Reliable Power Reliable Markets Reliable People Market Services Operating Reserve Redesign Project April 28, 2008 Working Group Session

2 Active Reserves – Phase 1 Issues to be discussed at upcoming meetings: Standby Reserves Price Cap Force Majeure definition and Liquidated Damage’s Secondary/financial market Self Procurement

3 Active Reserves – Phase 1 AESO Bid volume posted at D-1 Full visibility of all offers before and after market close Random close to each market Active reserves continue to be indexed to pool price Active reserves will settle using a clearing price/pay as offered On and Off Peak products remain Move profile volumes to NGX – use On and Off Peak definitions Profile volumes pay as offered Must offer requirement? Offer blocks flexible Minimum offers of 5MW with 1MW increments Remove virtual units

4 Active Reserves – Phase 1 Physical settlement of OR at D-1 Remove D-5 through D-2 – unique to Alberta D-5 through D-1 was intended to mitigate the sole buyer being cornered – more sellers in market today D-5 through D-2 was intended to manage uncertainty of the new “market” and as a temporary measure D-1 consistent with other ISO’s in North America Secondary market and self procurement generate necessary liquidity in advance of D-1 AESO post volume requirements at D-1 - largely predictable

5 Active Reserves – Phase 1 Prices and volumes visible pre and post market close Preferential for sellers to receive feedback during market open– basic tenant of many auctions Facilitates competition Once market opens and seller submits offer, offer is locked. Seller can only lower price and increase volume Full visibility of offers accepted and not accepted

6 Active Reserves – Phase 1 Random close 7 year history of offers being submitted at last second Random close deals with this behaviour, facilitates competition Market open for three minutes, closes randomly after the third minute (during the last four minutes) During market open, offers cannot be withdrawn after submitted – offers are locked. Offers prices can be lowered and volume increased Looking to mimic transferable characteristics from RRO auctions RRO general observation – longer market open, allows for more competition Standing offers can be submitted on a daily basis in advance of market open

7 Active Reserves – Phase 1 Active Reserves Indexed to Pool Price Indexing allows participants to reflect value of the OR product in relation to energy and creates an indifference to providing OR versus energy Should better facilitate participation in OR market 7

8 Active Reserves – Phase 1 Pay as offer versus clearing market – some industry thoughts Pay as offered: Pros - seller takes ownership of offer; consistent with other commodity markets; deals with free option; …… Cons - sellers adjust offers to guess clearing price; behaviour flattens out offer curve; extent sellers “guess” wrong, result could be inefficient deployment of providers; studies have shown higher prices than clearing market …… Clearing market: Pros - better facilitates participation; better fits with one physical buyer; consistent with AB energy market;…. Cons - dominant seller/s can influence price to a greater extent; un- necessary high prices; ……….

9 Active Reserves – Phase 1 Must Offer Requirement???? – some industry thoughts Must offer requirement: focuses sellers on consequences of not selling; does not facilitate new providers; what is the enforcement practicality on NGX?; consistent with energy market; standing offers could be sufficient – therefore not onerous; un-necessary as out of the money AESO Bid removed; … No must offer requirements: incentive required for sellers to participate – conscripted volume paid at a discount to contracted volume; no excuses to participate; if conscripting something wrong with market design – review necessary; must offer necessary in T-2 world, not so much at D-1; …. 9

10 Active Reserves – Phase 1 Flexible offer blocks only No limitation on number of price/quantity pairs - reduces utility of inflexible blocks Sellers can submit offers with a 5MW minimum and 1MW increments Simplicity – minimize errors Flexible blocks work well today 10

11 Active Reserves – Phase 1 5MW Less than 5MW is operationally inadequate In today’s environment with D-5 through D-2 trading, a seller can aggregate volumes of less than 5MW over a number of days. No longer the case – just D-1 If marginal requirement is less than 5MW, AESO will round up requirements that are >=3MW and round down if <3MW Subject to bullet directly above, if seller sells less than 5MW – penalty 11

12 Active Reserves – Phase 1 Profile Volumes Use existing On/Off Peak definitions Example: During the Off Peak AESO requires HE1, 10MW; HE2, 20MW; HE5, 30MW Valid offers must offer a minimum of 5MW during each of these 3 hours. Offers will be stacked according to price and required volumes filled accordingly. Pay as offered – accepted profile likely different for each transaction 12

13 Active Reserves – Phase 1 Remove virtual units Virtual units facilitate selling over a number of days No need when moving to just D-1 Fewer errors take place 13

14 Active Reserves – Revised Trading Schedule Active Reserves Trading Schedule on NGX (Open) – (Random Close) to 9.07 Active Reg D to 9.17 Active Spin D to 9.27 Active Sup D to 9.37 Standby Reg D to 9.47 Standby Spin D to 9.57 Standby Sup D to Active Reg D-1 Profile to Active Spin D-1 Profile to Active Sup D-1 Profile NGX deploy a position monitoring tool 14