Use of INC Offers and DEC Bids in SMD

1. Use of INC Offers and DEC Bids in SMD 1/14/03 Presentation to New England Markets Committee Stephen Wemple Director, Retail and Regulatory Affairs Con Edison Energy

2. Use of INC Offers and DEC Bids in SMD • INC Offers can be viewed as an energy sale into the DAM and a purchase from RT market • Used to convert RT energy into DAM energy • Allows RT energy to be used to hedge a DAM obligation • Called Virtual Generation in NY • DEC Bids can be viewed as a purchase from the DAM and a sale into RT market • Used to convert DAM energy into RT energy • Allows LSEs to buy DAM energy to cover RT loads • Called Virtual Load in NY

3. Use of INC Offers and DEC Bids in SMD • Generators / Marketers need DEC Bids to sell RT products at the HUB • Can use FTRs to hedge DAM congestion to the HUB but need DEC Bids at the HUB to hedge DAM to RT risk. • LSEs needing to hedge congestion from HUB to load zone will submit offsetting INC Offers @ HUB • Need to convert RT energy into DAM to use FTRs as a hedge • Only LSEs with load distributed around the HUB will buy RT energy at the HUB without an offsetting INC Offer • Otherwise the LSE will be at risk for RT congestion from Hub to Zone • Without DECs at the HUB, RT products will trade at zones • Will fragment the market and likely make the HUB obsolete • Generators / Marketers will buy FTRs to zones to hedge RT zonal energy • May not invest in a second set of FTRs to support DAM products at the HUB

4. Supplier PerspectiveUse of generation with FTRs and Dec Bids to hedge a RT energy sale @ Mass Hub Step 1 -Use of FTR to move DAM energy DAM Energy @ Generator A FTR from Generator A to Mass Hub + DAM Energy Mass Hub = Step 2 -Use of DEC to convert DAM to RT + DAM Energy @ Mass Hub DEC BID (DAM Purchase & RT Sale) @ Mass Hub RT Energy @ Mass Hub =

5. LSE Perspective Use of Inc/Dec Bids w/ FTRs to hedge RT load with RT energy purchase @ Mass Hub Step 1 -Use of INC to convert RT to DAM RT Energy @ Mass Hub INC Offer (DAM sale + RT Purchase) @ Mass Hub + DAM Energy @ Mass Hub = Step 2 -Use of FTR to move DAM energy FTR from Mass Hub to Load Zone DAM Energy @ Load Zone DAM Energy @ Mass Hub + = Step 3 -Use of DEC to convert DAM to RT. NOTE – LSEs can avoid Step 3 by bidding load directly into DAM + DAM Energy @ Load Zone DEC BID (DAM Purchase & RT Sale) @ Load Zone RT Energy @ Load Zone =

6. Balanced Hub • Assumptions: • Gen A has sold • 100 MW RT @ Hub • 60 MW to LSE A • 30 MW to LSE B • 10 MW to LSE C Generator A sells 100 MW in DAM DAM = $25 Gen A – Hedging Strategy Schedule 100 MW in DAM FTR hedges congestion to HUB Submit 100 MW DEC @ HUB Gen A owns 100 MW FTR Gen to Hub Mass Hub DAM = $28 RT = $27 LSE B has 30 MW load in Zone B w/ DAM = $45 LSE A has 60 MW load in Zone A w/ DAM = $35 LSE B owns 30 MW FTR from Hub to Zone B LSE A owns 60 MW FTR from Hub to Zone A LSE C has 10 MW load near HUB w/ DAM = $30 & RT = $29 LSE B – Hedging Strategy Submits 30 MW INC @ HUB FTR hedges congestion to Zone B Bids 30 MW DAM load @ Zone A LSE A – Hedging Strategy Submits 60 MW INC @ HUB FTR hedges congestion to Zone A Bids 60 MW DAM load @ Zone A LSE C – Hedging Strategy Requires no action from LSE At risk for RT congestion from HUB to load – assumed to be small

7. Balanced Hub – Settlement Gen A – Settlement DAM payment of $2500 = 100 MW x $25 FTR pays $300 = 100 MW x ($28 - $25) HUB DEC costs $100 = 100 MW x ($27 - $28) Net ISO Settlement = $2700 = value of RT @ HUB Hedges 100 MW sale @ HUB Relevant Prices Gen A = $25 DAM HUB = $28 DAM, $27 RT Zone A = $35 DAM Zone B = $45 DAM Zone C = $30 DAM, $29 RT LSE A – Settlement INC @ HUB pays $60 = 60 MW x ($28 - $27) FTR pays $420 = 60 MW x ($35-$28) Net ISO Settlement = $480 = difference between cost of DAM energy at Zone A and RT energy @ HUB LSE C – Settlement Pays ISO $20 = 10 MW x ($29-$27) Cost of RT congestion between @ Hub and Zone C LSE B – Settlement INC @ HUB pays $30 = 30 MW x ($28 - $27) FTR pays $510 = 30 MW x ($45-$28) Net ISO Settlement = $540 = difference between cost of DAM energy at Zone A and RT energy @ HUB

8. LSE B Omits INC @ Hub Generator A sells 100 MW in DAM DAM = $25 Assumption: LSE B fails to submit INC @ HUB, increasing HUB DAM price Gen A – Hedging Strategy Schedules 100 MW in DAM FTR hedges congestion to HUB Submits 100 MW DEC @ HUB Gen A owns 100 MW FTR Gen to Hub Mass Hub DAM = $40 RT = $27 LSE B has 30 MW load in Zone B w/ DAM = $45 LSE A has 60 MW load in Zone A w/ DAM = $35 LSE B owns 30 MW FTR from Hub to Zone B LSE A owns 60 MW FTR from Hub to Zone A LSE C has 10 MW load near HUB w/ DAM = $30 & RT = $29 LSE B – Omits INC @ Hub Pays difference between DAM and RT @ HUB FTR hedges congestion to Zone B Bids 30 MW DAM load @ Zone B LSE A – Hedging Strategy Submits 60 MW INC @ HUB FTR hedges congestion to Zone A Bids 60 MW DAM load @ Zone A LSE C – Hedging Strategy Requires no action from LSE At risk for RT congestion from HUB to load – assumed to be small

9. LSE B Omits INC @ Hub – Settlement Gen A – Settlement DAM payment of $2500 = 100 MW x $25 FTR pays $1500 = 100 MW x ($40 - $25) HUB DEC costs $1300 = 100 MW x ($27 - $40) Net ISO Settlement = $2700 = value of RT @ HUB Hedges 100 MW sale @ HUB Relevant Prices Gen A = $25 DAM HUB = $40 DAM, $27 RT Zone A = $35 DAM Zone B = $45 DAM Zone C = $30 DAM, $29 RT LSE A – Settlement INC @ HUB pays $780 = 60 MW x ($40 - $27) FTR costs $300 = 60 MW x ($35-$40) Net ISO Settlement = $480 = difference between cost of DAM energy at Zone A and RT energy @ HUB LSE C – Settlement Pays ISO $20 = 10 MW x ($29-$27) Cost of RT congestion between @ Hub and Zone C LSE B – Settlement FTR pays $150 = 30 MW x ($45-$40) Net ISO Settlement = $150 LSE B has $390 loss = 30 MW x ($27 - $40) = difference between RT and DAM energy @ HUB