April 11, 2008 Electric Restructuring Roundtable 1

The First FCA: Observations & Thoughts

Tom Kaslow

April 11, 2008

April 11, 2008 Electric Restructuring Roundtable 2

Forward Capacity Market Objectives Implement a capacity market with a defined

capacity product.

Provide market signals that encourage new entry where and when needed.

Implement a market that will stabilize and equilibrate around the cost of new entry.

April 11, 2008 Electric Restructuring Roundtable 3

First FCA Observations Significant qualified supply offered into FCA1.

Existing capacity exceeded ICR & LSR requirements.

Auction cleared at the floor, but only one data point.

ISO filing identifies conflicting standards. Installed Capacity Requirement/Local Sourcing

Requirement plan into OP4 Transmission Security Analysis plans to avoid OP4

April 11, 2008 Electric Restructuring Roundtable 4

What might be over the horizon? Will any of the hardwired FCM mechanisms

create problems?

FCA1 FCA2 FCA3

2XCONE $15.00/kw-mo

$12.00 $9.84

CONE $7.50 $6.00 $4.92

Clearing Price $4.50 $3.60

Floor Price $4.50 $3.60 $2.95

One possible scenario for FCA2.

April 11, 2008 Electric Restructuring Roundtable 5

What might be over the horizon? FCM will get what it signals. Will it be what we

need? Could displacement of flexible resources with less

predictable energy sources (intermittent resources) or resources with less access outside of OP4 lead to increased frequency of OP4 events?

Is there a desirable upper bound on OP4?

What are the economic, reliability and environmental considerations of higher OP4 frequency?

April 11, 2008 Electric Restructuring Roundtable 6

Conclusion New England has a lot riding on FCM. Subsequent FCA results will be important. Need to consider acceptability of possible

future outcomes. Frequent OP4. Early sustained surplus might lead to prices

spikes later.