Capacity Market Zones and Related MR1 and Tariff Changes

1. Capacity Market Zones and Related MR1 and Tariff Changes Pete Fuller NEPOOL Markets Committee/Reliability Committee/Transmission Committee December, 2013

2. Today’s Discussion • Proposal for complying with FERC Orders to ‘model all zones all the time’ • Proposed changes to: • Attachment K, Sec 3.1 (TC) • MR1, Section 12 (RC) • MR1, Section 13.5.1 (MC)

3. Qualifier • As currently structured and administered, FCM is deeply flawed: • Mitigation policies should provide the marginal existing resource a reasonable opportunity to recover all of its annual fixed costs • A demand curve that recognizes the incremental value of additional capacity is essential, especially in the absence of a supply curve based on long-run costs • Reliability reviews of existing resource offers (delist bids) should be eliminated; all constraints that are to be enforced through planning or operability criteria should be specified in the auction requirements

4. FERC Proceedings on Capacity Zones • In the April 13, 2011 Order on Paper Hearing, FERC approved: • “ISO-NE’s proposal to use the eight energy load zones as initial capacity zones. …we see no reason to further delay the modeling of all zones all the time.” (P.272) • “ISO-NE’s proposal to develop any future zones through ISO-NE’s system planning stakeholder process.” (P.283) • “ISO-NE’s proposal to allow static and dynamic de-list bids from all resources to establish zonal prices.” (P.290) • “ISO-NE’s approach of reviewing … rejected de-list bids in the zonal development process for subsequent FCAs to determine if additional zones are needed” (P.292) • “changes to the clearing mechanism used in ISO-NE’s descending clock auction structure [similar to a locational marginal pricing (LMP) clearing mechanism … recognizing bi-directional and mesh network constraints]” (P.293, 297)

5. In the 1/19/12 Order on Rehearing, FERC approved and affirmed: • “we maintain that ISO-NE’s proposal to model all zones all the time is appropriate” (P.107) • “We are … not persuaded by arguments that modeling zones is inappropriate in instances in which small zones may develop in highly congested urban and suburban areas.” (P.108) • With respect to the treatment of rejected delist bids, “[t]he better solution is to establish more zones. While ISO-NE has stated that it would be burdensome to model additional zones in the current auction in which a de-list bid is rejected, ISO-NE has indicated that it is amenable to developing additional zones for subsequent FCAs.” (P.109)

6. In the 2/12/13 Order on the Compliance Filing, FERC found: • “We deny ISO-NE’s request to waive the Commission’s prior directive that ISO-NE model eight zones for FCA 8” (P.117) • “this does not preclude ISO-NE from making an additional filing providing adequate support for the modeling of fewer than eight zones in FCA 8” (P.117) • “We recognize that the reduction in constraints to which Mr. Rourke refers may justify future zonal modeling with fewer than eight zones. Alternatively, binding constraints and local reliability problems that prove intractable, or that are not present now but arise in the future, may dictate an even larger number of zones.” (P.122)

7. Summing it all up in the 5/31/13 Order, the FERC noted: • “As relevant here, the FCM design incorporates locational pricing, in which capacity zones are modeled in order to permit zonal price separation when binding constraints arise.” (P.3) • “The Commission remains concerned, however, that despite having addressed zonal issues since 2010, ISO-NE has not developed an adequate process for determining the appropriate number of, and boundaries of, capacity zones in the New England region over time as conditions change.” (P.35) • “we will require ISO-NE to consider during that process: (1) the appropriate level of zonal modeling going forward; (2) the appropriate rules to govern intra- and inter-zonal transactions; and (3) whether objective criteria by which zones may automatically be created in response to rejected delist bids, generation retirements or other changes in system conditions would be appropriate in New England, or if not, why not.” (P.35)

8. Comparison 1) “The appropriate level of zonal modeling going forward” 2) “appropriate rules to govern intra- and inter-zonal transactions”

9. Comparison 3) “Automatic creation of zones in response to rejected delist bids, retirements or other changes”

10. Roadmap • The key purpose of modeling zones is to reflect binding constraints ‘when they arise’ • The constraints must all be modeled in order to show up as binding within an auction • The goal of defining capacity zones should be to identify the interfaces that might bind if the generation/DR mix changes • SEMA is a case in point. Recently, ISO was suggesting SEMA as export-constrained. A large retirement can change everything. • Bilateral trading of capacity lowers suppliers’ risk, leading to lower overall costs in the market • Reconfiguration auctions would continue to be available after the bilateral trading period

11. NRG Proposal • Zones for FCA9: • Model eight load zone interfaces, plus any others developed through the planning process, ‘all the time’ • Designate zones as import or export based on the balance of existing resources vs. TSA, including all delists/retirements (or MCL, including new resources likely to qualify) • Zones for FCA10 and beyond: • Refresh the list of interfaces through the planning process • Model all zones all the time • As soon as possible, revise the auction to handle bi-directional and mesh network constraints • Capacity Bilaterals: • Along with modeling all zones all the time, eliminate restriction on bilateral trades between zones (III.13.5.1(f)) • Add ‘Capacity Zone interface limits’ to criteria ISO must honor in their reliability review of capacity bilaterals

12. Proposed Tariff Language • Accompanying tariff language for: • Attachment K, Section 3.1 • Market Rule 1, Section 12.4 and new Section 12.4A • Market Rule 1, Section 13.5.1 and Section 13.5.1.1.3

13. Comments and suggestions are welcome prior to the Committee votes. Thanks for your consideration.