AUGUST 7-9, 2013 | LENOX, MA Andrew Gillespie MARKET DEVELOPMENT (413) Review of Market Rule 1: Section III FCM Carry Forward Rule

CARRY FORWARD DUE TO RATIONING Why is this provision necessary, and what is it meant to do?

What is the issue? Conceptually, the FCA would work better if all resources were rationable  But, requiring all resources to be rationable would make it very difficult for new resources to enter the FCA; most new resources cannot be easily scaled By being non-rationable, sponsors of new projects avoid the risk of being rationed below the full capability of the project, which allows lower per-MW costs to be reflected in their FCA offer  However, because of this ‘lumpiness,’ the auction may over-buy in order to meet capacity requirements 3

What is the impact of over-buying? The excess created when a lumpy new offer must be procured to meet the requirement can affect prices in subsequent FCAs  In the next auction, the excess is now existing and can depress the clearing price After any multiple year election, this is also a risk for new entrants  This risk also leads to higher offers from new resources; a risk premium would be included in the initial offer because of the uncertainty about future capacity values – times when the price should have been set by new capacity, but wasn’t because of the excess 4

What does the carry-forward provision do? The carry forward provision is meant to address the situation when, due to a previously cleared lumpy new offer, an excess amount of existing capacity was created The problem is price suppression in subsequent auctions; it is possible that this excess has offset the need for any new capacity in subsequent auctions, and hence the price was not set by a new offer The solution: Reset the clearing price when, because of this excess, the price should have been set by new capacity, but wasn’t because of the excess Reset to what price? Reset the price to that of new capacity 5

MARKET RULE CITATIONS What exactly are the provisions?

III Trigger. “The capacity carry forward rule shall be triggered in an import-constrained Capacity Zone if all of the following conditions are met: a)the sum of the amount of New Capacity Required plus the amount of Permanent De-List Bids clearing in the Forward Capacity Auction in the Capacity Zone is less than or equal to zero; b)there is not Inadequate Supply in the Forward Capacity Auction in the Capacity Zone; and c)at the Capacity Clearing Price, the sum of the amount of New Capacity Required plus the amount of Permanent De-List Bids clearing in the Forward Capacity Auction plus the amount of capacity carried forward due to rationing is greater than zero. The amount of capacity carried forward due to rationing shall equal the amount of capacity above the Local Sourcing Requirement procured in that Capacity Zone in the previous Forward Capacity Auction as a result of the Capacity Rationing Rule. “ 7

What is New Capacity Required? Seciton III “…“New Capacity Required” shall mean the Capacity Zone’s Local Sourcing Requirement, minus the total amount of capacity of Existing Generating Capacity Resources, Existing Import Capacity Resources, and Existing Demand Resources in the Capacity Zone (that is not permanently de-listed for the Capacity Commitment Period), …” 8

III Pricing. “If the capacity carry forward rule is triggered, then the Capacity Clearing Price for the Capacity Zone shall be the lesser of: (1) $0.01 below the price at which the last New Generating Capacity Resource, New Import Capacity Resource, or New Demand Resource in the Capacity Zone to withdraw withdrew from the Forward Capacity Auction; or (2) the Offer Review Trigger Price for a combustion turbine, as set forth in Section III.A ; provided, however, that if in the Capacity Zone there is Insufficient Competition and no capacity offered from New Generating Capacity Resources, New Import Capacity Resources, and New Demand Resources has been withdrawn from the Forward Capacity Auction, then the Capacity Clearing Price shall equal the Offer Review Trigger Price for a combustion turbine, as set forth in Section III.A ” 9

REVIEW OF CURRENT PROVISIONS Do the current provisions work?

Review of Trigger In FCA 8 the trigger conditions will identify any excess created in FCA 7, and will determine whether this excess capacity has offset the need for additional new capacity in FCA 8 (i.e., capacity that would have otherwise been needed) 11

Review of Administrative Price The method prescribed to determine an administrative price will work for FCA 8 The administrative price will be either: One cent below the last new offer to withdraw from the auction, or The price of a new combustion turbine 12

Notes and Conclusion Any new capacity offer participating in the auction in conformance with the Offer Review Trigger Price rules, and not an exercise of market power, is appropriate for use as an administrative price How this excess might increase or decrease in subsequent auctions (FCA 9 and beyond) is not an immediate problem  Recall, the proposed administration of carry forward out-of- market (OOM) capacity was a very similar problem that was ultimately not approved by the FERC Conclusion: based on this review and other considerations, the ISO is not proposing any modifications to this provision at this time 13

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