ICAP in NEPOOL Overview

1
ICAP in NEPOOL - Overview

• Load Serving Entities (LSE) required to cover
  monthly ICAP based on its proportion of load
• Generators have Summer (May-Sept) and Winter
  ratings
• If LSE does not meet requirement in a month,
  deficiency charge imposed
• Deficiency charges split among participants with
  uncontracted capacity
• Generators who didnt sell everything
• LSEs who overbought

2
ICAP Demand

• NEPOOL establishes annual Objective Capability
  Reqmt (OCR) for the entire system
• Roughly 15 above weather normalized summer peak
• LSEs have a known obligation going into the month
• By the 15th of the month, an LSEs ICAP
  requirement is determined for the obligation
  months (next month) based on the prior months
  contracts adjusted for load shifting known
  contract changes
• LSEs obligation is determined by its share of
  NEPOOL load times the annual OCR EXAMPLE Annual
  OCR is 25000MW
• LSE load in May is 2000MW, NEPOOL is 20000MW
  May ICAP requirement is 2500MW
• LSE load in May is 2000MW, NEPOOL is 16000MW -
  May ICAP requirement is 3125MW

3
ICAP Supply

• Generator rating established by test
• Adjusted for season
• Summer rating - 90F capability
• Winter rating 20F capability
• No availability adjustment until 150 days of
  outage
• Can supply during planned outages
• Planned outages must be approved by ISO

4
ICAP Pricing

• Bilateral market trading .60-.90/kWm
• LSEs generators are incented to participate in
  market
• Example LSEs Short 350MW ICAP, Generators Long
  5000MW ICAP. LSEs Pay 4.87/kWm (4.87x350x1000)
  or 1.7M, but Generators Get 0.34/kWm
  (1700/5000) or 1.7M
• Both LSEs Generators are better off
  participating in the market
• Deficiency charge provides market of last resort

5
Proposed Refinements

• Verifiable interruptible dispatchable load
  should be excluded from LSE obligations as well
  as OCR (numerator denominator)
• Deficiency rate for ICAP model should contain an
  automatic deficiency charge that provides
  incentive for LSEs to obtain required capacity
• NEPOOL deficiency charge was negotiated. ISO-NE
  concerned it may not be high enough based on
  recent studies and will be re-examining charge in
  near future.
• Provides a market of last resort
• Deficiency rate / formula should be a known
  quantity

6
ICAP Meets Principles of Generation Adequacy in
ERCOT

• Provides long term horizon (greater than 2 years)
• Provides a market based price signal
• Generates market based solution
• Equitable to all participants
• Includes mechanism to verify capacity
• Allows for adjustment for verifiable
  interruptible dispatchable load
• Provides an automatic deficiency charge for not
  acquiring required obligations
• Provides opportunity for self-provision and
  self-arrangement

7
Regulatory Legal Intervention Source of Market
Criticisms

• Some regulators did not support hedging by LSEs
• LSEs go short - exposed to deficiency charge
• Active bilateral market is slow to develop
• Market Clearing Mechanism Starts April, 1998
• Basically never cleared above 0/kWm until
  January 2000
• January 2000 gt 10,000/MW MCP ISO disallowed
  and ICAP Market (not requirement) cancelled
• Regulatory and legal challenges cause market
  confusion price fluctuation (8/2000 6/2001)

8
Regulatory Legal Intervention Source of Market
Criticism (Continued)

• Bilateral Markets trade 1-4(peaks)/kWm
  (1999-2000)
• Market clearing mechanism clears gt 10,000
  (1/2000)
• ISO filed to terminate market - FERC rejected and
  asked ISO to file deficiency charge
• LSEs press ISO into filing .17/kWm deficiency
  charge and canceling ICAP Market generators
  appeal to FERC (8/2000)
• Dropped to 1.00-2.00/kWm or stopped trading
• FERC re-imposed 8.75/kWm retrospectively LSEs
  appeal to Federal Court (3/2001) - courts issued
  stay and set rate back to .17/kWm
• Traded up to 3.00/kWm
• Dropped to 1.50-2.00/kWm when appeal hearing
  granted
• Participantes subject to deficiency unsure of
  exposure
• Federal Court lets FERC ruling stand
  prospectively (6/8/2001)
• FERC ordered further negotiations that resulted
  in 4.87/kWm rate

9
Summary

• ICAP can meet generation adequacy objectives in
  ERCOT
• Regulators need to support hedging activities by
  LSEs to ensure development of a stable bilateral
  market
• Clear unflawed market design principles and
  limited regulatory intervention can avoid
  problems experienced in NEPOOL