Reserve Proposals

David LaPlante, Vice President, Markets

DevelopmentMarch 14, 2001

Summary of Presentation

Describe Objectives of New Reserve Proposal presented to PC on 2/15

Describe How the Proposal would work

Compare it to current initiatives Present a progress report on unit

commitment and uplift reduction Recommendation

Proposal Objectives

1. Assure that reserve requirements are met with the lowest possible production loss.

2. Provide incentive for flexible units and flexible bidding of all units .

3. Reduce Uplift as much as possible4. Include replacement reserves in reserve

markets.5. Cascade prices in reserve markets.

Alternative Approaches

Participant Committee Proposal described by Jeff Tranen on 2/15 (PC Proposal)

Demand curve for reserves Other Initiatives:

Three part bidding Net Commitment Period

Compensation

Motivation for PC Proposal

To assure that energy and reserves are met with most efficient combination of energy and fast start resources

Minimize use of inflexible steam units providing reserve, consistent with minimizing total production costs

PC Proposal DescriptionBusiness Process

Commit units to provide energy only to determine most efficient energy units

Determine if this commitment yields adequate reserves. If so, stop

If not, back down fast start resources to provide reserves

Hold units at backed down level and run new commitment to provide sufficient energy and reserves

Proposal Description Reserve Market Pricing

Calculate Lost Opportunity Cost of units backed down to provide reserves in real-time (Real-Time ECP - bid)

Use this bid to price reserves Note: Units would be held back in

energy market to provide reserves but price of reserves not calculated until real time based on actual ECP

Analysis of PC Proposal Unit Commitment Objective Function.

Minimize energy production costs to meet:

Energy Requirement Ten-Minute Spin Requirements Ten-Minute Non-Spin Requirements Thirty-Minute Requirement

Commitment then checked to see if replacement reserve is met

In recent months no adjustment to commitment needed for replacement reserves

Analysis of PC Proposal

Current commitment objective function meets proposal objective of best use of resources (and as bid characteristics) to provide energy and reserves

Energy and reserves of fast start optimized by unit characteristics

Current Initiatives

Several Initiatives underway to meet same objectives as PC proposal Net Commitment Period

Compensation Three-Part Bidding Demand Curve for Reserves

Comparison of PC Proposal and Current Initiatives

Objective 1: Meet energy and reserve requirements at minimum product costs Current unit commitment procedures

do this. It co-optimizes energy and reserve requirements (without an accounting for reserve bid prices)

No need to change commitment process as described in PC Proposal

Comparison of PC Proposal and Current Initiatives

Objective 2: Provide Incentives for Flexible Resources and Flexible Bidding Both proposals seek to increase revenues

in the reserve market Magnitude of revenues increase in either

proposal is uncertain Current initiatives with NCPC and 3-Part

Bidding, incent shorter run times and lower low limits

Comparison of PC Proposal and Current Initiatives

• Objective 4 -- Reduce Uplift• The amount of uplift reduction that

occurs depends on how successful the proposals are with incenting more flexible unit characteristics.

• Other Important Efforts to reduce uplift are underway and have had some success

Comparison of PC Proposal and Current Initiatives

Objective 4: Include Replacement Reserve in 30 Minute Market New proposal does this by explicitly

increasing amount cleared in market Current initiatives does this by increasing

an amount cleared but with a demand curve

New proposal seems more market driven but could increase use of reserve price cap

Comparison of PC Proposal and Current Initiatives

Objective 5: Cascade Prices New proposal does this fully Current initiatives limited cascading.

Full cascading could be incorporated

Progress Report on Reducing Unit Commitment and Uplift

Steve Whitley has taken several steps to improve commitment and meet proposal objectives:

September 15, 2000: reduction of capacity margin from 1500 MW to 1350 MW

February 2, 2001: New York reserve sharing 1350 MW to 1050 MW

Increased internal focus on uplift reduction Improved transmission outage scheduling Improved satellite coordination of security

Progress Report -Replacement Reserves, met without Additional

Commitment Lower Requirement means fewer

units needed so additional commitment not needed

Units committed economically or via self-schedules provide needed reserves

This has resulted in lower uplift Following charts show reduction in

uplift. Analysis of available capacity over peak is underway

Recently Declining Uplift

Daily Energy Uplift, Rolling 7 Day Average, Since Start of 2001

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

12/3

1/00

01/0

7/01

01/1

4/01

01/2

1/01

01/2

8/01

02/0

4/01

02/1

1/01

02/1

8/01

02/2

5/01

03/0

4/01

03/1

1/01

2/2/01: start of reserve sharing

Uplift Since Start of MarketsDaily Energy Uplift, Rolling 7 Day Average,

Since Start of Markets

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

5/1/

99

6/1/

99

7/1/

99

8/1/

99

9/1/

99

10/1

/99

11/1

/99

12/1

/99

1/1/

00

2/1/

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3/1/

00

4/1/

00

5/1/

00

6/1/

00

7/1/

00

8/1/

00

9/1/

00

10/1

/00

11/1

/00

12/1

/00

1/1/

01

2/1/

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3/1/

01

Implementation

PC proposal - To fully implement concept in PC proposal of a day ahead selection of units in reserves requires a day ahead market of some kind. This would take several months to design and several months to implement

Current Initiatives - 3 to 6 months

Recommendation

Continue with Current Initiatives Continue work on improving

reserve markets Day-Ahead Concept. Unit Commitment Demand Curve