Market Evolution Program Long-Term Resource Adequacy

1. Market Evolution ProgramLong-Term Resource Adequacy Regulatory Affairs Standing Committee Meeting May 14, 2003 1

2. Long-Term Resource Adequacy Overview • Today’s Discussion: • Why is Long-Term Resource Adequacy of Concern? • Long-Term Resource Adequacy Working Group • LTRA Objectives • LTRA Evaluation Criteria • Barriers to Investment • LTRA Paths and Options • Next Steps 2

3. Why is Long-Term Resource Adequacy of Concern? Future Considerations: • Continued load growth • Retirement of generation assets • Proposed investment projects are uncertain to move forward • Requirement to maintain reliability A combination of new supply and demand-response is needed: • How do we ensure it happens? • How much is necessary? • When do we need it? 3

4. Long-Term Resource Adequacy Working Group • Membership, Timelines, and Decisions: • Through Market Advisory Council stakeholdering, Market Evolution Program working groups were formed for multi-interval optimization, day-ahead market and long-term resource adequacy • Over 20 members in the long-term resource adequacy working group • Inaugural meeting March 7; LTRAWG holds face-to-face meetings approximately every 2 weeks • LTRAWG has agreed on objectives, evaluation criteria, options/paths and barriers to investment • LECG (consulting firm) has provided expert advice 4

5. Long-Term Resource Adequacy Objectives • Review and recommend appropriate mechanisms to define requirements, allocate obligations and implement market-based allocation of demand and supply resources, to address Ontario's long-term resource adequacy needs, while: • Recognizing that appropriate mechanisms may extend beyond the IMO wholesale market jurisdiction and require policy or regulatory support from others; • Utilizing existing demand, supply and transmission resources efficiently; • Through market-based signals, facilitating efficient development of new generation sources, demand-response mechanisms and the mitigation of transmission limitations; • Seamlessly integrating with other IMO-administered markets; and • Mitigating seams conflicts with neighbouring jurisdictions recognizing Federal Energy Regulatory Commission Standard Market Design and other United States initiatives. 5

6. Long-Term Resource Adequacy Evaluation Criteria • Main Evaluation Criteria: • Assure Physical Adequacy of the Power System • Efficient Allocation of Obligations and Costs • Accommodate Market Entry • Address Gaming and Market Power • Supports Development and Refinement of Competitive Electricity Markets • Implementation that is Sustainable and Flexible 6

7. Barriers to Investment LTRAWG has identified the following investment barriers: • Lack of Consistent Electricity Policies • Lack of Independence of Regulatory Entities • Market Power on behalf of a Dominant Supplier • Lack of Liquid Contracting Market • Lack of Appropriate Investment Incentives 7

8. Long-Term Resource Adequacy Paths and Options • Path A: Improve Energy Market and Not Introduce any RAR • Option 1 - Improve Energy Market and Not Introduce any Resource Adequacy Requirements • Path B: Define the Role of LSEs and Require Forward Capacity Contracts • Option 2 - LSEs Required to Contract Forward Capacity Requirements • Option 4 - LSEs Required to Secure Forward Capacity Requirements and IMO Administers a Resource Adequacy Auction Market • Path C: Central Agency Procure Forward Capacity • Option 3 - Government Agency Required to Contract Forward Capacity Requirements • Option 5 - IMO Required to Secure Forward Capacity Requirements on Behalf of LSEs and IMO Administers a Resource Adequacy Auction Market • Option 6 - IMO Required to Secure Forward Capacity Requirements on Behalf of LSEs and IMO Administers a Resource Adequacy Call-Option Auction Market 8

9. Issues for Long-Term Resource Adequacy Paths Options • Most options have sub-options • Where the IMO would not have sole jurisdiction, significant constraints and barriers exist to implementing some of the identified options: • Compared to suppliers, most buyers do not have the ability to participate in wholesale spot markets and enter into bilateral contracts • No government agency has explicit obligations to procure long-term forward capacity • FERC published their White Paper on April 28, 2003 • FERC has backed off on imposing an explicit resource adequacy requirement (from their July 2002 SMD NOPR) by stating that the final rule will not: • change state authority over resource adequacy requirements and regional transmission planning; and • include a a minimum level of resource adequacy 9

10. Issues for Long-Term Resource Adequacy Paths Options • Barriers to investment is the main issue in Ontario • It is uncertain whether a resource adequacy requirement (i.e. implementation of either options contained in Path A or B) will solely be sufficient to increase new investment; therefore barriers to investment must be addressed • No tried and true resource adequacy requirement has been widely accepted within restructured power markets anywhere in the world • However, mostly all jurisdictions have implemented, or are developing, a resource adequacy requirement 10

11. Next Steps • Long-Term Resource Adequacy Workshop May 21 • IMO Steering Committee Meeting May 29 • Long-Term Resource Adequacy Working Group Meetings: • May 29, June 12 and June 26 • Feasibility Assessment (paths and options) will be completed in June • Market Advisory Council Meeting June 11 • Recommendations will be made to the IMO Board on July 3 11