ISO-NE Interim Compensation Mechanism

1. ISO-NE Interim Compensation Mechanism Methods and Assumptions Underlying Calculation of Forward Settlement Rate Prepared for: ISO New England March [24], 2017 DRAFT - CONFIDENTIAL January 2019

2. Agenda • Introduction and Overview • Analysis of a Forward LNG Contract • Analysis of Other Generator Costs and Benefits • Summary of Forward Rate Calculation

3. Introduction and Overview Analysis Overview • Analysis Group has estimated the costs of providing inventoried energy under ISO-NE’s proposed Interim Compensation program • The proposed forward rate is based on the estimated costs of providing inventoried energy by holding a forward natural gas (NG) contract supplied by a liquefied natural gas (LNG) terminal • This option represents the most viable, least-cost approach for a NG-only resource to procure inventoried energy • Other options considered include: • NG-only conversion to dual fuel or installation of satellite storage • Not cost-effective over a limited duration Interim Compensation program • Potential regulatory constraints in some states • Incremental oil holding costs ‒ provides insufficient revenues to incentivize action from non-oil units

4. Introduction and Overview Assumptions Regarding Forward LNG Contract • The generator enters into a forward contract with an LNG terminal: • 10 call options (terminals unlikely to offer contracts with fewer calls) • 90-day winter period (December 1 to February 28) • Commodity Price – the cost to purchasing NG, assumed: $10 / MMBtu • Reservation Price – estimated based on analysis • The generator supplies inventoried energy for an Interim Compensation program with a 3-day maximum duration • The generator preserves 3 call options for the Interim program throughout the winter and under all circumstances • The generator can thus exercise (and gain revenues from) up to 7 call options while maintaining its required stored energy inventory

5. Introduction and Overview Calculation Overview • Rate is set based on the expected unrecovered costs of a forward NG contract with an LNG terminal • There are three components to the expected unrecovered costs: • Forward LNG Contract Costs – Reservation charges net of benefits from the exercise of 7 call options (“fuel market value”) • Other Generator Costs – Credit and financial risk costs associated with the LNG contract • Incremental ISO-NE Revenues – Incremental revenues from avoided curtailment in ISO-NE energy and ancillary service markets via the 7 call options

6. Introduction and Overview Calculation • Table below summarizes the calculation in terms of 10 1-MWh call options • The calculated rate is $82.49 per MWh Calculation of Interim Compensation Program Forward Rate

7. Agenda • Introduction and Overview • Analysis of a Forward LNG Contract • Analysis of Other Generator Costs and Benefits • Summary of Forward Rate Calculation

8. Analysis of a Forward LNG Contract Illustration of Returns to a Forward LNG Contract • Return to call option reflects difference between spot price and Commodity Price • “Optimal” exercise conservatively accounts for limited number of call options: Commodity Price + Threshold > Spot NG Price Commodity Price + Threshold Commodity Price Spot Natural Gas Price

9. Analysis of a Forward LNG Contract Estimation of Returns Methodology • Costs and benefits of a forward LNG contract are estimated through Monte Carlo simulation • Simulates NG prices in 5,000 hypothetical winters • Simulated Algonquin Citygate prices based on prices from past winters, 2009/10 to 2018/18 • Simulation captures the value of a financial position ‒ a contract for physical supply introduces additional factors • Simulations are used to estimate • Reservation Price for an LNG • Expected financial gain from exercise of 7 call options

10. Analysis of a Forward LNG Contract Illustration of Monte Carlo Process (for 3 simulated winter price series) • Returns are calculated for each call in each simulated winter • Expected returns to contract reflect the average of returns across simulations. Price ($/MMBtu) Commodity Price

11. Analysis of a Forward LNG Contract Results • Monte Carlo simulation estimates that initial reservation price is $10.38 per MMBtu, reflecting a financially neutral contract • Physical contract cost includes a terminal markup of 12.5%, resulting to a Reservation Price of $11.67. Terminal markup reflects a combination of factors, including: • Terminal operating costs • Terminal operational constraints created by the contract • Opportunity costs compared to other contracts that offer lower risk or cost saving potential (e.g., multi-year or larger contracts) • The limited number of options available to gas-only resources for secure natural gas supply • Monte Carlo simulation estimates that expected net revenues per call option is $12.58 per MMBtu

12. Analysis of a Forward LNG Contract Results (continued) • Reservation charges from the forward LNG contract exceed the benefits of exercising the call option ‒ the difference reflects the opportunity cost of preserving call options for inventoried energy Calculation of Interim Compensation Program Forward Rate

13. Agenda • Introduction and Overview • Analysis of a Forward LNG Contract • Analysis of Other Generator Costs and Benefits • Summary of Forward Rate Calculation

14. Analysis of Other Generator Costs Methodology and Assumptions • Generators may face additional costs to entering into a forward contract not captured in the Monte Carlo analysis • Credit Costs reflect the cost to establishing credit that terminal counterparties may demand from generators prior to entering into the forward LNG contract • We assume these costs are 3% of the reservation price, based on publically available estimates of the costs of securing credit • Financial risk and other transaction costs include the costs associated with the increased financial risk to generators from holding a forward LNG contract. As margins in ISO-NE markets are relatively insensitive to natural gas prices, entering into a forward LNG contract increases the variation in returns, increasing risk and imposing a cost • We assume these costs are 10% of the reservation price

15. Analysis of Incremental ISO-NE Revenues Methodology • Incremental ISO-NE revenues are the benefit gas-fired generators expect to receive from an LNG contract through improved performance in ISO-NE markets • Generators can avoid potential curtailments in fuel supply due to NG market illiquidity, leading to improved performance • Estimated benefit reflects increased performance during Capacity Scarcity Conditions (CSC) • The total ISO-NE incremental revenues reflect : • Real-Time Market Incremental Revenues during CSC hours • Day-Ahead Market Incremental Revenues during CSC hours

16. Analysis of Incremental ISO-NE Revenues Calculations: Real-Time Market Incremental Revenues • Calculation of Day-Ahead and Real-Time Incremental Revenues reflects four basic components: Generator Margin × Curtailment Risk × Utilization× CSC Hours • Generator margin ‒ The margins earned by generators from supplying under shortage conditions, reflecting the PFP rate and operating reserve shortage prices (i.e., Reserve Constraint Penalty Factors) • Curtailments Risk – Risk of NG market illiquidity that limits physical NG delivery • Utilization – Average utilization during curtailments ‒ that is, the supply that resource otherwise would deliver into ISO-NE markets • Capacity Scarcity Condition (CSC) Hours – Assumed number of CSC hours. Analysis assumes a 20% likelihood of 10 CSC hours and a 5% likelihood of 50 CSC hours

17. Analysis of Other Generator Costs and Benefits Results: Other Generator Costs and Benefits • Other generator costs ($118) and benefits ($94) are roughly offsetting: Calculation of Interim Compensation Program Forward Rate

18. Agenda • Introduction and Overview • Analysis of a Forward LNG Contract • Analysis of Other Generator Costs and Benefits • Summary of Forward Rate Calculation

19. Forward Rate Calculation Results • The total unrecovered cost of the LNG contract is $247.46 • Costs reflect 3 MWh of inventoried energy • Unrecovered cost per MWh is $247.46 / 3, or $82.49/MWh Calculation of Interim Compensation Program Forward Rate

20. Contact Todd Schatzki, Vice President617 425 8250todd.schatzki@analyisgroup.com