Feasibility Study for a Northeastern Regional Day-Ahead Wholesale Electric Market

1. Feasibility Study for a Northeastern Regional Day-Ahead Wholesale Electric Market Presented by: LECG, LLC and Kema Consulting, Inc. Initial Meeting with Market Participants Toronto November 8, 2000

2. AGENDA • 1. Introduction • 2. Study Process • 3. Discussion LECG, LLC

3. INTRODUCTION Purpose of Study • The purpose of the study is to evaluate the feasibility of creating a combined day-ahead market (DAM) for electricity in the NYISO, ISO-NE and Ontario IMO. • A combined DAM could have a number of benefits: • Facilitate electricity market trading across a broad Northeastern region. • Enhance the efficiency of energy, reserve and congestion management markets for the region as a whole. • Improve regional reliability. LECG, LLC

4. INTRODUCTION Purpose of Study • There are, however, a number of practical transition issues that need to be examined: • The impact of changes to existing market rules, such as settlements and scheduling deadlines. • The compatibility of the present ISO market designs. • Software impacts. • Other transition issues. LECG, LLC

5. INTRODUCTION Study Scope • The RFP issued by the NYISO, ISO-NE and Ontario IMO requested a methodical examination of the costs and benefits of a combined DAM. • Describe and review the NYISO, ISO-NE, IMO and adjacent energy markets. This provides the basis for evaluating the critical issues in implementing a combined DAM. • Identify the similarities/differences between existing (or planned) markets. • Identify the strengths and weaknesses of existing (or planned) markets. LECG, LLC

6. INTRODUCTION Study Scope • (continued) • Identify the characteristics of a combined market. The RFP encourages: • Identification of beneficial characteristics not currently included in any of the individual markets. • Evaluation of the merits of a combined day-ahead financial market. • Leveraging recommendations off of current conditions in the three regions. • Assess the feasibility of incorporating adjacent day-ahead energy markets into a combined market. LECG, LLC

7. INTRODUCTION Study Scope • (continued) • Identify the qualitative benefits/deficiencies of a combined market. • Identify options and make recommendation(s). • Assess the impact of the recommended option(s) on market participants: Energy Suppliers, Load-Serving Entities, Marketers, Transmission Owners. • Assess the impact of the recommended option(s) on the NYISO, ISO-NE and IMO: adjustments to Tariffs, Operating Procedures, ISO Rules and Agreements and Software/Systems. LECG, LLC

8. INTRODUCTION First Phase • The feasibility study is the first of three phases that the ISOs envision for the DAM project. Phases II and III will occur upon acceptance of the results of the previous phases, and will entail separate RFPs at future dates. • Phase I: Feasibility study leading to a recommended approach(es) to a combined DAM market. • Phase II: System reliability impact study of the recommended approach by a joint ISO task force. • Phase III: Creation of a software functional specification. LECG, LLC

9. INTRODUCTION Summary: Balancing Objectives • The recommendations of the DAM feasibility study will need to balance a number of possibly competing objectives: • Facilitate regional trading and address major seams issues. • Consider the impacts of changes in market rules and software on the ISOs and market participants. • Recognize characteristics of the ISO markets that are already in place (or planned). • Accommodate differences between the ISO markets along important dimensions, e.g., treatment of ancillary services and local reliability rules. • Accommodate possible inclusion of other adjacent markets. • Avoid cost-shifting between regions. LECG, LLC

10. STUDY PROCESS Timeline • The DAM feasibility study is scheduled to be completed at the beginning of May, 2001. • November 2000, first two weeks: Initial meetings with ISOs and market participants in each region (in person or by conference call). • January 19, 2001: Draft report issued to ISOs and market participants. • February 2001, first two weeks: Meetings to discuss draft report with ISOs and market participants. • April 20, 2001: Revised report issued to ISOs and market participants. • Week of April 23, 2001 Final comment period for ISOs and market participants. • May 4, 2001: Final report issued and project concludes. LECG, LLC

11. STUDY PROCESS Input from Market Participants • Input from market participants will be sought at each stage of the study. • Meeting to discuss project initiation (today): • Feedback on study scope, process and timetable. • Identification of impediments to inter-regional trading and possible options for eliminating these impediments. • Ideas about desirable features of a combined DAM. • Identification of transition issues and concerns about the development of a combined DAM. • Draft report and presentation -- comment period. • Revised report and presentation -- comment period. LECG, LLC

12. STUDY PROCESS Market Participant Comments • Suggested approach for facilitating market participant comments on the draft reports: • Reports will be submitted to the appropriate committee within each ISO as well as to the ISO/MOU collaborative process. • Business Issues Committee at NYISO • NEPOOL Markets Committee • IMO Technical Panel and various Technical Advisory Teams/Panels • Reports will also be accessible via the ISO web sites. LECG, LLC

13. STUDY PROCESS Market Participant Comments • (continued) • Market participants will send their comments to a designated internet address (to be determined). • Responses to the comments will be made through the development of general explanatory materials, which will be sent to the market participant and posted on the web site. LECG, LLC

14. DISCUSSION Benefits of a Combined DAM • Some benefits that could be achieved through a combined DAM: • Better coordination of day-ahead interchange schedules. • Solve problems associated with scheduling of imports and exports between participating regions. • Simplify process for submitting and revising inter-regional schedules. • Better coordination of interchange schedules with unit commitment decisions. • Availability of inter-ISO congestion management. LECG, LLC

15. DISCUSSION Benefits of a Combined DAM • (continued) • Rationalization of inter-regional congestion hedges. • Facilitate the purchase of congestion hedges between two locations in different ISO regions. • Coordinate the timing of ISO auctions for congestion hedges. • Reduce market participant training and transaction costs through standardization. LECG, LLC

16. DISCUSSION Regional DAM “Wish List” • Market participant ideas are sought concerning other desirable features of a combined DAM, or other market impediments that could be addressed in the development of a combined DAM. • Some possibilities: • Simplify compliance with NERC tagging requirements. • Reduce scheduling and ancillary services costs. • One-stop day-ahead bidding and scheduling for the combined ISO region. • Single day-ahead bill for the combined ISO region. LECG, LLC

17. DISCUSSION Potential Transition Issues • There are potential transition issues and costs that need to be considered in evaluating the feasibility of a combined DAM. • Cost and implementation time for software changes. • Software solution time. • Compatibility with the present ISO market designs. • Impact on market participants of changes in market rules, such as settlements and scheduling deadlines. • Potential shifts across regions in costs associated with reserves and reliability. • Market timing issues. • Market participant input is sought to identify other transition issues and concerns that need to be addressed in the assessment of a combined DAM. LECG, LLC

18. DISCUSSION Possible Approaches • The project team has initially identified several possible approaches to combining (or coordinating) the DAMs of the three ISOs. • Simultaneous, separate DAMs. • Separate DAMs at the individual ISOs with some exchange of data to reduce scheduling inconsistencies. • Improved sequencing of the operation of separate DAMs. • Single-site combined DAM. • Single-site DAM with some decentralized information processing at the individual ISOs. • Each of these approaches, and possibly others, will be developed and evaluated during the course of the feasibility study. LECG, LLC

19. Market Participants B C B A C A Day-Ahead Bids Day-Ahead Market 1 Day-Ahead Market 2 Day-Ahead Schedules B A C A Market Participants B No C A Hour-Ahead Schedules Hour-Ahead Markets 18 LECG, LLC

20. DISCUSSION Separate Simultaneous • One approach to market coordination is for market participants to simultaneously submit bids and schedules to day-ahead markets affected by a given transaction. • This approach gives rise to the possibility that a given inter-ISO transaction might be scheduled in one DAM but not in the other. • These inconsistencies would then be resolved in hour-ahead market schedules. LECG, LLC

21. Market Participants B A Day-Ahead Bids C Day-Ahead Market 1 A C Day-Ahead Schedules Market Participants A Day-Ahead Bids C D Day-Ahead Market 2 A C D Day-Ahead Schedules 20 LECG, LLC

22. DISCUSSION Separate Sequential • Another approach to market coordination would be to sequence the DAMs, so that market participants would know whether the bids and schedules they make into Market 1 are accepted before submitting bids or schedules in Market 2. • Market participants can use such a sequential market structure to balance their inter-ISO schedules. LECG, LLC

23. Market Participants A C Day-Ahead Bids B Single Combined DAM (Markets 1 & 2) B Day-Ahead Schedules A Market Participants 22 LECG, LLC

24. DISCUSSION Combined • A third approach to market coordination would be to operate a single combined DAM. Generators and loads would submit bids and inter-ISO schedules would be determined in the combined DAM market. LECG, LLC

25. NEXT STEPS • Notes from this meeting will be made available on the ISO web sites. • Draft report will be issued on January 19, 2001. LECG, LLC