Revisiting the Mitigation Proposal Clayton Greer Constellation Power Source

Decision being Appealed TNT Motion – To accept the greater of the fixed Heat Rate option with a 14.5 HR or verifiable cost plus 15% and with a minimum two year notice to change any of the parameters of this option. This will eliminate the 25% adder in the DaRUC whitepaper. Passed 67.2% to 32.8%

Primary Reasons for Request Selected mitigation rate is excessive Will have profound deleterious effects on the market Creation of market power Vote passed on an inaccurate casting of a proxy

What the rate will do to the market? 14.5 HR equates to $72.50/MWh assuming $5/MMBtu gas prices Rate is more than $20/MWh higher than current market rates Can cause major swings in load zone prices where mitigated areas exist – Load zone prices are load weighted average – Price determination will be extremely risky for the competitive market

For Example Assume a large metropolitan area in a Load Zone can only be served by units that are mitigated – The Metro area represents 80% of the load in the Load Zone – The other busses in the Load Zone clear at $50/MWh The resulting Load Zone price will be:.80 * $ * $50.00 = $68.00/MWh

What this means Competitive margins are too thin to handle a $18/MWh swing in energy cost: – the pricing of competitive loads will be extremely risky – risk in the wholesale market extends to the retail market Will occur in the largest market in Texas Could severely impair the competitive market If abused, this risk could be used as market power

The Rate is Arbitrary Precept from Mitigation CG: “the competitive market should set rates where possible, but in the absence of a competitive market, rates must be mitigated to prevent market power abuse.” So why was a 14.5 HR selected?

Attempt to Create Price Signals? Provide high prices to encourage the development of new generation Emission limitations make generation development almost impossible Price signals are only effective where these signals can be received

Attempt to create zonal uplift Mitigated rate sets LMPs for generator and local load busses Concept: “high energy prices will encourage self commitment and cover start costs” Result: Zonal uplift Why: someone else’s problem Problem: the rate was made excessive to overcome the risk of start costs

Been Here, Done This! “Not my problem” is not the right answer – a poorly functioning market is everyone’s problem Current Market started with 18HR – Then ratchets – Then technology specific HR Cost deemed too high when uplifted ERCOT wide Now divided across even fewer!

A better way! Entities with market power should be made whole with a reasonable profit, not allowed extract monopoly rents! Other markets have a Cost Plus mechanism to pay units with market power – Attempts to cover actual generation costs with a reasonable profit There are detailed processes to determine verifiable generation costs This alternative was proposed, but not floored for vote

Results of Cost Plus Many mitigated units are in the 10 heat rate range Cost Plus would set the price of these units to $55.00 instead of $72.50/MWh The resulting load zone price under this mechanism could then be:.80 * $ * $50 = $54/MWh Significantly reducing the impact and risk

Proposed Motion Remand the 14.5 heat rate option vote back to TNT for further study with emphasis given on adoption of a cost plus proposal This important decision deserves careful scrutiny