Changes to New England’s Forward Capacity Market 120th New England Electricity Restructuring Roundtable Paul Roberti* Commissioner, RIPUC Boston, Massachusetts December 17, 2010 *Views expressed herein do not represent RIPUC or NECPUC, but are solely those of the author.

What Drive’s State Action/Perspectives on FCM Market Reforms? Cost Control/ Rate Impacts Market Functionality Reliability Regional Cooperation/ State Cohesion Environmental Goals/ Federal & State Initiatives

Translation . . . Let Clearing Price Drop – No more Floors! (Excess Capacity and Insufficient Delist Activity) Administratively- Set Prices (APR and Demand Curves) Are Wrong! Capacity surplus = Market Functionality LSR/ TSA Analyses are Overly Conservative , Unnecessary and Costly! States Have Unique Infrastructure, Different LSRs, and Different Policies/Perspec-tives LTCs Are New Norm: APR Proposals Inappropriately Discriminate Against LTCs , DR & EE Initiatives

Reality Check? Litigation Risk? (FERC) Adequate Compensation for Existing Resources?? Hello RMRs/ Goodbye DR Does Capacity Market Reflect CONE when New Entry is Needed? Is Surplus Rational? LSR/TSA Requirements Are Driven by NERC Requirements (even if conservative by some standards) Litigation Risk? (FERC) Long term risk and Volatility? Is Outcome Better with State supported Solution? LTCs and other state –sponsored capacity additions not within the Realm of the Market? (i.e., OOM)

Caught between market ideology and a dysfunctional commodity

Market Expectations Vs. Today’s Reality Resources offer at net-CONE Capacity additions: natural gas Three year lead time to build FCAs would drive new builds Prices trend to net-CONE Steady regional load growth Stable Financial markets Laissez-faire economics Net going-forward/opportunity costs DR/plant upgrades/renewables Lead times much shorter Long term contracts/incentives Prices trend downward to “floors” Flat or declining load patterns Stressed capital markets/tighter credit Growing “administrative” meddling

Comments and Caveats Information from ISO-NE Public Web Site Links are provided within tab Market structures changed dramatically between 1998-2009 Installed Capacity Requirement during Transition Period shown as positive value, but consistent with 'Objective Capability'. $/MW-Month have been converted to $/kW-Month in the final column. The rates from FCA 1, 2, and 3 are shown in this updated graph, and are arrived at via auction, rather than the transition period rate that was in effect between Dec. '06 and May '10. The graph extension through May 2013 does not show the effect of pro-rations, Peak Energy Rent, zonal price separation, etc. and therefore, is most "consistent" with the historical series, and is, for lack of a better term, a "supply side" number.

LOOKING FORWARD . . . . . Despite differences, FERC will make the decision LICAP PTSD has faded – and should (probably) not return Lifting cap on energy prices simply not palatable Convert FCM to deficiency auction and encourage self-supply? Markets are consistent with most state policies and remain best approach, although administrative “meddling” appears inevitable Capacity surplus situation provides opportunity to iron out market defects Stakeholder processes: a time-honored tradition in N.E. Guideposts: revenue requirements vs. rate stability Success of DR and the coming “Smart Grid”: Could it eliminate need for a capacity market over the long term? Reliability check: Stay focused on our common interest

Demand Resources Growing in New England 2010/11–2013/14: Total DR cleared in FCAs 1–4 (New and Existing); Real-Time Emergency Generation capped at 600 MW. © 2010 ISO New England Inc.

FLASHBACK: The LICAP Demand Curve! $/kW-month

Thank You Paul J. Roberti, Commissioner Rhode Island Public Utilities Commission 89 Jefferson Blvd. Warwick, RI 02889 (401) 780-2101 Email: proberti@puc.state.ri.us