Example #3 (Off-line Resource designated for TMNSR) • Final RTMP 65.45 • Unit HOL/LOL 15/10 • Energy Bid $60.00/MW • Startup and NoLoad Costs $0 and $0 • TMNSR Bid $1.10/MW OC = Final RTMP minus [S/U+NL+Energy] OC = $65.45 minus [$0 + $0 + $60] = $5.45 TMNSR CP = $1.10 + $5.45 = $6.55

44. Reserve Market Reform 3. Bidding Physical LOL Bidding physical LOLs for resources promotes additional operational dispatch flexibility, increases available reserves and may reduce uplift Units will be required to bid LOLs at their physical low operating limits, with an allowance for economic efficiency and emission characteristics ISO’s Market Monitoring and Mitigation group will identify “audit” requirements