January 8, 2013 | NEPOOL markets committee

1. January 8, 2013 | NEPOOL markets committee Jonathan Lowell Principal analyst | market development Tariff Clarification to Comply with June 20, 2013 FERC Order Regulation Market (Order 755) Compliance

2. Background • FERC approved the February 6, 2013 regulation market design on June 20, 2013 • New rules ordered to become effective in 180 days • One additional compliance requirement to address “inter-temporal opportunity costs” • The Commission’s order stated: “…we will require ISO-NE to submit, within 45 days of the date of this order, a compliance filing that explains how regulation resources will be allowed to incorporate inter-temporal opportunity costs into their bids and how ISO-NE will verify these costs, and the associated modified tariff revisions.” • This requirement was not explicitly stated in the market rule language filed on February 6, 2013.

3. What Are Inter-Temporal Opportunity Costs? • Storage resources may assess a different value to energy now versus energy later • Energy injections and withdrawals are inherently part of providing regulation service • Inter-temporal difference in LMPs represents an opportunity cost • May impact willingness to regulate now versus later • Order 755 allows inter-temporal opportunity costs (ITOC) to be included in the Regulation Capacity offer price. • The ITOC offer component reflects a Participant’s willingness to provide regulation based on the expectation of future LMP price differences.

4. Does This Mean a Change to the Market Design? • No. The filed design only places two limits on what a participant can offer: • Offer floor price of $0/MW • Offer cap price of $100/MW • Participants already could include inter-temporal opportunity costs • The tariff compliance change will add a sentence to III.14.3(a)(v): “The Regulation Capacity Offer price must be greater than or equal to $0/MW and may not exceed $100/MW. A Market Participant may include estimated intertemporal opportunity costs in its Regulation Capacity Offer price.” • The market design will still work in exactly the same manner

5. Proposed Implementation • eMarket interface will allow Regulation Capacity offer to be specified in two parts: • Inter-temporal opportunity cost component • Everything else • The two components will be added together to form a resource’s Regulation Capacity Offer price, and used for: • Resource selection • Regulation Capacity clearing price determination • Regulation make-whole payment calculation • The market design allows regulation offers to be updated at any time for any reason • Participants can easily reflect changing estimates of ITOC

6. Verifying Inter-temporal Opportunity Costs • Order 755 requires ITOC to be verifiable • ISO Internal Market Monitor routinely reviews market performance, including performance of the Regulation Market • Existing Appendix A provisions provide IMM with authority to ask Participants to provide justification for market offers, including the ITOC component of a Regulation Capacity offer • See MR-1 Section III.A.17.1. Data Collection and Retention. • These information requests will provide the ISO with the means to verify ITOC offers, if and as needed

7. Similar Approach Approved by FERC for CaISO • CaISO’s design includes a very similar concept • Participants submit their own estimates of ITOC • Participants “… have the burden to justify inter-temporal opportunity costs contained within a resource’s bid, upon request …” • Total regulation capacity bid, including ITOC must be no greater than the capacity bid cap

8. Next Steps • MC vote at July 25, 2013 meeting • PC review at August 2, 2013 meeting • File with FERC by August 5, 2013 (45 days from compliance order)