January 15, 2002 Douglas James, ISO New England

1. Agenda Item #4 1/15&16/02 MC Mtg. NEPOOL Manual 6Financial Transmission RightsManual Overview Presented to NEPOOL Markets Committee January 15, 2002 Douglas James, ISO New England

2. Financial Transmission Rights Manual • Introduction • Section 1 - Financial Transmission Rights Overview • Section 2 - Reserved • Section 3 - FTR Auction • Section 4 - FTR Secondary Market • Section 5 - FTRs & Market Settlements • Section 6 - FTR Auction Example • Section 7 - FTR Auction Revenue Settlement • Section 8 - Incremental ARRs • Section 9 - ARR Allocation Example (under development)

3. Section 1 – FTR Overview • Overview section provides brief overview of FTR concepts • Definition and purpose • Financial instrument • Acquisition and disposal • Valuation • Both benefit and potential liability • Requirements to participate • Eligibility • Financial assurance • Actions: who does what • Bidder/holder, ISO

4. Definition and Purpose • Definition and purpose of FTRs • Financial instrument to manage congestion risk • entitles holder to share of Congestion Charges that arise during periods of congestion • settled hourly against differences in Day Ahead Energy Market LMPs (Section 5) • defined in MW from point of receipt to point of delivery • unidirectional • Acquisition and Disposal • ISO administered FTR Auction (Section 3) • Secondary Market (Section 4)

5. FTR Valuation, Participation • Valuation of FTRs • Benefit when FTR designation is in same direction as congested flow • CC of DA LMP higher at point of delivery • Liability when FTR designation is opposite congested flow • Any actual deliveries opposing the congested flow would receive congestion credit offsetting such liability • Requirements to participate • FTR Auction, Registered secondary trading • Eligibility requirements • Financial assurance • Unregistered secondary trading • No requirements, settle with registered holder

6. Actions • Actions: who does what: ISOBidder/Holder Provide registration Register Initiate, conduct auction Submit bids/offers Post auction results Maintain record of FTRs Manage FTR portfolio Provide secondary market in eFTR: post, accept, confirm,reject quotes Include FTRs in monthly settlements Determine FTR Auction settlement

7. Section 2 - Reserved

8. Section 3 - FTR Auction • Overview • eFTR: the Market User Interface • Simultaneous Feasibility Test (SFT) • Determining Winning Quotes • Auction Timeline • Auction Business Rules

9. FTR Auction Overview • Auction: opportunity to acquire and sell FTRs • only way to create an FTR (may later subdivide) • Long and short term auctions • 2 six month auctions; 10 then 25 % of capability • then annual for five years; 50% of capability • monthly; remainder of transmission capability • On-peak and off-peak auctions • On-peak period: weekday hours ending 0800 - 2300 • Off-peak period: weekday hours ending 2400 - 0700, weekends, NERC holidays

10. FTR Auction Overview (Continued) • FTR Characteristics • Available between any Locations for which LMP is calculated and posted: Hub, Load Zone, Node, External Node • Designated as injections/withdrawals from Locations within and external to NEPOOL • Magnitude to nearest 0.1 MW • Provides hedge for deliveries consistent with FTR • Do not hedge against losses • FTR Auction is a Reconfiguration Auction • enables purchase of FTRs that are different from those offered for sale in the auction

11. eFTR • eFTR: Internet based; provides user interface with FTR Auction and related functions • FTR bids/offers submitted, validated, entered • Observe auction results, manage FTR portfolios • Other subsystems: determine, record highest valued bid-based feasible set of FTRs • establish base case for auction • iterate between evaluating quotes and SFT • determine FTR clearing prices • record results for posting on MUI • bridge to settlement and billing subsystems

12. Simultaneous Feasibility Test (SFT) • Preserves economic value of awarded FTRs • must collect sufficient Congestion Charges to cover FTR credits (revenue adequacy) • requires transmission system to support awarded set of FTRs during normal conditions • Power Flow: bids modeled as generation and load at injection/withdrawal Locations • model expected network topology for period • thermal ratings, interface limits • loop flows from other Control Areas • normal conditions and single contingency events • market feasibility test; not a reliability analysis

13. Determining Winning Quotes • Winning Quotes: • Set of simultaneously feasible FTRs with highest total value • determined by bid and offer prices • Steps: • download bids/offers from database • solve linear programming problem (LP) • check simultaneous feasibility (SFT) • iterate LP/SFT • upload results

14. Auction Timeline • ISO initiates, directs, oversees FTR Auction • Annual (initially, semi-annual) auction • six business day quoting window ends first day of month before FTRs are effective • results posted within six business days (intended to be before monthly auction window opens) • Monthly auction • five business day quoting window opens 15 business days before start of auction month • results posted within four business days

15. FTR Auction Timeline

16. Auction Business Rules • Bids and Offers: • Must be Eligible FTR Bidder to buy/FTR Holder to sell • To sell, must own for entire auction period duration • Rejected quotes may be resubmitted in quoting period • Bids: are for purchases up to the specified quantity (no minimum quantity may be specified) • Offers: are for sales up to the specified quantity (no minimum); may specify a reservation price • Outstanding FTRs modeled as fixed injections • Awarded FTRs may be acquired from FTR Holders in secondary market

17. Section 4 – FTR Secondary Market • Overview • eFTR Secondary Trading Center • FTR Secondary Trading Business Rules

18. FTRSecondary MarketsOverview • FTRs are originally awarded in the NEPOOL FTR Auctions • FTRs may be freely traded on the secondary market • NEPOOL FTR secondary trading market facilitates trade of existing FTRs between FTR Holders • Allows trading of existing FTRs only • Transfer of ownership is automatically registered with the ISO for FTR trades made through eFTR • FTRs can be traded independently of eFTR, however they can only be registered to the ISO via eFTR • FTRs cannot be reconfigured in the secondary market

19. eFTR Secondary Trading Center • FTR Holders can buy and sell FTRs directly with other FTR Holders through the Secondary Trading Center • eFTR Secondary Trading Center allows users to: • View FTR Postings • Post FTRs for Resale • Buy and Sell FTRs • The NEPOOL FTR Auction User’s Guide will have detailed instructions for participating in the secondary market (Guide is currently under development)

20. Secondary Trading Business Rules • An FTR can be split into multiple FTRs: • They may have different MW amounts, start and end times than the original FTR • However, an FTR cannot be reconfigured into FTRs with a larger MW value, earlier start time, later end time, or different path • FTR MW values can be split in 0.1 MW increments • Deadline for all FTR trades for the Operating Day is the end of the previous Operating Day • Once per day, updated FTR information reflecting the previous day’s trades is sent from the eFTR database to ISO NE’s settlement systems

21. Section 5 - FTRs & Mkt Settlements • Transmission Congestion Credit Target Allocations • Transmission Congestion Credit Calculation • Excess Transmission Congestion Revenues Distribution

22. Tsm Congestion Credit Target Allocations • Monthly Transmission Congestion Credit Target Allocations calculated with Hourly Positive and Negative FTR Target allocations summed separately for each FTR Holder • Positive FTR Target Allocations are compensated as Transmission Congestion Credits • Negative FTR Target Allocations are added to the Congestion Revenue for the month; FTR Holder is charged this amount • Congestion Revenue available for a month is equal to: • Total Congestion Charges collected in the month, plus • FTR Negative Target Allocations for the month, plus • Any Congestion Revenue Excess from previous month

23. Transmission Congestion Credits • The ISO compares the total of all monthly Positive FTR Target Allocations to the total Transmission Congestion Revenues Available • If total Positive FTR Target Allocation is <= Transmission Congestion Revenue, • FTR Holders receive Tsm Congestion Credit equal to Positive FTR Target Allocation • If total Positive FTR Target Allocation is > Tsm Congestion Revenue, • FTR Holders receive shares of the Monthly Tsm Congestion revenues in proportion to their Positive Target Allocations

24. Excess Tsm Congestion Revenues • If there is any Excess Transmission Congestion Revenue remaining at year end, then: • Stage One: Excess Transmission Congestion Revenue allocated in proportion to, but not greater than, any unpaid monthly Transmission Congestion Credit Target Allocations • Stage Two: Any remaining Transmission Congestion Revenue is distributed pro-rata to entities who paid Transmission Congestion Charges in that calendar year

25. Section 6 – FTR Auction Example • Overview of and Introduction to Example • Five-Bus Power System Model and System Participant Profiles • Annual FTR Auction Example • Monthly FTR Auction Example • Constrained Day-Ahead Energy Market Dispatch Example • Settlement of FTRs in Day-Ahead Energy Market

26. Section 7- FTR Auction Revenue Settlement • Overview • ARR Definition and Eligible Entities • ARR Allocation • ARR Valuation and Auction Settlement Timeline • Transmission Customer and Congestion Paying Entities Actions • ISO Actions

27. Overview • FTR Auction revenues are distributed to: • Sellers of FTRs in the Auction • Certain entities paying for new transmission upgrades (holders of Incremental ARRs) • Entities that pay Congestion Charges (get ARRs) • ARRs are allocated in a four-stage process • Based on load share of all generation and tie sources w/in capability of the transmission system • Special recognition for Incremental ARRs, Excepted Transaction & NEMA Contracts

28. ARR Definition & Eligible Entities • ARRs represent shares of revenues generated by sale of FTRs in a specific auction and are characterized by: • an injection Node/External Node • a withdrawal Location • a MW quantity • Allocated to entities exposed to paying the cost of congestion in NEPOOL: • Transmission Customers • Congestion Paying Entities • Parties to Excepted Transactions, NEMA Contracts

29. ARR Allocation • Stage 1 - ARRs (MW) are initially assigned based on • Excepted Transactions • Load ratio share of NEPOOL generators and tie sources • Incremental ARRs awarded for new transmission upgrades • Stage 2 - Remove negative valued ARRs, run SFT • Initially assigned ARRs having negative values in associated FTR Auction are eliminated • Remaining ARRs are subjected to a SFT (Incremental ARRs are not adjusted) • Non-NEMA ARRs at the end of Stage 2 are not modified • Stage 3 & 4 reallocate revenues to NEMA LSEs • based on NEMA Contracts & NEMA Monthly Peak Loads

30. ARR Valuation & Settlement Timeline • ARR valuation: based on market clearing prices in the corresponding FTR Auction • Timeline: Allocations are determined and settled on a monthly basis • Monthly Auctions: in second month following the auction, using data for the month in which the auctioned FTRs are effective • Auction revenues are collected and distributed concurrently with that second month’s settlement • Six-Month/Annual Auctions: as for the monthly auctions, in monthly increments (for each year of annual auctions)

31. FTR Auction & ARR Timeline

32. Required Actions • Transmission Customers and Congestion Paying Entities MAY, where applicable: • request ARR allocation for eligible Excepted Transactions • would have requested allocation for eligible NEMA Contracts (Oct 1, 2000) • provide updated information for “all requirements” NEMA Contracts

33. ISO Actions • The ISO performs the following actions: • receive, validate and monitor NEMA Contracts • respond to requests for ARR allocations associated with Excepted Transactions • select and validate network model and data inputs appropriate for related auction period • conduct ARR allocation • settle the FTR Auction • distribute FTR Auction Revenues to ARR Holders

34. Section 8 - Incremental ARRs • Schedule 15 provides few specifics • In keeping with SMD, looked to PJM while respecting differences in OATTs • Design principles: • Conform to NEPOOL OATT and existing processes governing transmission upgrades • Fairly measure incremental value of upgrade • Offer choices to customers • Provide enduring results • Correlate with related PJM practices

35. Section 8 - Incremental ARRs • IncARRs and Eligibility for Awards • Early Estimate of IncARRs • IncARR Awards • IncARR Business Rules • Actions: who does what

36. IncARRs, Eligibility, Early Estimates • IncARRs and Eligibility for Awards • Awarded for new transmission upgrades that make additional FTRs possible • Upgrades paid by RNS rate do not qualify • Share costs, share IncARRs proportionately • IncARRs continue with cost support/upgrade life • In MW, unidirectional, from Location/to Location • A claim on auction revenue, not an FTR • Early Estimate of IncARRs • Non-binding estimate to become available as part of Facility Study (on up to 3 Location pairs)

37. Incremental ARR Awards • Awarded sequentially [by in-service date] • Application initiates multi-round allocation process specific to each upgrade • Use FTR Auction and ARR allocation software with on-peak network model • Awards applied to both on and off peak auction revenue settlements • When cost responsibility is shared, lead customer requests and accepts IncARRs

38. Incremental ARR Awards (Continued) • Requests • Completed application requires information to properly model the upgrade in the ISO EMS Network Model • Requests submitted from point-to-point (from/to Locations) • Evaluation/Award • ISO establishes base conditions (without upgrades) • Upgrades added, IncARRs corresponding to request are determined and offered to customer • Customer accepts in full, in part, or rejects • Repeat request/evaluation cycle with accepted IncARRs modeled as pre-existing in subsequent rounds • Up to three rounds

39. Incremental ARR Business Rules • ISO interacts with only one customer when accepting applications, evaluating requests and offering resulting IncARRs • IncARRs offered become binding unless ISO receives alternative request within 6 business days • IncARR awards continue as long as upgrade costs are supported or for life of upgrade • IncARRs are not subject to reduction in ARR allocation

40. Actions • Actions: who does what: Bidder/Holder ISO Submit applications Receive/respond Submit requests Evaluate requests Offer IncARR awards Accept awards Post IncARR awards Maintain record of IncARRs

41. Section 9 – ARR Example • This section of M-06 is currently under development

42. Questions?