FCM Performance Incentives

1. FCM Performance Incentives Framework for Impact Assessment Paul J. Hibbard Analysis Group April 10 2013

2. Overview • FCM PI: Major Initiative • March 1 Meeting • Overview of approach to impact analysis • Role of Analysis Group • Potential additional scope items; qualitative vs. quantitative approaches • Today • Further review of analytic approach • Identification of scenario options, assumptions • Sources of data

3. Analytic Approach • Comparison • Status Quo • FCM PI • What is the difference? • With FCM PI, existing and new resources will adjust offers based on expected performance revenues (positive and negative) • This will effectively alter the supply curve for the capacity market • …changing clearing prices, cost to load, and revenues to suppliers • …changing the mix of resources in the market • …changing system reliability • Impact on supply curves depends on many assumptions • Need to model a realistic set of scenarios

4. Supply Curve Factors • Capacity market offers/delist bids • Unique to FCM PI • Expected PI revenues or payments • Risk premium • Same either way: going-forward costs, less energy, ancillary service, and NCPC revenues, net of production costs (“GFC”) • Existing – Upgrade investments (environmental, fuel certainty, performance) plus fixed O&M • New– Investment plus fixed O&M • Key parameters • FCM PI: Scarcity events (H), balancing ratio (BR), unit performance (A), Performance Payment Rate (PPR) • Assumptions regarding investment and fixed O&M costs for existing and new capacity • Energy, AS, NCPC prices/payments

5. Supply Curves • End Result • Multiple potential supply curves • Status quo • With influence of FCM PI • Including offers from existing resources, generic new resource types • With variations based on assumptions regarding potential upgrades, and based on other market factors • Upgrades - dual fuel, LNG, firm transportation, environmental, other • Market factors – GFCs, energy/AS market revenues, demand

6. Determination of Impacts • Combine supply curves and demand to identify FCM clearing prices under a realistic number of scenarios • Multiple supply curves, status quo and with FCM PI • Base, high and low ICR forecasts • Time Horizon • FCA 9 will be used as the model year; however, longer-term variations on load and resources will be captured through sensitivities • Identify potential impacts • FCM clearing prices • Costs to load • Revenues to suppliers • Resource mix • (Qualitatively) – potential directional impacts on other markets, reliability?

7. Key Data Sources, Assumptions • Demand • ICR – CELT/RSP • Supply GFCs • Fixed O&M – estimates by asset category – SNL/Ventyx • Potential upgrades • Dual fuel, LNG options, new firm pipeline capacity – AG estimates • Environmental retirements/upgrades – AG assessment based on ISO analysis and review of literature on cost estimates • New asset costs – ISO ORPT • Energy/AS market revenues - based on ISO data and AG projections, consistent with method in ISO ORPT

8. Key Data Sources, Assumptions (cont’d) • FCM PI Parameters • H, BR – AG analysis based on ISO data on and review of scarcity events and system load • PPR – Values based on ISO expectations (e.g., $4,000, $5,000, $6,000) • A – AG analysis by asset category based on historical ISO data • Risk Premiums • A number of market models available for valuing portfolio risk • AG analysis will review potential significance of risk valuation on FCM offers considering various approaches to valuation of risk

9. Paul J. HibbardAnalysis Group111 Huntington Avenue, 10th Floor Boston, MA 20199phibbard@analysisgroup.com617-425-8171