1. Day Ahead Market Working Group Meeting October 30, 2003 Market Evolution Program Sub-topic: Design Overview to Settlements, Prudentials and Payment Functions for the DAM

2. Public 2 Purpose of These Slides For discussion purposes only. These slides are meant to support a discussion of various processes required for a Day Ahead Market and their potential implications for design requirements. The specific design of the Day Ahead Market is an ongoing exercise between the IMO and its stakeholders. In no way are these slides meant to construe any final design features of the Day Ahead Market.

3. Public 3 Overview Today’s Topic: Design Overview  Development History  Issues of Relevance to the DAM Market: Settlements Prudentials Payment Functions  Design Approach: Objectives Considerations

4. Public 4 Development History A DAM market has significant design implications for: Settlements; Prudentials; and Payment Functions For each of these processes it is worth looking at our experiences to date. Some lessons may have relevance to the new DAM market and how it is developed

5. Public 5 Development History April 15, 1999 Original Version of the IMO MARKET RULES Original Version of the IMO MARKET RULES Initial Framework for settlement and financial clearing of the real-time market and the energy forward market: Settlement, Invoicing and Payment Timelines Inventory of most major Settlement Amounts - but further definition required Content of settlement statements and invoices The rules also included a brief description of the prudential framework for the real-time market market: No separate specification of prudential rules for energy forward market IMO-imposed maximum net exposure and trading limit

6. Public 6 IMO - Administered Markets Real-time Markets Procurement Markets Settlement of Transmission Rights Holders Real-time Markets Procurement Markets Settlement of Transmission Rights Holders Energy Forward Market Transmission Rights Auction Energy Forward Market Transmission Rights Auction Invoice (monthly) Invoice (monthly) Final Statement Preliminary Statement +10 business days after the trading day +20 business days after the trading day Invoice (weekly) Invoice (weekly) Final Statement Preliminary Statement +2 business days after the trading day +6 business days after the trading day Development History - original Settlements/Invoicing concept Deferred prior to market opening Temporarily 22 bus. days Original timing of major settlement, invoicing and payment events largely unchanged from original market rules. April 15, 1999 Defined time periods for raising Disagreements and Disputes

7. Public 7 Development History - original Prudential concept Original rules made no clear distinction between real-time market exposure and energy forward market exposure IMO-determined Maximum Net Exposure IMO-determined trading limit (fixed percentage of MNE) Future sources and options for prudential support April 15, 1999

8. Public 8 Development History - Interim Changes MARKET RULE AND REGULATORY REFINEMENTS Functional Deferrals: Energy Forward Market (still in effect) Capacity Reserve Market (still in effect) Preliminary and Final Pricing (later, a permanent change) New Settlement Amounts: IOG, Various month-end uplifts, etc. OEB definition of Transmission Tariffs Government-regulated charges defined (DRC, RRP, etc.) Prudentials: Revisions to nature and amount of prudential support Market participant-determined trading limits April 15, 1999 to May 1, 2002

9. Public 9 Development History - Interim Changes SYSTEMS DEVELOPMENT Affected by market rule refinements and regulatory change taking place in parallel to systems development and testing Affected by changing of the expected market commencement date Affected by finite capacity to deal with design change as the systems neared completion The information systems aspects of settlements and invoicing generally required more stakeholdering than prudentials. Conversely, the financial implications of prudentials required more stakeholdering than settlements and invoicing. April 15, 1999 to May 1, 2002

10. Public 10 Development History - Interim Changes MARKET RULE AND REGULATORY REFINEMENTS Regulatory changes such as Bill 210 have forced rapid response outside of the normal change management process used by both market participants and the IMO. SYSTEMS DEVELOPMENT Structured change management (“baseline”) and release management process and release management process enhanced Changes to settlements and prudential support systems have largely involved incremental additions to existing functionality - as opposed to a major overhaul to existing processes. No major changes to market clearing processes May 1, 2002 to Present

11. Public 11 Development History - Lessons Learned The topic of areas of Settlements, Prudentials and Payment Functions are aspects of design which will be of particular interest to market participants Applying major changes such as the DAM and Nodal Pricing to an operational market will be a new challenge Structured change management/release management requires sufficient lead times Stability in the overall design objectives set-out in the strawman will assist the detailed design process

12. Public 12 Overview Today’s Topic: Design Overview  Development History  Issues of Relevance to the DAM Market: Settlements Prudentials Funds Clearing  Design Approach: Objectives Considerations

13. Public 13 DAM Design - The Pieces Timelines: Current task with stakeholders is to establish a sequence of events - as opposed to specific times. Settlements: Not an opportunity to reformulate financial principles discussed at length in the Strawman and previous working group sessions. Division of first and second settlement activities General requirements: publication of settlement amounts and data Integration with real-time settlements and N.O.D. activities PBC Data Submission Residual settlement issues related to nodal pricing FTR’s are not a major component of the November 10th meeting

14. Public 14 DAM Design - The Pieces Prudentials: Not an opportunity to redefine financial risk management principles that will be set out in the Strawman The importance of classifying transactions as “physical” or “virtual” Decision Rules - bid/offer screening Nature of prudential support Use of historic data for prudential assessment Adjustment of decision rule parameters for day-ahead prudential assessment (1st and 2nd settlement) Integration with real-time prudential construct Frequency of Payments Transaction Routing: Classification of “physical” and “virtual” transactions Content of on-line information screens Market clearing functions and timelines

15. Public 15 For the time being, we shall assume that gathering and disseminating information between the various processes is a new business function. Each of the functions being designed also have some degree of interaction with other processes such as market participant data collection and the DAM Calculation Engine.

16. Public 16 Overview Today’s Topic: Design Overview  Development History  Issues of Relevance to the DAM Market: Settlements Prudentials Funds Clearing  Design Approach: Objectives Considerations

17. Public 17 A set of detailed design requirements by the end of Q1, 2004 that is consistent with the Strawman and any subsequent market rules development. The basis of a clear starting point for systems development and technical stakeholdering. Let the business needs as implied by the Strawman drive the detailed design - not the other way around, More time analyzing the true requirements means less time required addressing corrections to the design. Stabilize each stage of the design process before moving to the next one Design Objectives

18. Public 18 Business Context View Workflow View Dataflow View Systems View Design Views Required Each design view is progressively more detailed than the previous one The largest organizational implications are with the business context view The largest technical and cost implications will come out of the systems view Emphasis on technical detail Emphasis on business objectives

19. Public 19 Business Context View Questions to Ask at each stage What are the business rules that are implied by the Strawman? Do we still organize the existing real- time market functions the way we do today? Will DAM functions be organized the same way? What processes and sub-processes have been identified by the Strawman that need to be designed?

20. Public 20 Workflow View What are the key deliverables required FROM each process and sub-process identified in the Business Context View? Are are the key inputs INTO each process and sub-process? What are the timelines for each process and do they make sense? Questions to Ask at each stage

21. Public 21 Dataflow View Should logically follow from the workflow view What data from the current real-time market will need to be used? What new DAM data will be used and where is it needed? Questions to Ask at each stage

22. Public 22 Systems View A later stage of the design process (i.e. after end of Q1, 2004) A reflection of the quality of the design from the previous 3 stages How do we integrate new components with existing systems and data repositories? How will new data elements be communicated between participants and the IMO? Questions to Ask at each stage

23. Public 23 Upcoming Events November 10th (all day): DAM-WG Design Session: Joint presentation from IMO Settlements and Finance Departments Discussion of business requirements for key design features. November-March: Additional DAM-WG consultations as required Synchronization with final revisions to the Strawman Coordination with other aspects of design and market rule development Address residual DAM issues arising from the development of nodal pricing and FTR concepts

24. Public 24 End of Slides