Joel Gordon PSEG Power Connecticut LLC NEPOOL Markets Committee April 30, 2013

1. Somewhat Self-Serving,Yet Market Friendly and Non-Discriminating Winter Firm Energy/Reserve Proposal Joel Gordon PSEG Power Connecticut LLC NEPOOL Markets Committee April 30, 2013

2. System operates as firm “system contingent” energy. • Wholesale suppliers sell energy on a firm “system contingent” basis. • Retail users buy energy on a firm “system contingent” basis. • ISO sells energy on a firm “system contingent” basis. • System Contingent: Power is deliverable as long as the system is able to deliver it. • No one in the chain of title takes responsibility for system contingencies.

3. Creating System Contingent Firm Energy • ISO purchases energy from resources on a unit contingent basis. • It converts that energy into firm “system contingent” energy. • The core of ISO operations is designed to support that conversion to firm power. • Transmission planning standards to N-1-1 levels. • 1 day in 10 year planning standards • Expertise in load forecasting and modeling. • Setting up the system to react to contingencies • Acquiring 10 and 30 minute reserves, replacement reserves, reserve sharing, emergency energy transactions. • ISO knows how to deal with and model for unit forced outages, transmission outages, and load forecast error. • But it uses non-forced outage units to manage those risks. Fuel availability risk significantly complicates ISO’s ability to manage through contingencies.

4. Better Definition of Need Leads to Better Market Design • Need for non-fuel contingent energy needed for at least 10 days per winter season. • Two individual five day periods. • Non-fuel contingent energy periods separated by 3 days. • Average load during these events approximately: • 22,000MW on peak with reserves; • 16,000MW off peak with reserves. • 20,000MW ~average requirement with reserves. • Defining the need as 20,000 MW 24 X 7 for 10 days: • Total non-fuel contingent energy: 4.8 million MWh

5. Proposal to Address the Need • Non-Fuel Contingent, Unit Contingent Energy RFP • ISO RFP for 4.8 million MWh non-fuel contingent energy. • Designed as a call option at the DA or RT LMP, depending on where the unit is committed. • Call is unit contingent (non-fuel contingent) • Call honors unit operating characteristics: • Notification and Start Times; Min run/min down time; Eco-min/max • Strike price is the LMP at the unit node when operating. • ISO must strike a total of 20,000 MW for each daily call • Guarantees a day of non-fuel contingent dispatch capability • Failure to deliver due to fuel unavailability results in significant financial damages?

6. Who supplies the 22,000 MW on peak • Generators with on-site fuel: • Oil fired steam units - 6,895 MW • Nuclear units – 4,628 MW • Coal units – 2,484 MW • Gas w/Oil back up - ???MW • Storage Hydro 1,483 MW • Renewables – 957 MW • Replenished Suppliers • Pumped Storage Hydro – 1,698 MW • Imports - + 2,000 MW • Gas units with firm gas (may required different notice) • Demand response • Price dispatchable

7. Criteria • Requirement allows ISO to address full system requirements for ten days across the winter season. • Eliminates the fuel contingency in its daily dispatch – primary objective of project. • Payments should be made on a single clearing basis since all services provided are identical. • “If something is inappropriate, but highly desirable, then it is permissible.” Michael Bekker NEPOOL Theorem #1. • Could also therefore be “Pay-as-Bid” • Availability/Performance: LDs should be significant financial. • Cost allocation: “The appropriate allocation of any NEPOOL cost is to someone else.” Gordon NEPOOL Theorem #1. • Market Impacts: None. • Call option is separate payment outside of the energy and capacity market.