O C T O B E R 7 - 8 , 2 0 1 4 | N E P O O L M A R K E T S C O M M I T T E E

Matt BrewsterM A R K E T D E V E L O P M E N T

4 1 3 . 5 4 0 . 4 5 4 7 | M B R E W S T E R @ I S O - N E . C O M

Design changes for FCA10 to implement capacity zone demand curves

FCM Sloped Demand Curve:Conforming changes for FCA10

Design changes for FCA10 (and beyond) to implement capacity zone demand curves

• Includes conforming design changes necessary to implement capacity zone demand curves

• Changes to become effective beginning with FCA10– Rules for conduct of the FCA slide 3– Eliminating zonal administrative pricing rules slide 7

• Overview of tariff redlines slide 12

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FORWARD CAPACITY AUCTIONConforming changes to FCA starting price and descending clock auction (DCA)

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FCA starting price for capacity zones

• An import-constrained capacity zone may have a separate Net CONE if estimated to be ≥ 115% of system Net CONE – Current estimates are < 105% in CT, NEMA/Boston, SEMA/RI

• FCA starting price for a zone with separate Net CONE would be the zone’s demand curve “cap” price– e.g., MAX ( 1.6 x zone Net CONE, zone Gross CONE )

• Separate DCA rounds may be conducted for capacity zones with a unique FCA starting price

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FCA starting price for capacity zones (cont.)

• New capacity zones may be identified in year prior to FCA (§III.12.3)– Net CONE study will evaluate potential cost differences across region– If a new import-constrained capacity zone were formed, estimated costs for

subarea would be used to determine zone’s Net CONE– New zone Net CONE filed for instant FCA if ≥115% of system Net CONE

• April 28th Order accepting Capacity Zones process asked if local Net CONE estimate should be determinant of capacity zones (ER12-953, P 43) – ISO recommends Net CONE not be a factor in determining zones– Zones based on transmission studies (current process) identify areas with

need for additional supply, based on low capacity levels, and then model the zone in the FCM to establish needed price signals

– Zones based on expectation of higher cost of supply would inefficiently support costly resources when transmission limits don’t prevent more cost-effective resources outside the area from serving local requirements

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Revise DCA application of LSR and MCL

• DCA round closing conditions– Capacity zone closing conditions evaluate whether zone supply is less

than or equal to quantity of demand specified by the capacity zone demand curve (rather than ≤ LSR, or ≤ MCL)

– System-Wide Demand Curve is adjusted for purposes of evaluating system excess supply in auction rounds after an import-constrained zone has closed (FCA won’t purchase extra supply outside zone to cover unmet demand)

• Update references to LSR and MCL, as appropriate, where capacity quantities are determined by zone demand curves

ADMINISTRATIVE PRICING RULESElimination of capacity zone administrative pricing

Capacity zone administrative pricing rules

• Remove remaining administrative pricing rules applicable to capacity zones: – Inadequate Supply (IS), – Insufficient Competition (IC), and– the Capacity Carry Forward Rule

• System IS and IC rules were removed with implementation of the system-wide demand curve for FCA9

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Remove Inadequate Supply and Insufficient Competition pricing rules

• Administrative provisions were intended to mitigate supplier market power

• Sloped demand curves dampen price volatility and mitigate the exercise of market power by adjusting demand to price

• Administrative triggers and pre-defined prices will not necessarily track with market fundamentals

Remove Capacity Carry Forward Rule

• Originally implemented to prevent price suppression in subsequent auction after clearing excess capacity with a non-rationable (lumpy) resource needed to meet zone requirement– Excess may negate need for new entry in next year

• Zone and system demand curves more effectively limit the magnitude of price suppression– Non-zero demand value at levels above LSR in import zones– Import zone price not less than rest-of-pool (based on system curve)

• Demand curves decrease the likelihood of clearing excess MW– Example on next slide– When the auction must purchase 100% of LSR (vertical demand) a 300MW

resource may be accepted to satisfy 1MW need– With sloped demand curves, the auction evaluates the relative gain or loss of

clearing excess MW to satisfy demand and may not accept excess MW– Sloped demand curves will decrease excess MW which will further limit price

suppressing effect of lumpy resources

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Capacity Carry Forward Rule Example:

Sloped demand curves decrease the likelihood of clearing excess MW• Single capacity zone sloped demand curve,

and two ‘lumpy’ priced offers [A] and [B]

• Not possible to clear at exact intersection ofsupply and demand (due to lumpy offers)- Lumpy offers must clear all or nothing

• Auction maximizes social surplus; optimum will be achieved by either:

Alternative (1) is to clear the lumpy marginaloffer [B]. Yields a lower price [P1] and more capacity [Q1]. Surplus loss of clearing [B] is caused by excess MW procured at price above demand (represented by red triangle)

Alternative (2) is to not clear offer [B]. Yields a higher price [P2] and less cleared capacity [Q2]. Surplus loss of not clearing [B] is caused by foregoing capacity offered at prices below demand price (represented by green triangle)

• Offer [B] clears if the green triangle is larger than the red triangle

Alternative 2[P2, Q2]

Alternative 1[P1, Q1]

TARIFF REDLINESOverview of tariff revisions for capacity zone demand curves

Overview of tariff revisions for capacity zone demand curves

The posted tariff revisions include all necessary redlines to implement the ISO’s proposed capacity zone demand curves and conforming changes.

Note: the tariff document also includes the revisions for demand curve related changes to Reconfiguration Auctions and CSO Bilaterals (WMPP #64)

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Topic Slide

Forward Capacity Auction (FCA) #14

Administrative Pricing Rules #15

Related cleanup items #16

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Forward Capacity Auction

Tariff Section(s) Description of Revisions

I.2.2 New defined term “Capacity Zone Demand Curve”

III.13.2.2 Capacity Zone Demand Curves for import-constrained and export-constrained capacity zones

III.13.2.3 Separate auction rounds may be conducted if capacity zones have unique FCA starting price

III.13.2.3.3 i) Replace reference to MCL with export zone demand curve and clarify inclusion of import capacity in the system supply curveii) Replace references to LSR and MCL where capacity quantities are determined by Capacity Zone Demand Curvesiii) Describe how System Wide Demand Curve quantity is adjusted when import-constrained zone price separation occurs

III.13.2.4 Separate CONE and Net CONE values set capacity zone FCA starting price if 115% of the system Net CONE

III.13.2.7.4 Zone LSR constraint no longer applicable for clearing algorithm

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Administrative Pricing Rules

Tariff Section(s) Description of Revisions

III.13.2.5.2.5,III.13.2.5.2.7

Remove reference to application of administrative pricing rules

III.13.2.7.9 Remove Capacity Carry Forward Rule. Not necessary to sunset because settlement provisions were recently updated to define applicable rates for the commitment period that this rule applied.

III.13.2.8 Inadequate Supply and Insufficient Competition rules sunset with CCP10. Provisions preserved in the event either rule is applied in FCA9 and defined rates are necessary for market settlement.

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Related cleanup items

Tariff Section(s) Description of Revisions

I.2.2 Remove alternative pricing relate definitions (APR-1, -2, -3)

III.13.2.5.2.5 Reinstated provision that de-list bids are not rejected solely on basis of Net ICR (inadvertently deleted with system-wide demand curve)

III.13.7.2.1.1 Address inadvertently omitted update of settlement provision related to the FCA clearing price lock-in (extended with system-wide demand curve)

SUMMARY AND SCHEDULERecap and next steps

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Summary and schedule

• Summary– Design changes for FCA10 include rules for conduct of FCA and

removing administrative pricing rules– Proposed tariff revisions have been posted with October MC materials

• Schedule– November – additional discussion (design and tariff) – December – MC vote– January 2015 – filing with FERC