Adding Flexibility to Static Delist Bids

1. Adding Flexibility to Static Delist Bids NEPOOL Markets Committee October 12, 2011

2. Current Rules • Static delist bids are binding months before the auction • Once submitted, a static delist bid cannot be withdrawn • Once reviewed and approved by ISO MMU and FERC, a static delist bid cannot be modified • From original filing, reasoning was based on ‘integrity of the bidding and MMU review process’ and ‘reliability of information’ available to other market participants • Not a major concern with dynamic delist bids available below 0.8 CONE

3. Upcoming Rule Changes • With FCA7, the dynamic delist bid threshold will be dramatically reduced to $1/kW-mo, and there will be no floor price • Without a floor price, new resource offers (if economic) or existing resource delist bids are the only way to clear the auction and establish a price that permits recovery of any fixed costs • Given the regional surplus, existing resources must delist from FCA7 for the auction to clear • With the lower DDB threshold, many units that previously could have used a DDB will need to submit an SDB to attempt to recover even their cash going-forward costs allowed under the tariff

4. Mechanics of Static Delist Bids • SDB must be submitted eight months in advance of the auction (June 1, 2012 for FCA7, which will occur on February 2, 2013) • SDBs are based on historical market and cost data and projected costs, and can include significant uncertainty when applied to a future period • Resources will likely face uncertainty regarding costs, such as environmental compliance requirements and others such as maintenance and upgrades • Preparing a SDB is a labor-intensive, data-intensive process, with inherent uncertainty • Under current rules, the resource owner has no opportunity to adjust the SDB in response to changing requirements or market conditions

5. Proposal for Non-Binding Static Delists • Resources submit cost data 8 months in advance • ISO MMU reviews data, consults with owner as needed, and ultimately files determination at FERC • Rather than a binding bid, the approved price is an upper limit (a ‘reference’ price) • Based on information gained between the submittal and the auction, the resource could lower its price below the approved upper limit during the auction • For example, deferral of an environmental compliance obligation that was anticipated at the time of SDB submittal could materially change a resource’s appetite for taking on a CSO

6. The Proposal Benefits Consumers • ISO MMU and FERC will approve upper limits on delist prices in accordance with the tariff, blocking any market power concerns • During the descending clock auction, participants may be induced to offer lower prices to maintain revenues and market share (ie, ‘competition’) • More capacity may stay in the auction at lower prices, providing the potential for lower prices determined by competition • Reduces potential for RMR/rejected delist bids

7. The Proposal Benefits Suppliers • External factors that influence costs and revenue expectations can change a lot in 8 months. • Delisting a resource, potentially leading to deactivation, is a major decision and companies do not want to commit any sooner than necessary. • Cost and revenue information for SDBs is due 8 months in advance of the auction. Flexibility to adjust the price, even if only in a downward direction, creates optionality.

8. The Proposal Benefits FCM • A defining feature of FCM is the interactive descending clock auction. SDBs submitted 8 months in advance are unable to interact with the auction. • Establishing inflexible SDB prices 8 months in advance is like setting summer energy reference prices on winter fuel prices and prohibiting a resource from offering its actual lower costs. • The descending clock auction might be moot, given a large number of SDBs likely to be submitted for FCA7 and future auctions. FCA7 might be over in June of 2012.

9. ISO Concerns • Reliability Reviews: Currently, ISO pre-analyzes SDBs, since they are binding. If SDBs are non-binding, reliability analyses within the auction may be more time-consuming. • Under existing rules, DDBs are available below 0.8 CONE, so ISO must be prepared for ‘real-time’ reliability reviews below that level. The proposed situation is not materially different. • The tariff specifies that the FCA can take up to five business days. If needed, it should be trivial to change the rule to extend the duration of the auction.

10. ISO Concerns • Flexibility will create an incentive for more resource owners to submit SDBs, to determine their maximum price • The elimination of the floor and the $1 DDB threshold ensure that more resource owners will submit SDBs. The question is whether they will be able to account for all available information at the time of the auction or be restricted to what is known 8 months in advance. • More entities participating in price formation (within the bounds of MMU/FERC review) will increase efficiency of outcomes • Binding SDBs could lead to more Non-Price Retirement Requests

11. Next Steps • The precipitating rule changes (elimination of the floor price, reduction of the DDB threshold to $1/kW-mo) will take effect for FCA7, and it’s critical that this change also be implemented for FCA7 • We will continue to consult with ISO and stakeholders to refine the proposal • We will be seeking a vote in a timeframe that will accommodate implementation for FCA7