ISO New England State of the Markets Report May April 2002 Robert Ethier, Ph.D. Manager, Market Monitoring and Mitigation ISO New England June 26, 2002

2 Overview Market Results May 2001-April 2002: Consistent with Past Analysis: Markets workably competitive Projections: Near term looks stable Market Developments: Summer 2002 Reforms, SMD Concerns: Load Response, Transmission Constraints

3 New England Energy Prices and Comparisons ($/MWh)

4 New England All-In Energy Price ($/MWh)

5 Price-Cost Mark-up Analysis Evaluate actual energy clearing price (ECP) versus cost- based simulated dispatch Simulated dispatch designed to produce perfectly competitive market outcome Metric is % increase over perfect market outcome Preliminary results show market is functioning well, with modest increase over competitive baseline Consistent with Bushnell & Saravia (2002) results

6 Withholding Analysis Performed by Board Markets Advisor - David Patton “Analysis consistently indicates that the New England markets have been workably competitive.” (Patton et al 2002) Economic Withholding –Output Gaps generally small - average less than 1% –Output Gaps decrease with high loads, for large participants Physical Withholding –Deratings decrease with high loads, for large participants Econometric results consistent with above observations

7 Projections - Reserve Margins

8 Projections - HHIs

9 Market Developments Summer 2002 Pricing Reforms –Implemented May 1, 2002 –Reserve reforms have had impact –Peak load pricing reforms not yet put to the test Standard Market Design –Dramatic rule revision: day-ahead market, locational pricing –Addresses most critical market reform needs –On-track for 1st Quarter 2003

10 Concerns - Load Response Total MW Increased payments, flexibility for 2002 –Emergency response gets $100/MWh, 2 hour minimum –Economic response gets ECP multiplier for constrained areas –RFP solicits Connecticut response with additional fixed payment Total MW –Approximately 83 MW through RFP with substantial fixed payment More load response is desirable

11 Concerns - Transmission Constraints Three primary areas of concern: NEMA/Boston, Connecticut, SW Connecticut NEMA/Boston - transmission upgrades and new generation will improve situation Connecticut/SW Connecticut –Some new generation in Connecticut –Little improvement in SW Connecticut –No significant transmission upgrades in near-term