Demand Resources Performance Penalties in FCM

1. Demand Resources Performance Penalties in FCM Name Herb Healy April 13, 2009

2. The Issue • Like other supply resources, active Demand Resources are subject to penalties for under-performance when dispatched in FCM events • Determined in Section III.13.7.2.7.5.2. Negative Monthly Capacity Variances • For both RTDR and RTEG • Unlike all other supply resources, current rule language for active DR imposes a punitive penalty structure on under-performance that allows penalties to exceed revenue potential; i.e., penalties can exceed compensation on a $/kW-mo basis when the DR resource has been prorated by price • All other supply resources have language that adjusts the under-performance penalty to the price-prorated compensation level • In case of intermittent resources, there is no performance penalty

3. The “Potential” Impact • For Capacity Commitment Period 1 (as result of FCA1), active Demand Resources were prorated as follows: • RTDR in CT was prorated to $4.24/ kW-mo (together with all other supply resources in CT) • ~ 94% of the FCA1 Capacity Clearing Price • All RTEG was double prorated to $2.92/ kW-mo • ~ 65% of FCA1 Capacity Clearing Price • Current Market Rule penalty structure imposes a punitive penalty on both of above, starting in June, 2010 • $0.26 /kW-mo for RTDR greater penalty than ability to earn • $1.58/kW-mo for RTEG greater penalty than ability to earn • Above unlikely, but problematic to DR Providers (as with any resource provider)

4. What’s Needed • Performance penalties for supply resources (except intermittent) are calculated via a 2 step process • Determination of the under-performance short-falls • Multiplying the under-performance by an effective penalty price • For other resources, the effective penalty price is the Capacity Clearing Price of the FCA for the Commitment Period as adjusted for price proration • For active DR, the price proration adjustment to the Capacity Clearing Price needs to be inserted into the MR language, in 2 separate sections: • Negative variance • Positive variance • [note: load does not pay more for positive variance of active DR; positive variance is a mechanism for distributing under-performance penalties to DR resource(s) that over-performed in the same performance period]

5. Perspectives • Do proposed changes comport with Settlement Agreement (SA)? • Ans: Yes. SA did not envision punitive performance penalties • Do proposed changes comport with IMMU? • Ans: Yes. See, for example, IMMU Report to FERC: Review of the Forward Capacity Market Auction Results and Design Elements, June 5, 2009: “Neither penalty structure is punitive in that penalties are capped by the revenues received” • Does ISO agree with proposed changes? • ISO is welcome to answer. Our discussions indicate yes to proposed rule change, but ISO would prefer not to expedite this process • Why the expedited process? • Ans: First light on issue was ~ Nov 2009. The DR Providers have worked with ISO since to determine a resolution approach. Final decision on need for rules change derived last Thurs • Is this retroactive rule-making? • Ans: No. This does not impact price that load pays for resources in any of the past FCAs, nor prospectively for that matter, nor does it shift payments between resources

6. Herb Healy101 Federal StreetSuite 1100Boston, Ma 02110Tel: 860-306-4503Email: hhealy@enernoc.com