New Entry Pricing

1. NEPOOL Markets Committee May 7, 2014 New Entry Pricing Bruce Anderson New England Power Generators Association, Inc.

2. New Entry Rate Lock – The Problem • 5 (or 7) year rate lock distorts prices and sends inefficient signals • Two-tier (different) prices for New vs. Existing • New Entrant is essentially given a long-term price floor • Rational businesses only lock in high prices, not low ones – so it’s not really just rate certainty; it’s a selectively available floor price. • Existing resources thus see a lower price than New, for up to 4 (6) years following the New Entry • Existing Gen/DR will potentially retire before it should, because the price it is paid is less than the value it is providing • This unnecessarily and inefficiently accelerates the need for yet more New Entry • Prices spike for all Cleared resources for one year; then • Load continues to pay high-priced lock-in rate to New Entrant for many more years • Price suppression for Existing causes pre-mature retirement; zone goes short, causing need for more New Entry • Process continues in a vicious, unending circle of inefficiency • Over the long run, consumers pay more • Continuously paying for high priced, long-term rate locks • Forced to accept yet more New Entry when less expensive, Existing facilities could have met the same need (but instead retired). • New Entrants become Existing at some time – anticipating price suppression from the next round of New Entrants will drive up the $$ the New Entrant must recover in its 5-7 year rate lock. So the New Entrant bid is higher than necessary, and the Clearing Price to all others is also higher than necessary in the year of that New Entrant

3. Possible Solutions • Eliminate Rate-Lock altogether • There are legitimate financing reasons for rate certainty. While eliminating the rate-lock would address the efficiency problems, it could make financing more difficult. • Therefore not pursuing elimination at this time • Change the $0 bid requirement for rate-locked resources in years 2-7. • Preferred because the financing benefits of rate lock are retained, but adverse market consequences corrected. • Similar process is in place in PJM

4. Solution Details • Today: • Rate-locked resource treated as price-taker in years 2-5 (or -7) • Proposal • Rate-locked resources submit “shadow” delist at the lower of: • Its new entry bid price, or • Net CONE • Use of the “lower of” mitigate the risk that the New Entrant’s bid was not truly competitive • New Entrant continues to receive its rate-locked payment • Shadow delist bid is used to clear the market/zone

5. Why this solves the problem • New Entrant retains financing advantage of rate-lock. • Balance of market is clearing efficiently • Existing Resources see better price signals; avoids uneconomic retirements • Volatility is reduced as the cycle of uneconomic retirements/unnecessary New Entry is addressed • Better pricing at the end of the rate-lock period should drive down the initial offers of New Entrants to more reasonable levels. • Works well in tandem with Demand Curve • A fact explicitly recognized by FERC in PJM.

6. Schedule • Important to get this matter resolved before FCA-9 • Demand curve will in all likelihood be in effect for FCA-9; Commission may approve proposal to extend the price lock-in from 5 to 7 years • May MC: Overview, questions, and suggestions • June MC: Finalize proposal, review Tariff language • July MC: Vote • Implement for FCA-9