JUNE 10-11, 2014| mc meeting

1. JUNE 10-11, 2014| mc meeting Henry Yoshimura Email: hyoshimura @iso-ne.com Forward Reserve Market Full Integration of Demand Response Resources into the Energy and Reserves Markets

2. The Recent Decision By the Court of Appeals for the District of Columbia Circuit

3. Recent Decision By the Court of Appeals for the District of Columbia Circuit • On May 23, 2014, the Court of Appeals for the DC Circuit issued a decision vacating FERC Order No. 745 • The decision is significant because it found that the FERC has no jurisdiction to regulate demand response • The court stayed its decision on May 23, 2014, to allow for the disposition and consideration of any petitions for rehearing • Since the court order is not yet in effect, the ISO must continue administering the current terms and conditions of the Tariff, including all provisions affecting demand response • Legal proceedings concerning this decision may become protracted • Rehearing before the full 11-member DC Circuit (rehearing en banc) is possible • After rehearing, Supreme Court review is also possible • The final outcome and the timing of these proceedings are uncertain • It is possible that finality may not be achieved for another two years

4. Implications of the Court Decision on the Plan to Integrate Demand Response into Wholesale Markets • Uncertainty over the final disposition of Order No. 745 presents market development challenges • Suspending all development work will delay the achievement of comparable treatment of resources in the markets if the court decision is ultimately reversed • If software and infrastructure are developed, resources would have been wasted if the court decision is ultimately upheld • And more resources may be needed to dismantle that which was developed • Given this uncertainty, the ISO believes that the best course of action at this time is to: • Complete the work already in progress to develop market rules allowing demand response to provide operating reserves • Filing rules in the October 2014 timeframe provides demand response providers with the operating reserve construct before FCA 9, scheduled for February 2015 • Delay software and infrastructure development until there is more certainty

5. Integration of Demand Response Resources into the Forward Reserve market

6. Demand Response Resources in the Forward Reserve Market • Today’s discussion will be on the market rule changes that would enable Demand Response Resources (“DRRs”) to participate in the Forward Reserve Market (“FRM”) • The ISO does not propose to change the general structure of the FRM in this project • To enable DRRs to participate in the FRM, the Tariff must: • Specify the eligibility requirements for a DRR to meet Forward Reserve Obligations • Establish how DRR performance will be measured and compensated for participating in the FRM • Define CLAIM10/30 auditing rules for DRRs • CLAIM10/CLAIM30 auditing rule changes will be discussed at Reliability Committee meetings (not in today’s presentation)

7. ELIGIBILITY TO PROVIDE FORWARD RESERVE

8. Forward Reserve Market General Structure • The FRM procures ten-minute reserves (as TMNSR) and thirty-minute operating reserves (as TMOR), in advance, for delivery in real time • Participants enter offers into a Forward Reserve Auction • Auctions are held twice a year, once each for the summer and winter seasons • Participants with cleared offers acquire a FRM obligation • Specific physical Resources are not identified as part of the offer entered into the Forward Reserve Auction • Before the Operating Day, participants that acquire FRM obligations assign specific Resources to meet their FRM obligation

9. Present Forward Reserve Resource Eligibility Requirements • To meet a Forward Reserve Obligation, a Resource must: • Be able to receive and follow Dispatch Instructions • Have an energy market offer that indicates: • The Resource’s minimum and maximum levels of output or consumption • The MW quantity the Resource is willing and able to provide within 10 or 30 minutes from an off-line state • The Resource’s Ramp Rate • For an on-line Resource, establish capability based on its Ramp Rate and available MWs • For an off-line Resource, be a Fast Start Generator and have established an audited CLAIM10/30 value • Resources must establish capability through a CLAIM10/30 audit • Provide at least 10-second real-time telemetry and hourly revenue quality meter data • Provide up-to-date information on its real-time physical capabilities • For a Dispatchable Asset Related Demand (“DARD”) Resource, capability must be established through a CLAIM10/30 audit

10. Forward Reserve Resource Eligibility Requirements for DRRs • To meet a Forward Reserve Obligation, a DRR must: • Be able to receive and follow Dispatch Instructions • Have an energy market offer that indicates: • Minimum and maximum levels of demand reduction • The MW demand reduction quantity the DRR is willing and able to provide within 10 or 30 minutes from an uncommitted state • The DRR’s Ramp Rate • The capability of a DRR that has been committed and has received a Dispatch Instruction will be based on its Ramp Rate and available MWs • A DRR that has not been committed must be a fast start resource and have established a CLAIM10/30 value • DRRs must establish capability through a CLAIM10/30 audit • Provide real-time telemetry and hourly revenue quality meter data • DRRs meeting a TMNSR obligation must provide at least 1-minute telemetry • DRRs meeting a TMOR obligation must provide at least 5-minute telemetry • All DRRs must provide 5-minute revenue quality meter data • Provide up-to-date information on its real-time physical capabilities

11. Defining a Fast Start Demand Response Resource • To allow DRRs to provide reserves from an off-line state (i.e., a DRR that has not been committed), a new term – i.e., Fast Start Demand Response Resource – must be defined • Like a Fast Start Generator, a Fast Start Demand Response Resource must be able to be committed and dispatched within 30 minutes and meet the following criteria: • Minimum Reduction Time does not exceed one hour; • Minimum Time Between Reductions does not exceed one hour; • Demand Response Resource Start-Up Time plus Demand Response Resource Notification Time does not exceed 30 minutes; • Personnel available to respond to dispatch or has automatic remote interruption capability; • Is dispatched using a CFE connected RTU to the DDE; and • Has satisfied its Minimum Time Between Reductions.

12. COMPENSATION FOR PARTICIPATION IN THE FORWARD RESERVE MARKET

13. FRM Settlement • FRM compensation includes three main components • Forward Reserve Credit • Failure-to-Reserve Penalty • Failure-to-Activate Penalty • Market Participants with FRM obligations receive a Net Forward Reserve Credit, which is the sum of the Forward Reserve Credit + Failure-to-Reserve Penalty + Failure-to-Activate Penalty • The Net Forward Reserve Credit can be a payment or a charge • A Resource paid in the FRM foregoes Real-Time Reserve compensation • A resource paid in the FRM will have its Real-Time Reserve payment adjusted to prevent double payment for the same MW • No changes to the basic design of FRM Settlement are proposed • This presentation focuses on the integration of DRRs into FRM settlement

14. 1. Forward Reserve Credit Computation • A Market Participant’s Forward Reserve Credit is equal to its Final Forward Reserve Obligation multiplied by the applicable Forward Reserve Payment Rate (“FRPR”) for each Reserve Zone, reserve product (TMNSR, TMOR), and settlement interval • A Market Participant’s Final Forward Reserve Obligation is calculated as the minimum of its Forward Reserve Delivered MWs (“FRDM”) and its Forward Reserve Obligation adjusted to account for Internal Bilateral Transactions • The Final Forward Reserve Obligation may be less than the Market Participant’s Forward Reserve Obligation as determined by the Forward Reserve Auction • FRPR is the Forward Reserve Clearing Price less the Capacity Clearing Price for the relevant Capacity Commitment Period, and applicable Capacity Zone associated with the Reserve Zone

15. Inputs to Determining Forward Reserve Credits • Forward Reserve Credits are based on the lower of the Market Participant’s Forward Reserve Obligation and its delivered Forward Reserve capability • Delivered Forward Reserve capability – i.e., Forward Reserve Delivered MW (“FRDM”) – is determined by comparing: • Forward Reserve Qualifying MWs (“FRQM”) • FRQM is the capability of a Resource offered at or above the Forward Reserve Threshold Price (“FRTP”) • Offered CLAIM10* for off-line Resources or Ramp Rate X 10* for on-line Resources, and • Forward Reserve Assigned MWs (“FRAM”) • The computation of FRDM and FRQM are explained in more depth on the next few slides *These values are for Resources providing 10-minute reserves; the analogous values for Resources providing 30-minute reserves are Offered CLAIM30 and Ramp Rate X 30

16. Current Forward Reserve Delivered MWs (“FRDM”) Computation • For off-line generators, FRDM = Min (FRQM, Offered CLAIM10*, FRAM) • For on-line generators, FRDM = Min (FRQM, Ramp Rate x 10*, FRAM) • For DARDs, FRDM = Min (FRQM, Offered CLAIM10*, Ramp Rate x 10*, FRAM) • FRDM is calculated first for TMNSR, and any remaining TMNSR MWs qualify to meet TMOR delivery requirements • Resource FRDM is summed to determine FRDM for a Market Participant * These formulas are for Resources providing 10-minute reserves; the calculations for Resources providing 30-minute reserves are analogous but use CLAIM30 instead of CLAIM10, and multiply Ramp Rate by 30 instead of 10 where applicable

17. Current Forward Reserve Qualifying MWs (“FRQM”) Computation • For off-line generator Resources, FRQM is the Resource’s capability that is ≤ its Economic Maximum Limit, which is offered at a price (inclusive of pro-rated start-up and no-load fees) at or above the FRTP • For on-line generator Resources, FRQM is the Resource’s capability that is ≤ the Economic Maximum Limit and > the Economic Minimum Limit, which is offered at an energy offer price at or above the FRTP • For DARD Resources, FRQM is the Resource’s capability that is ≤ the Maximum Consumption Limit and > the Minimum Consumption Limit, which is offered at an energy offer price at or above the FRTP • The FRTP is determined daily and is set at a sufficiently high level so that Resources would likely be designated to provide Real-Time Reserve

18. Calculation of Forward Reserve Credit for DRRs • Calculation of Forward Reserve Credit for DRRs will be similar to that of other FRM Resources • For a Fast Start DRR which has not been committed (i.e., off-line): • FRDM = Min(FRQM, Offered CLAIM10*, FRAM) • For a DRR which has been committed and has received a Dispatch Instruction (i.e., on-line): • FRDM = Min(FRQM, Ramp Rate X 10*, FRAM) • FRDM are calculated for each Resource, Reserve Zone and settlement interval, first for ten-minute capability and then for thirty-minute capability • Resource FRDM are summed to Market Participant FRDM for each Reserve Zone and settlement interval, by product *These formulas are for Resources providing 10-minute reserves; the calculations for Resources providing 30-minute reserves are analogous but use CLAIM30 instead of CLAIM10, and multiply Ramp Rate by 30 instead of 10 where applicable

19. Calculation of FRQM for DRRs • Similar to on-line and off-line generators, FRQM for DRRs will be calculated as: • For a Fast Start DRR which has not been committed (i.e., off-line): FRQM = the amount of offered MWs, ≤ Maximum Reduction, where DRR offer price inclusive of pro-rated Interruption Cost* ≥ FRTP • For a DRR which has been committed and has received a Dispatch Instruction (i.e., on-line): FRQM = the amount of offered MWs, ≤ Maximum Reduction and > Minimum Reduction, where DRR energy offer price ≥ FRTP * The pro-rated Interruption Cost = Interruption Cost/Maximum Reduction

20. Treatment of Avoided Distribution Losses • To reflect the capability and real-time performance of a DRR, the potential and actual Net Supply (MWs injected into the grid) must be determined based on data from the DRR’s component assets • Average avoided peak losses (“AADLoss”) are added to: • Any FRQM MWs, in the form of reduced consumption or consumption available for reduction, either provided as energy MWs dispatched when DRR price ≥ FRTP or as reserve capability using the following formulas: • Offered CLAIM10* for DRRs that have not been committed • Ramp Rate X 10* for DRRs that have been committed and have received a Dispatch Instruction • AADLoss will not be added to any FRQM MWs provided in the form of actual Net Supply or potential Net Supply • If RQM shows Net Supply, then any additional reserve capability (i.e., Ramp Rate X 10*) would be in the form of Net Supply, which should not include AADLoss * Values adjusted for AADLoss are listed for DRRs providing 10-minute reserves. The values adjusted for DRRs providing 30-minute reserves are analogous but use CLAIM30 instead of CLAIM10, and multiply ramp rate by 30 instead of 10 where applicable

21. 2. Failure-to-Reserve Penalty • If a Market Participant fails to deliver enough MW to cover the Obligation, a “Failure-to-Reserve” Penalty is assessed • This calculation of the penalty is not impacted by resource type. • Failure-to-Reserve MWs (“FTRM”) for a Market Participant, for each settlement interval, by Reserve Zone, by product, are calculated as: Max (Forward Reserve Obligation – FRDM, 0) • The penalty for failing to reserve MWs, for each settlement interval, is calculated as: FTRM X Max (1.5 X FRPR, Real-Time Reserve Clearing Price – FRPR)

22. 3. Failure-To-Activate Penalty • A Failure-To-Activate Penalty will be assessed when a Resource that has been assigned to provide reserves fails to “activate its Forward Reserve capability ” – i.e., convert reserve capability into energy – when dispatched by the ISO during a contingency • Resource level Failure-to-Activate Penalties, by product for each settlement interval, are summed to determine the Market Participant’s total Failure-to-Activate Penalty in that settlement interval • A Resource’s Failure-to-Activate MWs (“FTAM”) are determined by comparing the Desired Dispatch Point (“DDP”), sent to the Resource by the ISO, and the actual performance (based on RQM) of the Resource: • When the performance (output) of a generator is lower than the DDP, the generator has failed to activate an amount of Forward Reserve capability • When the performance (consumption) of a DARD is higher than the DDP, the DARD has failed to activate an amount of Forward Reserve capability • The penalty for failing to activate when dispatched is calculated as: FTAM X (FRPR + Max (2.25 X FRPR, applicable RT LMP*)) *RT LMP is Real-Time Locational Marginal Price

23. Failure-To-Activate Penalty for DRRs • FTAM for a DRR will be calculated as: Max(DDP - DRR performance, 0) where FTAM ≤ DDP, DRR performance = Adjusted baseline – RQM, and DDP = ISO dispatched demand reduction amount • AADLoss will be added to the portion of DRR performance that represents a reduction in consumption; AADLoss will not be added to the Net Supply portion of DRR performance • The penalty calculation for DRRs is the same as for other resource types: FTAM X (FRPR + Max (2.25 X FRPR, applicable RT LMP))

24. Forward Reserve Obligation Charge • A Resource assigned to meet a Forward Obligation gives up revenue from Real-Time Reserve, which is volatile, in exchange for fixed revenue from the FRM • This is to prevent double compensating the same MW as Forward Reserve and as Real-Time Reserve • To accomplish this, the same MWs that would receive credit for both Forward Reserve and Real-Time Reserve will be multiplied by the applicable Real-Time Reserve Clearing Price to determine a Forward Reserve Obligation Charge • The Forward Reserve Obligation Charge is subtracted from the Real-Time Reserve payment • This approach, which is already part of the FRM design, would be applied to DRRs participating in the FRM

25. Summary: Net Forward Reserve Credit • The Net Forward Reserve Credit is calculated for each Market Participant

26. Deferring the implementation date for the full integration of Demand Response into Wholesale Markets

27. The ISO is Considering Requesting a Deferral in the Implementation of Full-Integration • Given the uncertainty over the final disposition of Order No. 745, the ISO is considering including a request in the October filing to postpone implementation of fully-integrated market rules for demand response from June 1, 2017 to June 1, 2018 • With an additional year, legal proceedings regarding Order No. 745 are more likely to be resolved before major software and infrastructure development work must commence • This plan also avoids implementing two different sets of market rules for demand response one year apart – once in 2017 before pay-for-performance (“PFP”) is implemented, and once again in 2018 when PFP is implemented