1 Market Evolution Program Long-Term Resource Adequacy Regulatory Affairs Standing Committee Meeting May 14, 2003

2 Long-Term Resource Adequacy Overview Today’s Discussion:  Why is Long-Term Resource Adequacy of Concern?  Long-Term Resource Adequacy Working Group  LTRA Objectives  LTRA Evaluation Criteria  Barriers to Investment  LTRA Paths and Options  Next Steps

3 Why is Long-Term Resource Adequacy of Concern? Future Considerations:  Continued load growth  Retirement of generation assets  Proposed investment projects are uncertain to move forward  Requirement to maintain reliability A combination of new supply and demand-response is needed:  How do we ensure it happens?  How much is necessary?  When do we need it?

4 Long-Term Resource Adequacy Working Group Membership, Timelines, and Decisions:  Through Market Advisory Council stakeholdering, Market Evolution Program working groups were formed for multi-interval optimization, day-ahead market and long-term resource adequacy  Over 20 members in the long-term resource adequacy working group  Inaugural meeting March 7; LTRAWG holds face-to-face meetings approximately every 2 weeks  LTRAWG has agreed on objectives, evaluation criteria, options/paths and barriers to investment  LECG (consulting firm) has provided expert advice

5 Long-Term Resource Adequacy Objectives  Review and recommend appropriate mechanisms to define requirements, allocate obligations and implement market-based allocation of demand and supply resources, to address Ontario's long- term resource adequacy needs, while:  Recognizing that appropriate mechanisms may extend beyond the IMO wholesale market jurisdiction and require policy or regulatory support from others;  Utilizing existing demand, supply and transmission resources efficiently;  Through market-based signals, facilitating efficient development of new generation sources, demand-response mechanisms and the mitigation of transmission limitations;  Seamlessly integrating with other IMO-administered markets; and  Mitigating seams conflicts with neighbouring jurisdictions recognizing Federal Energy Regulatory Commission Standard Market Design and other United States initiatives.

6 Long-Term Resource Adequacy Evaluation Criteria Main Evaluation Criteria:  Assure Physical Adequacy of the Power System  Efficient Allocation of Obligations and Costs  Accommodate Market Entry  Address Gaming and Market Power  Supports Development and Refinement of Competitive Electricity Markets  Implementation that is Sustainable and Flexible

7 Barriers to Investment LTRAWG has identified the following investment barriers:  Lack of Consistent Electricity Policies  Lack of Independence of Regulatory Entities  Market Power on behalf of a Dominant Supplier  Lack of Liquid Contracting Market  Lack of Appropriate Investment Incentives

8 Long-Term Resource Adequacy Paths and Options  Path A: Improve Energy Market and Not Introduce any RAR Option 1 - Improve Energy Market and Not Introduce any Resource Adequacy Requirements  Path B: Define the Role of LSEs and Require Forward Capacity Contracts Option 2 - LSEs Required to Contract Forward Capacity Requirements Option 4 - LSEs Required to Secure Forward Capacity Requirements and IMO Administers a Resource Adequacy Auction Market  Path C: Central Agency Procure Forward Capacity Option 3 - Government Agency Required to Contract Forward Capacity Requirements Option 5 - IMO Required to Secure Forward Capacity Requirements on Behalf of LSEs and IMO Administers a Resource Adequacy Auction Market Option 6 - IMO Required to Secure Forward Capacity Requirements on Behalf of LSEs and IMO Administers a Resource Adequacy Call-Option Auction Market

9 Issues for Long-Term Resource Adequacy Paths Options  Most options have sub-options  Where the IMO would not have sole jurisdiction, significant constraints and barriers exist to implementing some of the identified options: Compared to suppliers, most buyers do not have the ability to participate in wholesale spot markets and enter into bilateral contracts No government agency has explicit obligations to procure long-term forward capacity  FERC published their White Paper on April 28, 2003  FERC has backed off on imposing an explicit resource adequacy requirement (from their July 2002 SMD NOPR) by stating that the final rule will not: change state authority over resource adequacy requirements and regional transmission planning; and include a a minimum level of resource adequacy

10 Issues for Long-Term Resource Adequacy Paths Options  Barriers to investment is the main issue in Ontario  It is uncertain whether a resource adequacy requirement (i.e. implementation of either options contained in Path A or B) will solely be sufficient to increase new investment; therefore barriers to investment must be addressed  No tried and true resource adequacy requirement has been widely accepted within restructured power markets anywhere in the world  However, mostly all jurisdictions have implemented, or are developing, a resource adequacy requirement

11 Next Steps  Long-Term Resource Adequacy Workshop May 21  IMO Steering Committee Meeting May 29  Long-Term Resource Adequacy Working Group Meetings: May 29, June 12 and June 26  Feasibility Assessment (paths and options) will be completed in June  Market Advisory Council Meeting June 11  Recommendations will be made to the IMO Board on July 3