Nodal/ Zonal Pricing Settlement Model Background

1. Nodal/ Zonal PricingSettlement Model Background Mark Karl, Manager Market Design ISO New England 8/11/2003

2. Presentation Overview • This Summary-level Presentation sets the stage for further in-depth review and discussion of nodal pricing. • Review the Background for Nodal Pricing • Explain the Operations/ Settlement Model and its Implications • Review Available Options • Present Workshop Process

3. Nodal Pricing Compliance Order Background

4. Nodal Pricing Background • FERC first ordered implementation of Nodal/ Zonal choice in the CMS/MSS order • CMS/MSS Abandoned in favor of SMD • FERC SMD NOPR suggested a requirement for nodal pricing for load as part of a “National Standard” • ISONE comments estimated a minimum 18 month implementation in New England • ISO-NE SMD Filing proposed implementation of nodal pricing for generation with zonal pricing for load

5. Nodal Pricing Background • Zonal-only pricing was challenged by NICC • FERC Response to ISO-NE SMD filing imposed nodal pricing compliance requirement • Accepted 18 month implementation estimate • Required progress reports in quarterly update filings • ISONE/ NEPOOL submitted request for clarification • FERC responded that 18 month clock started 3/1/03 • FERC agreed 18 month estimate is approximate • FERC agreed that NEPOOL could wait for simultaneous implementation

6. Nodal Pricing Background • Currently active challenge at FERC filed by NICC • Requests FERC declare 18 month implementation clock start date coincident with SMD order (9/2002). • Requests FERC order a Date Certain for implementation. • Requests customers with interval metering be permitted nodal option now. • Requests implementation of “Nodal Choice”. • Filing opposed by NEPOOL, ISO-NE, CMP, NU • Discuss implementation difficulties and point to ongoing stakeholder process • Decision still pending

7. Power System and Settlement Model Overview

8. Operations Locational Model • The “Electric System Model” used in EMS • Modeling for the purpose of defining Pricing Locations • Locations are used in: • Financial Transmission Rights Auction • Day Ahead Market • Real Time Market • Settlement

9. e-Nodes • Electrical Nodes • A point in the Electric system which may be electrically isolated by open circuits. • Prices may be calculated at every e-Node

10. p-Nodes • Pricing Nodes that are captured by the system • Linked to any e-Node

11. Private p-Nodes • “Private” p-Nodes • Used for modeling purposes as part of ap-Nodes • Prices calculated but not viewable by Market • Location is not usable by Market for Bidding/FTRs/Transactions

12. Public p-Nodes • “Public” p-Nodes • Locations that may have Bids/FTRs/Transactions • Prices are published for DA/RT and FTR Markets

13. ap-Node • Aggregated p-Node (ap-Node) • Public Locations • Used for Nodes, Zones and Hubs • Contains two-to-many p-Nodes weighted average prices

14. ap-Node (Combined Cycle Unit) • Combined Cycle Unit • Individual Units modeled as private pNodes • Bidding only at “public” apNode level

15. ap-Node (Multiple Bus node) • Multiple Bus Node • Not a station that can split and create differing prices • Multiple private buses that are load weighted to create the one public location • Allows ISO to add new buses without changing the public model

16. ap-Node (Zone) • Zones • Public Locations • Made up of individual p-Nodes (both public and private) • Each p-Node is load weighted

17. ap-Node (Hub) • Hub • Public Location • Made up of the same locations that make up 15 Public ap-Nodes/p-Nodes and 17 Private p-Nodes. • Each p-node in the Hub is non-weighted

18. Settlement Model • Used for calculation and assignment of load to Participants • Accounts for all load • Puts electric system (EMS) model data in a framework to assign payment responsibility • Allows for reconciliation of differences between EMS data and revenue-quality retail data

19. Area Tie Node Load Unit Load Tie Area Node Load Node Unit Tie Settlement Model Pieces

20. Meter Domains • Tool used to group electric system Nodes (p-nodes) for any business purpose • Typically associated with a “Host Utility” • Geographically bounded Meter Domains

21. Meter Domains • Each Node (p-node) must be part of at least one Meter Domain • Each Meter Domain must contain at least one Node (p-node) • Meter Domains used to determine if all load was assigned. Meter Domains

22. Meter Domains • A Node (p-node) may be part of one and only one Meter Domain • Metering Domains must be encapsulated in one Load Zone (Pricing Zone) • This was the “driver” for splitting NGRID and NSTAR territories into multiple domains. Meter Domains

23. Tie Lines Tie Lines • Physical electrical lines • Used to connect “Metering Domains”

24. Tie Lines Tie Lines • One domain is monitor; other is receiver • Reading is from monitor’s perspective • Monitor is usually the Metering Domain where the meter is located

25. Loads • Loads are used for any of the following: • Dispatchable load • Load (wholesale, retail, etc…) • Low voltage(LV) transmission losses Loads

26. Loads • Meter loads reported currently • Used also for dispatchable loads • including pumped storage pumping • One unmetered load asset for each domain • Used to ensure load balances within the domain Loads

27. Units • Modeled the way they are telemetered to Operations • Also model “Settlement Only Generators” which are too small to be modeled in the EMS Units

28. Area Load Node Load Load Unmetered Tie Node Area Unit Unit Node Load Load Load Unmetered Tie Putting the Pieces Together

29. 100 Calculating Unmetered Load (Balancing Load at the Metering Domain) - ( S Generation + S Load + S LV Losses - S Tie Lines) Generation = 310 Load = -120 LV Losses = -5 Tie Line = 100 Node XYZ 0 -25 150 Node ABC 160 -40 -55 = -(310 + -120 + -5 - 100) = -85 is the value of the Unmetered Load Network Area 123 – “Metering Domain” -5 (LV loss) Load Unmetered

30. Linkage of Wholesale to Retail • Metering domains do not cross pricing zone boundaries. • Therefore all load in the domain pays the same (zonal) price. • Retail customers are mapped to “Load Assets”. • Load assets are logical customer groupings which are the wholesale representation of retail load.

31. Linkage of Wholesale to Retail • Host Utility Responsibilities: • Create and manage “Load Assets”. • Map Retail customers to Load Assets. • Report Hourly Load Asset loads to ISO. • Report Hourly Generator and Tie data to ISO • Balance load of the metering domain (through resolving discrepancies in reported data)

32. Network Area 123 - “Metering Domain” 100 Node ABC Load Asset 5000 Load Asset 1000 Load Asset 3000 Node EFG Node XYZ Load Asset 2000 Load Asset 4000 Unmetered Depiction of “Load Asset” Mapping

33. Calculation of Payment by Load • EMS Calculates Nodal Prices using Bids and State Estimator Input. • Zonal Prices Calculated as Load Weighted Average of Nodes in Zone. • AMR Submits Load Asset hourly consumption. • ISO associates Load Asset with appropriate Zone and charges hourly zonal price. • Ownership contracts assign Participant responsibility for load assets.

34. Nodal Pricing Implementation Choices and Issues

35. Nodal Pricing Implementation Options • At this point, four basic options have been identified for nodal pricing compliance. • From easiest to hardest implementation: • More/Smaller Zones • “Special Circumstances” Nodal • Full Nodal Pricing • Nodal Choice

36. Nodal Pricing Implementation Options • Implement more/ Smaller Zones • Not a “Nodal Pricing” solution but similar impact. • Split zones which experience intra-zonal congestion. • NGRID and NSTAR have already been through this process. • Delivers most of the benefit of nodal pricing at minimal cost and with minimal contracting disruption. • Maintains a robust zonal pricing system for those wanting that type of price stability. • Maintains existing Load Asset accounting and contract system.

37. Nodal Pricing Implementation Options • “Special Circumstances” Nodal – Certain Customers may Qualify • All the load at a node chooses Nodal. • Includes Load Assets associated only with load at that Node. • Requires OP18 Compliant Metering – Interval Metering is not sufficient. • The Node is removed from the Zonal Price Calculation.

38. Nodal Pricing Implementation Options • “Special Circumstances” Nodal Alternate approach: • Requires customer install OP18 metering – Interval metering is not sufficient. • ISO redefines the Node • Previous single node becomes an ap-Node made up of two p-Nodes. • One p-Node counts toward zonal price and the other does not. • Load opting for Nodal price becomes a meter reader. • ISO requires node weighting to allow zonal price to be calculated. • Weighting could be fixed or dynamic

39. Nodal Pricing Implementation Options • Full Nodal – All customers move to nodal pricing on a given date. • Option to Balance load at the node or use Node estimation approach. (Very different costs) • Allows calculation of zonal price in real time, but zonal price not used in settlement. • Requires new node-associated Load Assets. • Requires retail load mapping to nodes as well as to Load Assets. • No choice regarding nodal versus zonal pricing.

40. Nodal Pricing Implementation Options • Nodal Choice – customers at each node may chose nodal or zonal price. • Zonal price is a residual calculation of load weighted average of that portion of load opting for zonal price. • Almost impossible to calculate a real-time zonal price. • Actual vs Estimated node weights • Real-time calculation using actual weights would require extensive telemetry. • Requires balancing of load at each node. • Requires reconfiguration of Load Assets and may require nodal/zonal specific Load Assets.

41. Nodal Pricing Implementation Issues • Many NEPOOL Participants are Opposed • Potential disruption of existing contracts • Requirement to redefine Load Assets possibly down to a nodal level • Determination of cost/ benefits • Need for agreement regarding the specific option to be implemented • Agreement as to who pays for implementation • Need for State Regulatory support • Need to come to regional agreement on issues and possibly file with FERC

42. Nodal Pricing Implementation Issues • Retail Load is not mapped at a nodal level • Much of Retail load has network service • Routine changes on Distribution System frequently change retail node mapping • Load Assets exist at Zonal Level – not Nodal • Fully balancing load at the nodal level requires substantial expenditures • Nodal choice effectively precludes real-time calculation of zonal price

43. Nodal Pricing Next Steps • ISO will schedule a series of Participant Forums. • ISO and NEPOOL will present Foundation Issues. • ISO will not present or defend a “straw proposal” in workshops. • ISO will focus on presenting implementation issues and will facilitate Participant discussion. • Participation by State Regulators is essential to Process. • Based on Stakeholder input, ISO will develop a recommendation for presentation to NEPOOL. • Target start of workshops in September with recommendation to NPC by end of this year.