Addressing ISO-NE’s Performance Incentives

1. Addressing ISO-NE’s Performance Incentives Markets Committee Meeting September 20, 2013

2. Alternative to ISO’s Performance Incentive Proposal • Problem Statement • Existing FCA design lacks mechanism to monitor resource performance prior to and during the capacity commitment period outside of the defined shortage event conditions. • During FCA qualification resources offer into the FCA based on performance during a single seasonal test, not based on actual past performance. • No mechanism to true-up resource obligations based on recent performance prior to the delivery year.

3. Alternative to ISO’s Performance Incentive Proposal • Proposed Solution • Implement an EFORd Pay-For-Performance approach and maintain the Enhanced Shortage Event Penalty mechanism. • The EFORd approach will measure the portion of time a unit is in demand, but is unavailable due to a forced outage, de-rate, or otherwise unapproved unavailability (fuel unavailability). • The EFORd approach will require each resource to true-up to its obligation, based on recent performance, prior to the commitment period. • The Enhanced Shortage Event Trigger will incentivize performance during shortage events. (Triggered more frequently). • These changes will: • Provide stronger incentives to avoid de-rates, procure fuel, and properly invest in maintenance to minimize forced outage events. • Clear the FCA with reliable capacity resources that are based on proven, historical performance.

4. Determining a Resource’s EFORd Value • EFORd = Equivalent Demand Forced Outage Rate • Prior to FCA participation: • The ISO will determine the ICAP value for each Supply Resource using the latest results of a resource’s Summer Seasonal Claimed Capability test. • The ISO will then utilize the EFORd FCA value, which is equal to the resource’s forced outage data for the 12 months ending September 30 prior to the FCA, in determining the UCAP value of a unit offered into the FCA as follows: UCAP Offered = ICAP * (1 – EFORd FCA)

5. UCAP Forward Capacity AuctionPay-for Performance Approach • Calculate the system-wide UCAP value • Control Area ICR (ICAP) value = 211 MWs • System Average EFORd = 5% • System UCAP = 211 * (1 - .05) = 200 MWs • Resource specific UCAPs are determined in similar fashion. • Suppose the ISO has to purchase 200 MWs to meet ICR:

6. Reconfiguration Auction True-up During the 3rd RAA • As an additional incentive to improve performance, the EFORd approach will require resources to true-up to meet its obligation, based on their most recent years performance, prior to the Capacity Commitment Period. • The ISO will utilize the EFORdARA3 value, equal to the resource’s forced outage data for the 12 months ending September 30, to determine the resource’s UCAP value prior to the third Annual Reconfiguration Auction (3rd ARA). • Supply resources will be required to Buy or Sell MWs during the 3rd ARA,based on their most recent years performance, to true-up to their obligations prior to the commencement of the Capacity Commitment Period.

7. 3rd Annual Reconfiguration Auction True-up Example • Resources who improve their performance have the opportunity to sell MWs during the 3rd ARA, and those resources whose performance declines must buy MWs to cover their positions during the 3rd ARA.

8. Exemptions and Other Proposed Changes • The EFORd used in determining the UCAP value of a unit will exclude events Outside Management Control (ex: transmission outages) and ISO approved outages. • Expand tariff for the Treatment of Existing Resources to be Treated as New to establish a benchmark for investment/installation of dual-fuel capable resources. • Enhance new investment cost recovery provision to facilitate cost recovery beyond a single auction period. • E.g. – a flexible five year term based on the ISO’s amortization schedule. • Increase the Dynamic Delist Threshold to Percentage of FCA Starting Price (e.g. 30%). • Resource cost would still need to be verified.

9. Operational Example under Dominion’s proposal • Resource A is offline during the operating day - did not clear in the DAM; and did not self schedule to be online. • ‘Stressed system conditions’ occur during the day that prompts the ISO to call Resource A to run for reliability. • However, Resource A cannot get gas to come online to perform as directed by the ISO. • Resource A then, is subject to an EFORd increase, and a lost opportunity in the Energy Market for its failure to perform because it was not on an ISO approved outage. • Resource A is also at risk to PER, if LMP values get high enough, and Shortage Event Penalties if stressed system conditions escalate to trigger a Shortage Event.

10. Benefits of Dominion’s Approach • Multi-tiered method fills the gaps missed in the current FCA design. • Coupled with the enhancements made to the Shortage Event Penalty, incorporating the EFORd mechanism is a more efficient method to ensure availability, performance, and reliability. • Using EFORd is all hours is a less risky performance method. • Eliminates the need for subjective risk premiums. • Implements a true ‘Pay-for-Performance’ approach. • Will “weed out” the bad MWs and increase the value of performing MWs. • Bolstered auction price signals for new build when needed and encourage investment. • Honors fuel diversity throughout the region.

11. Questions?