NOVEMBER 13, 2013

Bob Laurita and Mario DePillisINTERNAL MARKET MONITORING

Presentation to the NEPOOL Markets Committee

Compliance Filing: Consultation under Offer Flexibility Rules

Agenda

1. Summary of Commission’s October 3, 2013 Order

2. Review of the proposed Market Rules related to Participant Fuel Price Adjustment and the “Lock Out” Provision

3. Proposed Market Rule Changes to Comply with the Commission’s Order

Commission Order (Summary)

• On October 3, 2013, the Commission issued an order on offer flexibility.

• The Commission accepted the majority of the ISO’s and IMM’s proposed Market Rule changes

• The Commission ordered two modifications: – “The IMM must calculate the Reference Levels for locked-out

resources based on updated information, instead of using the day-ahead price index.” (From Paragraph 35)

– “ISO-NE must submit a compliance filing with Tariff language clarifying that the IMM will make the hourly Reference Levels available to individual resources. ISO-NE must submit a compliance filing with Tariff language clarifying that the IMM will make the hourly Reference Levels available to individual resources.”(From Paragraph 36)

Review of Fuel Price Adjustment Market Rule

• Prior to the Supply Offer deadline for any market (i.e., day-ahead market, Re-Offer Period and each hour in real-time), a Market Participant may enter a fuel price for the IMM to use in calculating a Resource’s reference level if the Market Participant believes its actual fuel costs will exceed the IMM’s index-based fuel price by a large enough margin to put the Resource at risk of inappropriate mitigation.

• Market Participants can enter their requested fuel price through an interface in eMarket at any time.

• The IMM will use two ex post tests to review Fuel Price Adjustment requests :

– Supply Offer Consistency and – Fuel Price Consistency

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• Supply Offer Consistency Test– The Market Participant must enter a Supply Offer that is within 10% of

the requested fuel price adjustment.

• Fuel Price Consistency Test– In addition, a Market Participant that enters a fuel price adjustment

must submit documentation after the fact verifying that the submitted fuel price is based on a fuel price quote, contract or price from an electronic trading system.

• Failure to Meet Two Requirements Results In “Lock Out”– If a Market Participant fails either test above the Market Participant

will be excluded from submitting a fuel price adjustment through the eMarket user interface for a two - to six-month period.

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Gas Price Information In New England

• Intra-day trading is primarily OTC.– Trading is illiquid.– Little public price information– Prices are time and generator specific, e.g., large generators may pay

more due to larger volumes.

• Gas prices can vary significantly from generator to generator, particularly during the Operating Day. Applying price received by Generator “A” to Generator “B” would increase probability of error.

• IMM’s primary source of intra-day price is from individual generators

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Solution Requirements for “Locked-Out” Generators

• Compliance with FERC Order requires that locked-out generators must be able to inform IMM of fuel cost changes.

• Compliance with FERC Order requires up-to-date fuel cost information in absence of real-time fuel price indices

• IMM is restricted to generator-specific fuel cost information, especially during the Operating Day.

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Proposed Market Rule Changes to Comply with the Commission’s Order

• The IMM will clarify in the Market Rule that a “locked-out” Market Participant can contact the IMM using the consultation process defined in Section III.A.3.1 of the tariff to request a change to the fuel price.

• Section III.A.3.1 will allow Market Participants to consult during the Operating Day for intra-day fuel price changes.

• The normal rules for consultation will continue to apply: – The “locked-out” Market Participant will be required to provide ex

ante documentation of their expected fuel cost.– The Market Participant’s request must be received between the hours

of 8:00 a.m. and 5:00 p.m.

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Proposed Market Rule Changes to Comply with the Commission’s Order (Continued)

• The proposed Section III.A.3.1 ex ante approach allows the IMM to review the Market Participant’s documentation.

• A “Locked-Out” Market Participant can pro-actively request a fuel price adjustment through the consultation process for a future time period (i.e., over-night gas price.)

• Section III.A.3.3. will clarify that Reference Levels will be available to Market Participants when the Reference Levels are calculated.

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OCTOBER 3, 2013 ORDER EXCERPTS

Paragraph 34

• “We agree with NEPOOL that the proposed Offer Flexibility Changes represent a balance of interests. Because the fuel price adjustment mechanism provides market participants with the latitude to increase a resource’s Reference Level without prior review, it is appropriate for a market participant to be subject to a lock-out period if the IMM determines that the participant cannot substantiate or justify its fuel price adjustment”

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Paragraph 35

• We note, however, that there are a few potential inconsistencies between ISONE’s intended application of the proposed revisions, including the lock-out provisions, and the actual proposed Tariff language. Accordingly, our acceptance is conditioned upon ISO-NE submitting revised tariff records in a compliance filing that reconciles the proposed Tariff language with ISO-NE’s statements. In its answer, ISO-NE states that, during the lock-out period, “the Reference Levels for the resource would be determined by the IMM based on a published day-ahead fuel price index.” The provisions, however, do not specify what type of pricing information the IMM will use to calculate the hourly Reference Levels for resources that are locked-out – i.e., whether the IMM would use a day-ahead price index or real-time (or operating day) price information. We find that, since the IMM will be calculating hourly Reference Levels that incorporate updated information, the IMM also should calculate the Reference Levels for locked-out resources based on updated information, instead of using the day-ahead price index. Accordingly, ISO-NE must submit clarifying Tariff revisions reflecting that approach.

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Paragraph 36

• Further, while ISO-NE states that the IMM “must develop hourly Reference Levels rather than Reference Levels that are fixed for an Operating Day,” proposed Tariff section III.A.3.3 as drafted states that “Reference Levels will be made available on a daily basis.” ISO-NE must submit a compliance filing with Tariff language clarifying that the IMM will make the hourly Reference Levels available to individual resources. The proposed Tariff revisions, as modified, should use updated information for Reference Levels for locked-out resources to help prevent inaccurate market price signals.

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