Ancillary Services Update NEPOOL Markets Committee October 14, 2003

1. Ancillary Services Update NEPOOL Markets CommitteeOctober 14, 2003 Jim Milligan jmilligan@iso-ne.com ISO-NE Markets Development

2. Purpose • Present and discuss alternatives for Reserve Market Settlements • Solicit feedback from Participants • Identify and categorize outstanding issues • Achieve consensus on alternative for Settlements

3. General Concept • System and Locational Reserves are operational requirements. • Reserves will be purchased from available supply resources to meet the requirements. • Reserves utilized in real time will only be compensated once for service provided. • Alternatives discussed below differ in the timeframes that reserves will be purchased.

4. Common Features • Reserve requirements assigned to Load Obligations • Incremental requirements from 1st and 2nd contingencies assigned to resource owner(s) (See Slide #5) • Accounts for Forward Reserve Market Clearing • Bi-Lateral contracts can be allowed • Dispatchable Loads participate in reserve clearing • Locational Requirements included • Demand Curves included

5. 1st and 2nd Contingency Obligations • ISO is proposing that incremental reserve requirements caused by 1st and 2nd supply contingencies be assigned to resource owner(s) • Example • 1st contingency = 1400 MW • 2nd contingency = 1150 MW • 3rd contingency = 1100 MW • System ten minute reserve requirement equals 1400 MW • System thirty minute reserve requirement equals 575 MW • System replacement reserve requirement (if included) equals 575 MW

6. Contingency Assignments (cont.) • In preceding example, 250 MW of the ten minute reserve requirement would be specifically allocated to resource owner(s) of 1400 MW supply. The remaining requirement (1150 MW) would be assigned to load obligations. • In preceding example, 25 MW of the thirty minute requirement would be specifically allocated to resource owner(s) of 1150 MW supply. The remaining requirement (550 MW) would be assigned to load obligations. • Replacement reserves, if included, would be assigned to load obligations. • These assignments would apply to DA and RT markets.

7. Settlement Alternative 1 • Day Ahead Market • Purchase of Reserves is obligatory • Forecasted Reserve Requirements are inputs • Three classes (TMSR, TMNSR, TMOR) • System and Locational • Assigned to load based on DA Load Obligations and specifically assigned requirements • ICAP Resources required to submit availability offers • Forward Reserve Cleared MW have obligations. • Recognizes Bi-Lateral contracts, if desired.

8. Settlement Alternative 1 (cont.) • The following is an example of Day Ahead Settlements for Ten Minute Spinning Reserve. Similar methodology would be employed for Ten Minute Non-Spinning and Thirty Minute Reserves. Quantities would be settled separately by Load Zones • Day Ahead Quantities • Day Ahead TMSR Generation Obligation DA TMSR SO Cleared Day Ahead TMSR Offers • Day Ahead TMSR Load Obligation DA TMSR PO Share of DA LO * TMSR Assigned to Load • Adjusted Day Ahead TMSR Load Obligation ADA TMSR PO DA TMSR PO Adjusted for Forward Market and Bilateral TMSR Purchases • Day Ahead TMSR Adjusted Net Interchange DA TMSR ANI DA TMSR SO less ADA TMSR PO (positive is reserve sale) • Day Ahead Market • Reserve costs distributed based on ADA TMSR PO • Reserve Sales based on DA TMSR SO • Payments based on DA TMSR ANI (Generation obligations less load obligations)

9. Settlement Alternative 1 (cont.) • Real Time Market • Actual Reserve Requirements are inputs • Three classes (TMSR, TMNSR, TMOR) • System and Locational • Based on system conditions at time of clearing • Markets clear based on previous discussions • Real time reserve obligations based on RT Load Obligation deviations • Real time supply based on resources designated

10. Settlement Alternative 1 (cont.) • The following is an example of Real time Settlements for Ten Minute Spinning Reserve. Similar methodology would be employed for Ten Minute Non-Spinning and Thirty Minute Reserves. Quantities would be settled separately by Load Zones Real Time Quantities • Real Time TMSR Generation Obligation RT TMSR SO TMSR Supplied in Real-Time • Real Time TMSR Load Obligation RT TMSR PO Share of RT LO * TMSR Assigned to Load • Adjusted Real Time TMSR Load Obligation ART TMSR PO RT TMSR PO Adjusted for Forward Market and Bilateral TMSR Purchases • Real Time TMSR Adjusted Net Interchange RT TMSR ANI RT TMSR SO less ART TMSR PO • Real Time TMSR Adj. Net Int Deviation RT TMSR ANI Dev RT TMSR ANI less DA TMSR ANI • Real Time Market • Reserve costs distributed based on ART TMSR PO • Reserve Sales based on RT TMSR SO • Payments based on RT TMSR ANI Dev (Deviations from DA positions)

11. Settlement Alternative 2 • Day Ahead Market • Substantially the same as Alternative 1 • Reserve Requirements cleared in DA but may be satisfied with Virtual Bidding in addition to physical resources • Would allow those with obligations/resources to decide whether to buy/sell in Day Ahead or Real-time by using virtual bids • Virtual bid characteristics would be same as energy virtual bids • RAA process would be modified to clear forecasted load plus full reserve requirements

12. Settlement Alternative 2 (cont.) • The following shows the differences from Alternative 1 for Ten Minute Spinning Reserve. • Day Ahead Quantities • Day Ahead TMSR Generation Obligation DA TMSR SO Cleared Day Ahead TMSR Offers plus Cleared TMSR INCs • Day Ahead TMSR Load Obligation DA TMSR PO Share of DA LO * TMSR Assigned to Load plus Cleared TMSR DECs • Adjusted Day Ahead TMSR Load Obligation ADA TMSR PO DA TMSR PO Adjusted for Forward Market and Bilateral TMSR Purchases • Day Ahead TMSR Adjusted Net Interchange DA TMSR ANI DA TMSR SO less ADA TMSR PO (positive is reserve sale) • Day Ahead Market • Reserve costs distributed based on ADA TMSR PO • Reserve Sales based on DA TMSR SO • Payments based on DA TMSR ANI (Generation obligations less load obligations)

13. Settlement Alternative 2 (cont.) • Real Time Market • The real time market settlements for all alternatives is the same • Payments based on RT TMSR ANI DEV (deviations from Day Ahead positions)

14. Settlement Alternative 3 • Day Ahead Market • Under Alternative 3, load has an option to purchase reserves in the Day Ahead market (similar to energy). • The ISO would publish the forecasted reserve requirements for the operating day. • Participants, via Reserve Demand Bids, would indicate a willingness to purchase reserves in Day Ahead • RAA process would be modified to clear forecasted load plus full reserve requirements

15. Settlement Alternative 3 (cont.) The following is an example of Day Ahead Settlements for Ten Minute Spinning Reserve. Similar methodology would be employed for Ten Minute Non-Spinning and Thirty Minute Reserves. Quantities would be settled separately by Load Zones • Day Ahead Quantities • Day Ahead TMSR Generation Obligation DA TMSR SO Cleared Day Ahead TMSR Offers • Day Ahead TMSR Load Obligation DA TMSR PO Cleared Day Ahead TMSR Demand Bids • Adjusted Day Ahead TMSR Load Obligation ADA TMSR PO DA TMSR PO Adjusted for Forward Market and Bilateral TMSR Purchases • Day Ahead TMSR Adjusted Net Int DA TMSR ANI DA TMSR SO less ADA TMSR PO (positive is reserve sale) • Day Ahead Market • Reserve costs to load based on ADA TMR PO • Obligations to choose to buy DA (through demand bids) or buy in real time • Sales based on supply obligations (DA TMSR SO)

16. Settlement Alternative 3 (cont.) • Real Time Market • The real time market settlements for all alternatives is the same • Payments based on RT TMSR ANI DEV (deviations from Day Ahead positions)

17. Comparison of Alternatives Strengths Weaknesses A 1 Offers highest degree of certainty that May lead to price differences between DA needed reserves will clear in day ahead and RT markets with little ability to market. Requires fewest changes from arbitrage. May lead to decreased participation current RAA process. in DA energy market in order to escape obligation for DA reserves. A 2 Virtual bidding would create opportunity Requires changes to RAA process. May to arbitrage between markets and may lead to need to commit additional resources lead to more consistent pricing. May in RAA to meet operating requirements. curtail ability to exercise market power in DA market. A 3 Offers greatest ability to arbitrage Requires changes to RAA process. Most likely between markets and curtail potential to lead to need to commit additional resources exercise of market power. in RAA to meet operating requirements.

18. Issues • If bi-lateral reserve contracts are desired, should there be DA bi-laterals that flow into real-time and real-time only bi-laterals for reserves.

19. Questions?