OPSI 10th Annual Meeting Improving Generation Performance October 14, 2014 Marji Rosenbluth Philips Director, Federal and RTO Services

DIRECT ENERGY One of the largest Gas and Electric Marketer/Manager in the U.S. Natural gas and electricity sales to small, medium and large sized businesses, public institutions and government Load Serving Entity; Demand Response Provider; Agent for Generators; Toll Gas for Generators Sales in 2013 85 TWh Retail Power sold (Rank #2) 12 TWh Wholesale Power sold 550 Bcf Retail Gas sold (Rank #1) 250 Bcf Wholesale Gas sold Peak load in PJM January 2014 was around 9,000 MWs DE Would be sixth largest zone based on MWs served

Basic Principles of Capacity “Market” Must provide opportunity for recovery of and on capital investment PJM must ensure pool of money available to resources; meet just and reasonable standard Payment should be based on attributes that contribute to reliability Risk/reward/performance penalties must provide appropriate incentives Capacity suppliers manage ALL risk of meeting obligations

Key PJM Objectives More MWs (esp. for Winter 2015) “Better” MWs Greater operational flexibility Market Stability Bottom Line: PJM’s Proposal looks more like a GUARANTEE OF REVENUES No market stability for load

What were we paying for? PJM assured consumers that RPM was working Have seen significant new build under existing price RPM has forced the exit of more expensive units as intended NERC Report on the Polar Vortex confirms that PJM meets reliability standards Bottom line: Consumers have been over paying some generation and underpaying others if RPM is not meeting reliability needs

What are Consumers Now Being Asked to Pay for During Transition? Winter testing Incremental Auction Purchase by PJM of up to 10,000 MWs for winter PLUS DR MWs that “go away” because the CSP obligation is not matched with specific LSE load provider customers Higher costs Generator assurance that it can meet its performance obligations Firm fuel, storage, dual fuel capability Bottom Line: Some units will “requalify” as “firmer” capacity without having to invest any money to change their operations Generators unlikely to be able to develop storage, dual fuel capability or enter into firm fuel contracts during the Delivery year of 2015-16 Difficult to build storage or dual fuel in one year Most “firm” gas contracts have already been executed; suppliers will have to pay a premium to acquire “firm” transportation for 2015-16

Demand Response The “EPSA” Order addressed jurisdiction, not DR’s contributions to reliability DR does not go away in terms of its contribution to the system simply because a new form of compensation must be identified Bottom Line: By requiring CSP obligations to be matched with specific LSE load or the DR capacity goes “poof” leads to inefficient outcomes: the DR product is still there and does NOT need to be replaced or consumers paying more than they should

Flaws in the Transition BOTTOM LINE: Consumers are double paying (if not more) for reliability; generators are shifting market risk to consumers in exchange for guaranteed capacity revenue stream LSEs are undermined in their attempts to contract forward while guaranteeing generator revenues PJM taking other initiatives that will be far more effective (and less costly) and should wait to see how these changes impact markets before moving to draconian change in RPM construct

Overkill? Responding to 1 in 10 Year Incident The MWs are there; DR performed well; no final decision on “EPSA” Winter testing ensures MWs are there And if it is not serving that purpose than why should load pay for it and it not be up to the generator to manage its [availability/capacity] risk? Enhancements to the energy market and generation bidding (to reflect true gas costs) will improve market revenues substantially Does nothing to change operational limitations on units that cannot run in extremely cold temperatures Does nothing to change gas generator ability to procure gas if dispatched through reliability run or if unit is located behind the city gate Procuring and paying for additional MWs for 12 months to cover 2 months exposure (post 2015-16 IA)

Transition Issues Load will be double paying for additional MWs PJM intends to procure Winter testing; 10,000 MWs and DR MWs Ironically units, such as nuclear, may rebid as higher performing capacity and get paid more without changing any operational practice PJM likely wind up clearing “bad” MWs that were not able to clear the initial BRA Premature to eliminate DR as a capacity product

We Support Changes That Can Achieve the Same Results: Eliminate Force Majeure and Out of Management Control Performance Excuse Allow risk premium in bids to reflect insurance costs, cost of operational changes (Do not need to raise compensation to all units) Get Energy market pricing right: Increase energy cap to reflect true cost when generator fails to perform and must buy out of its DA commitment Can Eliminate penalties if energy cap raised Ensure scarcity prices function effectively Ensure appropriate market oversight Reduce uplift costs and capture them through LMP Distribute non-performance penalties to load that paid for performance

Changes We Support: Allow hourly Day Ahead offer bids to reflect gas costs For each electric day, there are two “gas” days – generators should be able to reflect different pricing in their bids Note that moving the gas day to 4am does not address this issue Allow Real Time bid offers to reflect the cost of gas May mean raising LMP cap as noted in previous slide Shorten bidding and dispatch solution program timing to fall within the hours that gas is actively traded NAESB has recommended extending the closing of timely gas nominations, which will facilitate this

Changes We Support PJM’s preparing for the role of DR in future auctions Support PJM being prepared in the event that the EPSA Order becomes final PJM does not need to act pre-emptively in auctions that have already cleared Long standing FERC policy to not mandate retroactive adjustments

Other Solutions to Explore ISO-NE model single base clearing price with greater performance incentive in real time Underperforming generators compensate over performing generators; customers net neutral Bifurcate procurement to monthly or seasonal quantities so do not overpay for product needed only for 2 months Continue to enhance regulation market in ways that reward flexibility and will lead to liquidity Work with states to develop demand response programs that appropriately compensate demand resources for reliability they provide during winter and summer 14

Other Solutions to Explore Consider going back to original RPM proposal that allowed PJM to create constraints in the clearing model to acquire desired generator attributes Example: Can add constraint to LDA to clear x amount of dual fueled generation; that way there is transparent benefit to consumers of why the generator is getting enhanced payments