1. FERC Order in Devon Power LLC, et al. ER03-563-00
Robert Ethier
Director, Market Monitoring
ISO New England Inc.
May 2, 2003

2. Background
NRG had applied for Reliability Must Run (RMR) agreements with the FERC to recover the full cost of service for its Connecticut fleet.
ISO-NE had proposed, and the Commission had accepted, a scarcity pricing mechanism called the ‘Proxy CT’ that provided special mitigation rules for generators in chronically congested areas (DCAs).
The intent of the Proxy CT was to control local market power while allowing price signals to incent investment in chronic problem areas.
These areas were identified as CT, SWCT and NEMA/Boston

3. FERC Action on April 25, 2003
Denied NRG’s request for RMR arrangements for full cost of service recovery
Allowed guaranteed recovery of only certain maintenance costs required for reliability
New agreements required within 30 days reflecting this ruling

4. FERC Action (cont’d)
FERC rejected the Proxy CT (combustion turbine) proposal it had previously accepted
ISO to modify Market Rule 1 by June 1 with temporary measure – ‘Peaking Unit Safe Harbor’ offer
Allows fixed cost component in offers of certain units
ISO-NE required to file Locational ICAP plan by March 1 ,2004.

5. FERC Action (cont’d)
Directed ISO-NE to establish temporary bidding rules:
Permit selected peaking units to raise their offers to reflect fixed and variable costs (PUSH) Peaking Unit Safe Harbor
Peaking unit defined as capacity factor less than 10%, resident in identified DCAs
Allow peaking units to set price
Offers would be allowed to reflect total fixed costs, levelized over 2002 MWh’s of generation

6. FERC Action (cont’d) FERC Rationale:
RMR contracts suppress market-clearing prices, increase uplift payments, and make it difficult for new generators to profitably enter the market.
In short, extensive use of RMR contracts undermines effective market performance.

7. FERC Action (cont’d) FERC Rationale:
Our reason for increasing the safe harbor energy bids of these units is to provide a market mechanism for high cost, seldom run units to recover their fixed costs.
When a peaking unit is called, all sellers will be able to receive a high market price and recover fixed costs. This feature will encourage entry by new generators.

8. Rule Development
ISO-NE intends extensive discussions with stakeholders on rules changes
Regular and special Markets Committee meetings in May to develop rules
ISO-NE to make compliance filing by May 30
ISO-NE to implement temporary rules changes on June 1
Rule changes in effect until introduction of Locational ICAP

9. Locational ICAP
Order directs ISO-NE to develop a mechanism to implement location or deliverability requirements in the ICAP or resource adequacy market
Capacity within chronically constrained areas to be appropriately compensated for reliability
Discussions ongoing with stakeholders
Resource Adequacy Working Group
Markets Committee
ISO-NE intends to file revised ICAP rules no later than March 1, 2004, for implementation no later than June 1, 2004, as required by the Order
Consistent with existing Locational ICAP schedule