DALRP Simulation Methodology and Analysis Results

1. Prepared by: Neenan Associates Prepared for: NEPOOL Markets Committee DALRP Simulation Methodology and Analysis Results

2. Alternative Designs for DALRP • Sequential program design • ISO-NE’s day-ahead electricity market closes and unit commitment algorithm is run • DALRP load curtailment offers are then evaluated based on set day-ahead LMPs • Economic DALRP offers are scheduled but have no direct effect on day-ahead LMPs; indirect effects on day-ahead LMPs were excluded from the analysis • Integrated program design • DALRP load curtailment offers are evaluated coincident with other supply offers by day-ahead unit commitment algorithm • Economic DALRP offers are scheduled and will therefore directly affect the day-ahead LMP

3. Benefit/Cost Ratios for Alternative Designs • Sequential program design • Given implementation deadlines established by the FERC in previous Orders, ISO-NE had already initiated implementation • Remaining investment costs estimated to be $0.6 Million • Net benefits estimated to be $0.9 Million • B/C Ratio = 1.5 • Integrated program design • The cost of program components already developed under the sequential approach that can be used for the integrated approach was excluded • Remaining investment costs estimated to be $5 - $7 Million • Net benefits estimated to be slightly less than $2 Million • Low-end estimate of costs results in B/C Ratio = 0.4

4. Overview of Benefits • Estimate the potential benefits from DALRP over a three-year time horizon (the proposed life-span of the program) • Transfer Benefits • Collateral Savings: Reduction in the cost of purchasing load in the DAM • Hedge Savings: Reduction in the future cost to hedge load • Welfare Benefits • Change in Net Social Welfare (NSW): Improvement in allocation of societal resources when load is curtailed in response to actual supply costs relative to the payments provided to undertake them

5. Estimating Benefits: Short-Term Bill Savings Price • Reduction in LMP causes a short-term transfer from Gens to LSEs as the cost to purchase electricity in RTM is reduced (Assume 11% load transacted in RTM) Equilibrium w/o DR P2 2 Bill Savings 4 Equilibrium w/ DR 1 P1 DR Payments 3 Supply DR Load RT Load

6. Estimating Benefits: Long-Term Hedge Savings • Reduction in LMP due to DR also has a downward influence on long-run average prices • If those who demand hedge contracts (60% of RTM Load) assume these reductions in price will be maintained in the long-run, they will demand hedge contracts that incorporate this lower price expectation • This amounts to a “long-run” transfer from producers to consumers as the money that would have gone to producers (Gens) inures back to consumers (LSEs)

7. Estimating Benefits: Change in Net Social Welfare (1) For load above LD, supply price above value to customer  DWL: a + b Payment: b + c  NSW: a – c = DWL – Payment = (a+b) – (b+c) Positive  NSW when a>c

8. Estimating Program Benefits: Change in Net Social Welfare (2) As supply curve becomes flatter, e.g. smaller flexibility, a can be smaller than c NSW is decreased This is made worse when payment rate exceeds Act. LMP

9. Benefits Simulation Methodology • Factors allowed to vary • DALRP Participation Rate • Bid Distribution • Market Prices and Supply Conditions (i.e. supply flexibilities) • Majority of DALRP events expected to occur in NEMA and CT  Restrict simulations to include only these two zones

10. DALRP Participation Rate • Assume two levels of expected program participation • Low: 100 MW • High: 250 MW • Based on 2004 Program Evaluation, roughly 175 MW would be subscribed to DALRP • Low participation level represents a 75 MW reduction from the expected participation level • High participation level represents a 75 MW increase from the expected participation level and is symmetrical upper bound on participation • Equally distribute participants load curtailments to the two analyzed zones (e.g. 50 MW each zone, or 125 MW each zone)

11. Strike Price Low Priced Bids High Priced Bids $75/MWh 10% 5% $150/MWh 35% 15% $250/MWh 30% 40% $500/MWh 25% 40% Bid Curve Distribution Methodology • Assume four strike-price levels are available for bidding during two four-hour blocks from HE9 – HE 12 and HE13 – HE16 on weekdays only • Assume participants load curtailments are distributed across the different strike-price levels in two ways (e.g. Low Priced Bids and High Priced Bids)

12. ISO-NE Electricity Markets • ISO-NE electricity market driven predominantly by price of natural gas • Therefore, expectations for gas markets over next three years drive expectations for ISO-NE electricity markets • Experts have differing views of long-term gas markets • Natural gas demand is outstripping supply by a wide margin, resulting in supply shortages and price spikes • Introduction of new Liquefied Natural Gas (LNG) technology will increase supply and avoid price spikes

13. Expected Market Prices and Supply Conditions 2005-2007 (1) 1. Similar to 2004 (Base): Use 2004 “adjusted” RTM LMPs and all other observed market prices and supply flexibilities to characterize markets in 2005, 2006, and 2007. • Higher and more volatile than 2004 (High): The expected level, not frequency, of “above average” prices to be affected. Commensurate changes in supply flexibilities would be expected with changes in price. • When either RTM LMP > $75/MWh or DAM LMP >$75/MWh, adjust both Base DAM and RTM market prices by 50% and increase all calculated 2004 supply flexibilities by a factor of 3 • LMP capped at $1000/MWh • Only adjust supply flexibility when less than 30

14. Expected Market Prices and Supply Conditions 2005-2007 (2) • Base Condition • Average prices and price flexibilities are low • Maximum prices don’t exceed $400 in DAM • High Condition • Average prices increased by over $5/MWh, but average price flexibilities are still very low • Maximum prices and flexibilities are now much more conducive for DALRP to show its value

15. Final Benefits Calculations • Distribution of Load Settlement • 11% of real-time load is settled at RTM LMP • 29% of real-time load is settled at DAM LMP • 60% of real-time load is settled through Hedge contracts • Welfare Calculations • Demand curve represented as a step function based on four strike-price and bid levels • Assume DR always complies with Day-Ahead schedule, even if RTM LMP < DAM LMP  Real-Time Deadweight Loss could be negative

16. Final Benefits Calculations (2) • Hedge Benefits • Weekday hours from HE7 through and including HE22 • Integrated Method assumes 100% of reduction in average DAM LMPs will affect hedge contracts • Sequential Method assumes the reduction in average RTM LMPs will affect hedge contracts proportional to amount of load settled in RTM vs. DAM (0.11/0.29 = 37%) • Bill Savings • Integrated Method assumes reductions in price exist in both DAM and RTM resulting in total benefits being the combined RTM and DAM Bill Savings • Sequential Method assumes only RTM Bill Savings are attributable to scheduled load curtailments

17. Estimated Yearly Welfare DALRP Benefits • In all cases, market conditions are not conducive for generating positive changes in welfare • If such programs were undertaken by private sector, no payment would be required to achieve load reductions which would always result in welfare improvements

18. Estimated Yearly Net Transfer DALRP Benefits • Sequential program generates benefits that are roughly half as large as Integrated design • Extreme views of markets, customer bidding behavior and participation rates generate large net benefits in both cases

19. Expected 3-Year DALRP Benefits • Assume low market conditions prevail over next 3 years • ISO-NE sees large jump in program enrollment after first year • Marketing and education efforts in third year lower bid price thresholds

20. Costs of Alternatives • Provided by ISO New England • Cost of Integrated Clearing method based on: • Identification of tasks to implement integrated clearing • Estimated manpower required to execute each task, which would be based on experience from other projects • Software development cost estimates provided by software vendors • Cost of Sequential Clearing method based on approved project charter and current project status

21. Supporting Cost Data