Presentation Outline

1. Presentation Outline • Represents ad hoc group of DR providers comprising the • NEPOOL LR subsector that has been active in this issue DR Sector's* Alternative Proposal & Rationale Explanation of Proposed Market Rule Language Changes

2. Overview of Issue and Proposal • ISO has an under-procurement issue • Guaranteed result of the overall process of ICR determination and subsequent procurement in FCM auction • This is a larger issue than just DR • DR Sector's proposal addresses this issue • This is really a long-term policy issue • ISO’s studies that show the benefit of high availability resources on ICR • and resulting Reserve Margin • Policy issue– does benefit go to load, or to those providing the benefit? • DR Sector's solution is predicated on payment to providers for benefit • delivered based on historical performance in FCM • Leaves a short-term issue to bridge gap between now and when DR performance data will be available in FCM, • DR Sector's solution is predicated on recognition of existing commercial • implications to stakeholders and market

3. DR Sector's “True-Performance” ProposalSummary • The DR Reserve Margin should reflect True DR Performance • The Current Reserve Margin does not reflect True Performance • Current Reserve Margin = (ICR / 50-50 Load Forecast) • The DEMAND RESPONSE PERFORMANCE FACTOR (“DRPF”) reflects True Performance • DRPF = 1 + [((ICR w/o DR) - (ICR w/DR)) / (Total MW of DR)] • DRPF reflects the marginal value of the ability of 1 MW of DR to reduce the total MW of ICR region-wide • Phase-In Period: Until such time as historical data is available, the DRPF will be 10%

4. The Issue • Current overall process of ICR calculation methodology • AND procurement in FCM auction DOES lead to under-procurement of capacity • equal to reserve margin gross-up given to certain resources • Could/ would lead system reliability issue • Would not meet LOLE criteria of 0.1 • Currently those resources include demand resources, and • NYPA import capacity • This is a broader issue than demand resources • Should not single out individual participant sector

5. ISO Overall Capacity Procurement Process • ICR based on meeting LOLE metric (1 outage/10 yrs) • Based on load, load uncertainty, existing capacity • resources, generation EFORd, and generation size • Does NOT use reserve margin gross-up ICR Determination Inconsistent • Procures ICR • DR procured based on reserve • margin gross-up value Auction LOLE Determination • Checks to see if reliability • metric is met • --- comes up short by DR • reserve margin Inconsistent treatment of DR resources guaranteed to result in under-procurement

6. ISO ICR Sensitivity Analyses • High availability resources DO provide a net system benefit in terms of reduced ICR and therefore reserve margin • A perfect resource reduces reserve margin in range of 10.7 to 11.1 %, depending on modeling as supply resource vs load reduction • reference ISO presentation “Development of New England ICR and • the Contribution from Demand Resources”, Wayne Coste • 100% available DR reduces reserve margin by ~ 10% • 2384 MW of demand resources reduces ICR by 236 MWs • reference ISO presentation “Impact of Demand Resources on Installed Capacity Requirement”, Peter Wong

7. FCM Rules for DR Mandate High Availability Performance • Rules for measuring the capacity of demand response in the FCM are VERY different and much more stringent/punitive than the rules that have been used during the ICAP market and the Transition Period  • DR providers have taken on conservative obligations • Extremely likely that they will be more than 100% reliable starting in • June 2010 • New rules are forcing function • Demand resources are penalized very differently from generation • Generators paid based upon a claimed capability audit, and keep that • rating even if they don't perform  • If a Demand Resource does not fully perform, it's rating is diminished • for extended period  • Cannot make up this rating by over-performing, • Can only come close to original rating • This difference in approach and degree of penalty evidences that • market already treats DR differently than generation

8. Performance Comparison • - EnerNOC data from large utility customer - • Similar under-performance penalty structure • No payment for over-performance • 6 events over 1 month period • Performance has averaged ~ 160% (uncapped) Similar FCM Market Rules  Similar high performance results

9. Elimination – Substantive Change to Settlement Compromises • FCM encompassed a complicated negotiation and contains variety of compromises • eg, DR not to receive energy payments in exchange for totality of • Settlement Agreement • Section 11.II.E.2.a of the Settlement Agreement states: •  "In the Forward Capacity Market, Real Time Demand Response shall remain as qualifying capacity Resources subject to Market Rule 1, Appendix E and the Load Response Manual.” • At the time that the Settlement Agreement was reached, Demand • Response received the Reserve Margin • What the ISO is proposing is beyond an 'evolution' of the current rules • unwinding rules of game to detriment of one group of stakeholders • should be part of overall investigation of resources and benefits/ valuation

10. Unwinding the Settlement -- the Broader Issue • Not incorporated into DR Sector's proposal, but we would support • Investigation of the broader issue of whether gross-up benefit and • value should be allocated on individual resource basis • To include stakeholder process initiative to derive process for • determining a availability rating for all resources under the FCM

11. DR Sector's Long-Term Proposed Solution • DR gross-up factor (DRPF) determined annually, based on benefit provided • Derived from EFORd differential between generation and DR • Conversely, no benefit, no gross-up • Mechanism • An aggregate EFOR for DR, as well generation, determined on an • annual basis for each auction period • To extent that DR has a lower EFOR than generation, DR obtains the • benefit of lowered ICR and resulting reduced reserve margin • Annual EFOR for DR determined from average performance of DR • in preceding commitment periods for which performance is available • Similar to how EFOR of generation is currently treated in the • FCM/ FCAs • DRPF = 1 + [((ICR w/o DR) - (ICR w/DR)) / (Total MW of DR)] Approach guarantees valuation based on benefit derived

12. Reconciliation of ICR • Proposal requires the ICR to increase by amount of that gross-up • such that reliability (0.1 LOLE) is met first and foremost • amount of gross-up <1% of ICR* • ISO to revise the way in which the overall process to determine ICR and subsequently procure capacity is accomplished • details left to ISO and PSPC * For FCA #3, based on intermediate DR penetration case

13. Short-Term Provision of Proposal • Short-term issue – what to do until such time as data is available to determine the benefit provided (ie, 2010/2011 delivery period)? • Solution must recognize two considerations: • Elimination of reserve margin gross-up causes commercial harm to • 3rd party providers • standard customer contracts with standard terms (splits) of • payments • multiple year commitments • Elimination of reserve margin gross-up is bad for the market • DR industry is a nascent industry • substance and magnitude of change shows uncertainty and lack • of consistency of valuation in the market Strongly suggests a phase-in approach as fair approach

14. DR Sector's Phase-In Proposal • DR Sector proposes a phase-in approach to above long-term rule change: • Until such time as that value can be determined by historical performance in the FCM, demand resources will receive reserve margin gross-up of 10% • level of benefit associated with highly available resources per ISO • studies • “innocent until proven” -- on basis of other DR programs, • reasonable to believe DR will be highly available resource in FCM • reasonable way to address the commercial harm that would • otherwise be caused by sudden and precipitous elimination

15. Reconciliation of ICR During Phase-In • Proposal requires the ICR to increase by amount of gross-up • such that reliability (0.1 LOLE) is met first and foremost (similar to long-term resolution) • ISO to revise the way in which the overall process to determine ICR and subsequently procure capacity is accomplished • details left to ISO and PSPC • ICR impact is minimal • increasing ICR to allow for DR gross-up (< 1% in ICR) • - offset by • increasing the availability of active DR in the ICR calc which • could decrease ICR (~ 0.6%) • combination would be close to a wash • Capacity risk is small

16. Explanation of Market Rule Changes • The DR Sector “True-Performance” proposal uses as a base-case the existing Market Rule 1 language contained in the ISO’s proposal in addition to the new language proposed by the ISO. • This Impacts: • Calculation of Capacity Value: • III.13.7.1.5.1 (existing) • ISO removed gross-up, Enernoc substituted DRPF • Enernoc defined DRPF calculation • Enernoc inserted 10% phase-in value until such time as historical data is available to calculate DRPF • Enernoc re-arranged last sentence of original paragraph (non-substantive) • Special Provisions for DR in 1st and 2nd CCPs • III.13.7.1.5.1.1 (new) • Enernoc left ISO proposal untouched.

17. Explanation of Market Rule Changes (cont’d) • Hourly Calculated DR Performance Values • III.13.7.1.5.9 (new) • ISO proposed to remove old gross-up from divisor of Performance Value calculation • Enernoc substituted old gross-up in the divisor of Performance Value calculation with the DRPF