Highlights of the 2004 State of the Market Report

New York Electricity Markets

David B. Patton, Ph.D.

Potomac Economics

Independent Market Advisor

May 5, 2005

-2-

Energy and Natural Gas Prices2003 – 2004

$0

$15

$30

$45

$60

$75

$90

J F M A M J J A S O N D J F M A M J J A S O N D

2003 2004

En

ergy

Pri

ces

$/M

Wh

$0

$2

$4

$6

$8

$10

$12

Nat

ura

l Gas

Pri

ces

$/M

MB

tu

East WestNatural Gas

-3-

Average All-In PriceCosts per MWh of Load, 2002 - 2004Average All-In Price

Costs per MWh of Load

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

2002 2003 2004 2002 2003 2004 2002 2003 2004 2002 2003 2004

State* NYC East Up-State West

Region

$/M

Wh

NYISO Operations

NTAC

Uplift

Voltage & Black Start

Regulation

Reserve

Energy

Capacity

*Capacity portion of state price excludes Long Island.

Based on calculations provided by NYISOMarket Monitoring and Performance

-4-

Ratio of Day-Ahead to Real Time Prices 2002-2004Comparison of Day-Ahead and Real-Time Prices

2002 - 2004

80%

90%

100%

110%

120%

West HudsonValley

NYC LongIsland

345 kVSystem

AstoriaEast

Vernon /Greenwd

AstoriaWest

Greenwd/Staten Is.

Zones Within NYC

Rat

io o

f D

A P

rice

/ R

T P

rice

200220032004

-5-

Frequency of Day-ahead Constraints and MitigationNew York City Load Pockets, June to December 2004Frequency of Day-Ahead Constraints and Mitigation

New York City Load Pockets, June to December 2004

0%

10%

20%

30%

40%

50%

60%

70%

80%

StatenIsland

ConEdCable

Into the138 kV system

AstoriaEast

AstWest/Queen

AstWest/Queen/Vernon

Vernon/Greenwd

Greenwd/Staten Is.

Outside the138kV system

Sub-pockets inside the 138kV

Per

cen

tage

of

Inte

rval

s

No RT Mitigation

RT Mitigation Invoked

Intervals possiblywarranting mitigation

-6-

Estimated Net Revenue in the New York Market2002 to 2004

Based on calculations provided by NYISOMarket Monitoring and Performance

Economic Dispatch of Generic Gas-Fired CT and CC Net Revenue Streams

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

2002

2003

2004

2002

2003

2004

2002

2003

2004

2002

2003

2004

2002

2003

2004

2002

2003

2004

LI NYC Capital LI NYC Capital

Combined Cycle Combustion Turbine

$ pe

r In

stal

led

MW

- Y

ear

Ancillary

Energy

Capacity

-7-

Monthly Congestion Expenses 2002 – 2004Monthly Congestion Expenses

2002 - 2004

$0

$20

$40

$60

$80

$100

$120

J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D

2002 2003 2004

Con

gest

ion

($

Mil

lion

s)

Balancing Congestion Costs

Day-Ahead Congestion RentsDA RT

2002 $414 $1112003 $534 $1552004 $470 $159

-8-

Value of Real-Time Congestion on Major Interfaces2002 – 2004

$0

$100

$200

$300

$400

$500

2002 2003 2004 2002 2003 2004

Up-State New York Down-State New York

Mil

lion

s of

Dol

lars

NYC Load Pockets

Dunwoodie-South

Into Long Island

UPNY-ConEd

Capital to Hudson Valley

Central-East

-9-

Day-Ahead Shortfalls and Real-Time Congestion 2002 – 2004Day-Ahead and Real-Time Revenue Shortfalls From Congestion

2002 - 2004

$0

$50

$100

$150

$200

$250

$300

2002 2003 2004

Con

gest

ion

($

Mil

lion

s)

Day-Ahead Revenue Shortfall

Balancing Congestion Costs

Revenue Shortfall2002: $188 Million2003: $280 Million2004: $188 Million

-10-

Day-Ahead and Real-Time Uplift Expenses 2002 – 2004

0

20

40

60

80

100

120

140$

in M

illi

ons

2002 2003 2004 2002 2003 2004 2002 2003 2004

RT Local Reliability Other RT Uplift DAM Uplift

Day-Ahead and Real-Time Uplift Expenses2001 - 2004

Yearly Uplift Expenses2002: $213 Million2003: $203 Million2004: $258 Million

-11-

Real-Time Prices and Interface SchedulesEastern NY and New England

Monthly Price Statistics

-$5

-$3

-$1

$1

$3

$5

$7

$9

$11

$13

$15

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

-$5

-$3

-$1

$1

$3

$5

$7

$9

$11

$13

$15

NY

Pri

ce -

NE

Pri

ce (

$/M

Wh

)

Absolute Average Price Difference

Average Price Difference

-$150

-$100

-$50

$0

$50

$100

$150

-1500 -1000 -500 0 500 1000

Net Exports (MW)

NY

Pri

ce -

NE

Pri

ce (

$/M

Wh

)

Counter-Intuitive Flows

Net ExportsNet Imports

-12-

Expenses for Ancillary Services2002 – 2004Expenses for Various Ancillary Services

2002 - 2004

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Jan

Feb

Mar

Ap

rM

ayJu

ne

July

Au

gSe

ptO

ctN

ovD

ec

Jan

Feb

Mar

Ap

rM

ayJu

nJu

lA

ug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Ap

rM

ayJu

nJu

lA

ug

Sep

Oct

Nov

Dec

2002 2003 2004

(as

a P

erce

ntag

e of

Tot

al M

ark

et E

xpen

ses)

30-Minute Reserves

10-Minute NS Reserves

10-Minute Spinning Reserves

Voltage Support

Regulation

-13-

Areas of Potential Improvement and Recommendations

• In February 2005, the NYISO implemented enhanced real-time commitment and dispatch software (RTS).

The new real-time software runs on a platform used by the day-ahead market, providing opportunities to make the day-ahead and real-time market models more consistent.

It has the capability of scheduling external transactions and committing generation on a 15-minute rather than hourly basis.

The dispatch software (RTD), co-optimizes energy and ancillary services on a 5-minute basis.

We will be evaluating the performance of the markets under RTS following the summer 2005 and recommend in the meantime that NYISO continue to work to implement the full functionality offered by RTS.

• If price convergence within NYC does not improve with the implementation of RTS, we recommend virtual trading be expanded to load pockets or individual nodes.

-14-

Areas of Potential Improvement and Recommendations

• Supplemental commitments through the local reliability pass of SCUC and the SRE process are often required to meet local requirements in New York City, which increases uplift on units in the City.

In the longer-run, the ISO should improve the modeling of local reliability rules and NOx constraints to include them in the initial SCUC commitment.

In the short-run, we continue to recommend that ISO allow operators to pre-commit certain units that are known to be needed prior to the day-ahead market.

• Real-time prices in adjacent regions continued to not be efficiently arbitraged in 2004.

Implementation of the coordination provisions that are under development with New England will address this issue.

Export fees were eliminated between New York and New England in 2005, which should help improve the interchange between markets.