FCM Restructuring Roundtable: Sustainable Markets & Future Directions

1. Whither FCM?Restructuring RoundtablePeter D. FullerDecember 17, 2010

2. FCM Reform Status • FERC is evaluating the briefs filed in the paper hearing. The last briefs were filed on September 29 • FERC indicated a target for a final order by March 1, 2011 and implementation for FCA5 (June 2011, for delivery 2014/15) • ISO has indicated FCA6 as earliest implementation for many of the pending reforms

3. Key Supplier Issues in FCM • Pending at FERC Now: • Need to completely address price distortions from out of market entry • Fully addressing ‘OOM’ entry from FCAs 1-3 in the prospective application of Alternative Price Rule • Need to make FCM locational • Monitor all zonal interfaces all the time for potential constraints (and avoid over-mitigation) • Need to re-set the auction price parameter • Floor prices in FCA1-4 have provided no market information on the cost of new entry (“CONE”) • Still pending the stakeholder process • FCM product definition & ‘comparability’ of dispatchable and non-dispatchable generation and demand resources

4. Sustainable Markets • To Succeed, the Markets Need to Have: • Clear and consistent obligations for all providers of the product • Reliability product definition should be technology-neutral and fully specify both the ‘planning’ and ‘operational’ needs for reliability • Are there in fact multiple products, a la quick-start capability procured in LFRM? • ramp capability, dispatchability, other? • The economic system must be self-contained and internally consistent • No external subsidies • Operational and investment decisions should be consistent with visible market prices

5. Sustainable Markets (2) • Recognize, and allow market prices to reflect, all reliability constraints • FCM zonal pricing should reflect marginal resource needed to satisfy identified constraints, including those identified through ‘reliability review’, if needed • Energy markets should have no ‘out-of-merit’ dispatch; marginal price to satisfy a constraint should be visible in LMP • Monotonically-increasing supply curve in energy markets • No un-priced “reliability dispatch” of demand resources or other operator actions

6. When You Come to A Fork … • Centralized Auction-based Market • Challenges in adequately defining the product(s) and specifying the constraints • Challenges in avoiding out-of-market distortions • Is new entry financeable? • Contract-based Market • Allocate responsibility for the reliability product to LDCs or others on behalf of end-use customers • Contract-based system for assembling portfolios of new and existing resources to meet reliability obligations • LDCs, states, etc could address their own policy goals in their approach to the portfolio, provided it meets the reliability product needs of ISO-NE

7. Where Does the Future Lie? • Recent capacity resource additions are overwhelmingly contract-based, not market-based • Current market price outlooks are not sufficient to support investments to renew the aging fleet or to achieve state and regional environmental and other policy objectives • FCM may be incapable of supporting investment due to the short tenor of the guaranteed price, plus heightened regulatory uncertainty • Long-term contracts for renewables and repowering with efficient new combined cycle plants will advance the regional goals of lower emissions, lower cost, enhanced reliability and regional energy independence* • Can contracts co-exist with FCM? Do we need to look at a contract-based capacity mechanism? * See, New England Governors’ Renewable Energy Blueprint, September 15, 2009