December 18, 2003

1. Market Rule Changes forLocational ICAP ISO New England Market Monitoring December 18, 2003 Robert G. Ethier, Ph.D. Director, Market Monitoring

2. OUTLINE • Why do we need MMM for LICAP? • Why is energy mitigation being revised? • Changes under LICAP • De-listing in Import Constrained ICAP Regions (ICIRs) • ICIRs and LICAP Spot Market • Energy Market Constrained Area Threshold Changes

3. WHY DO WE NEED MMM FOR LICAP? • Identified LICAP sub-areas have concentrated ownership • High HHI’s (between 2,307 and 5,346 in June 2003) • High ownership share of two largest participants (between 63% and 92% in June 2003) • Demand curve helps reduce incentive to exercise market power, but is insufficient • Cournot modeling shows that largest two participants have incentive to raise prices to the cap • No mitigation authority for “Rest of Pool” ICAP

4. WHY IS ENERGY MITIGATION BEING REVISED? • Parallel to NYISO approach to mitigation with introduction of LICAP: tighter thresholds in ICIRs, relaxed thresholds in non-ICIRs • Current congestion thresholds were intended for typically unconstrained regions • In ICIRs, current thresholds too loose given frequent need to dispatch units to relieve constraints (and expected ICAP prices) • Outside ICIRs, experience has shown constraints to be infrequent, suggesting that relaxing thresholds is ok

5. OVERVIEW OF CHANGES UNDER LICAP • MMM will monitor de-listing requests and have the authority to deny de-listing in ICIRs • MMM will have mitigation authority in the LICAP spot auction in ICIRs • Changes to Constrained Area energy market thresholds in both ICIRs and Rest of Pool

6. DE-LISTING IN ICIRs • MR 1 requires justification of de-listing requests • Two clear justifications for de-listing: • Sale of capacity to another control area • Cost savings of de-listing exceeds expected capacity revenue • Each justification may require submittal of verification • Resources without such justification may be denied de-listing

7. DE-LISTING IN ICIRs (Continued) • Start-Up of LICAP market • MMM to review and possibly re-list Resources whose de-listing is inconsistent with acceptable de-listing criteria • Resources in ICIRs denied de-listing may be eligible for a Transitional Locational ICAP payment

8. ICIRs AND LICAP SPOT MARKET • Mitigation in LICAP spot market based on the conduct and impact test model • Applicable only in ICIRs, not Pool-wide • Conduct Threshold: $1.00/kW-month • Market Impact Threshold: $1.00/kW-month • MMM will not mitigate offers in ICIRs below the ICAP clearing price in the unconstrained Rest of Pool Region

9. ICIRs AND LICAP SPOT MARKET (Continued) • Reference Levels • Based on going forward costs • Participant may provide justification 15 days prior to spot market clearing at their discretion • Net of expected net revenues • Default reference value of $1.00/kW-month

10. RATIONALE FOR CONDUCT AND IMPACT THRESHOLD • Reflects inexact nature of Reference Price calculation for LICAP • Intended to reflect value of obligations incurred by ICAP resources • Recallability of energy sales to external control areas • Risks associated with obligation to offer in DA market • Limits on ability to take economic outages • Limits on ability to schedule planned maintenance

11. ENERGY MARKET CONSTRAINED AREA THRESHOLD CHANGES • Conduct and Impact thresholds generally the same • In the unconstrained Rest of Pool Region • Energy thresholds for units providing transmission system support change from $25/MWh or 50% to $50/MWh or 100% increase • In the ICIRs • Energy thresholds for units providing transmission system support change from $25/MWh or 50% to $12.50/MWh or 25% increase • Start-Up and No-Load Conduct threshold changes from 50% to 25% • OR Impact threshold changes from 100%/$10/MWh to 50%/$10/MWh