FCM Delists AND NPRR s Rejected for Reliability

1. NEPOOL Markets Committee July 8-10, 2014 FCM Delists AND NPRRs Rejected for Reliability Bruce Anderson New England Power Generators Association

2. The Problem • At the October 9 Markets Committee meeting, the ISO explained that the administrative offers entered into the FCA for de-list bids and NPRRs rejected for reliability causes price suppression and the displacement of economic resources, and under certain circumstances causes the ISO to rely on reconfiguration auctions to meet the region’s resource adequacy needs. • Presentation available at: http://www.iso-ne.com/committees/comm_wkgrps/mrkts_comm/mrkts/mtrls/2013/oct892013/index.html • When a de-list or retirement request is rejected because of a local reliability constraint, the resource is retained to meet the local need, but it is also counted towards meeting the system/zonal need • The MW contribution of a rejected de-list bid/retirement request towards meeting the system/zonal need is uneconomic; this capacity costs more than the clearing price - if it were not for the local need this resource would have exited the auction • This affects price formation: • This capacity is kept in the auction (similar to a ‘price-taker’) • This effectively shifts the supply curve to the right, tending to lower the clearing price and displacing other, lower priced, capacity offers/bids • Accepting any rejected de-list bid or retirement request after the FCA cannot undo this effect (the ‘missing’ capacity is covered in a subsequent reconfiguration auction) • When an ‘out-of-market’ resource is retained to meet the system requirement it can displace both new and existing ‘in-market’ resources

3. Proposed Solution • The FCA should clear as if the out-of-market rejected de-list or NPRR did not offer into the market • The clearing price is set at the offer price for the last resource that didn’t clear as a result of the rejected de-list bid or NPRR counting towards ICR, less 1 cent • A de-list bid rejected for reliability is paid at its de-list price as approved by the IMM • An NPRR rejected for reliability is paid at 100% of its COS – the COS will include a 10% risk adder on the cost of capital component of the COS

4. Proposed Solution • Compensation for resources released from reliability obligation prior to the Capacity Commitment Period • Resource should be compensated for maintaining (and improving) the resource to be available in the CCP • Resources should be guaranteed some level of payment to compensate for costs incurred prior to entitlement to revenues, and as an incentive to accept the CSO • Compensated for capital expenditures incurred to meet CSO plus 25% of CSO payments otherwise entitled to if needed for reliability in the CCP

5. Benefits of Proposed Solution • Price formation in main FCA is not disrupted • Price signals remain accurate for rest of market • Retained resource is fairly compensated for costs and risks, even if released prior to delivery year • Tailoring obligation to actual need, and allowing for compensation upon release would give a rejected NPRR greater incentives to accept the CSO

6. Schedule • Important to get this matter resolved before FCA-9 • Pool is tight, many units facing environmental and economic challenges. There is no more surplus to save us if we get it wrong. • Current compensation mechanism is insufficient to retain resources that are needed for local reliability • Need FERC order no later than mid-Sept • May MC: Overview, questions, and suggestions • June MC: Finalize proposal, review Tariff language • July MC: Vote • Implement for FCA-9