Treatment of Intertie Failures Intertie Trading Subcommittee November 24, 2003

Purpose Update on source and volume of intertie transaction failures Focus on ‘economic’ failures with NYISO subject to review under 7/7.5.8A of the market rules Assess impact of existing MACD guidelines and propose change

Intertie Failures Generally: Volume of intertie trading 1,567,000 MWh average monthly from May to Sept./03 –787,000 MWh imports, 780,000 MWh exports On average, 132,000 MWh (8.4%) fail monthly for all reasons (security, TLRs, uneconomic, NERC tag discrepancies) Exports failures predominant in recent months –17,800 MWh imports, 114,500 MWh exports failed NERC tagging failures are a small portion of the overall intertie failure rate.

Monthly Failures

Intertie Failures - Reliability Imports Failed imports have an effect on reliability during on-peak hours –During the day, most units that have committed to run are, thus, all scheduled energy must be delivered as promised or demand could exceed supply Exports Failed exports tend to have an effect on reliability during off- peak hours –Thermal units left online overnight in anticipation of exports may be forced into UBG state if transactions fail –Hydroelectrics may not be available to be constrained down due to their inability to safely spill –In summary, resources are less maneuverable which limits the options available to stay out of an over-generated state

Intertie Failures - Market Impact Imports When import transaction fails, IMO must find more expensive generation to compensate for failure This tends to raise HOEP relative to pre-dispatch price Exports When export transaction fails, IMO may constrain off domestic generation to compensate for failure This tends to lower HOEP relative to pre-dispatch price and cause increase in CMSC payments

Intertie Failures Imports - On Peak Of the 17,800 MWh of all failed imports, 11,100 MWh of imports failed during peak hours –Of those on-peak import failures, 1,700 MWh failed for economics (15% of all failed on peak imports) Exports - Off Peak Of the 114,500 MWh of all failed exports, 78,000 MWh failed during off peak hours –Of those off-peak export failures, 18,700 MWh failed for economics (24% of all failed off peak exports)

Current Guidelines Current Guidelines allow 3 safe harbours: – 1,000 MWh or 3% failure rate – No further review if HAM is volatile – Bid or offers within $10 or 20% of HAM price

Total NYISO Economic Failures 22,316 MWh FAILED Test #1 7,008 MWh PASSED Test #1 15,308 MWh FAILED Test #1 and Test #2 5,519 MWh PASSED Test #1 and Test #2 16,797 MWh FAILED Test #1, Test #2 and Test #3 175 MWh PASSED Test #1, Test #2 and Test #3 21,405 MWh Investigation Closed Subject to further review Economic Failures - July 2003

Proposal Single safe harbour –acceptable failure ratio of 3% –measured according to time and direction of failure: on-peak imports on-peak exports off-peak imports off-peak exports

MW failed for all reasons MW failed for economics 3% Failure Ratio Volatility/ Stability PITSanctionable Import - On peak12,3001, Import - Off peak11,1001, Export - On peak26,6004,4002,2001, Export - Off peak52,50018,7006,5004, Guidelines These are monthly averages to illustrate the impact of the existing Guidelines. Interties by the Numbers - Sanctionable MWh

These are monthly averages to illustrate the impact of the proposed Guidelines had they been in place for the previous period.

Going Forward Consultation with market participants on proposed changes - Intertie Trading Subcommittee Decision on revised guidelines Continued monitoring of intertie performance