Copyright © 2014 The Brattle Group, Inc.

PREPARED FOR

PREPARED BY

Capacity Demand Curve in ISO-NEResponses to Feb. 27 th Questions and Comments

ISO New England

Samuel A. NewellKathleen SpeesBen Housman

March 6 th , 2014

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Contents

▀ Stakeholder Demand Curves− Comparison of Curves− Performance Summary Table

▀ Responses to Stakeholder Questions and Comments− Customer Cost Impacts− Responses to Wilson Energy Economics Presentation

▀ Appendix: Updated Curves from MA AGO and NU

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Stakeholder Demand CurvesComparison of Curves

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Stakeholder Demand CurvesPerformance Summary Table

Average Standard Deviation

Frequency at Cap

Average LOLE

Average Reserve Margin

Reserve Margin

Standard Deviation

Frequency Below NICR

Frequency Below

Minimum Acceptable

AverageAverage of

Bottom 20%

Average ofTop20%

($/kW-m) ($/kW-m) (% of draws) (%) (%) (%) (% of draws) (% of draws) ($mil) ($mil) ($mil)

Stakeholder Curves

NESCOE Curve $8.3 $2.4 5.6% 0.129 12.2% 2.5% 43.1% 14.5% $3,283 $1,973 $4,542

National Grid Curve (tuned to 1-in-10 LOLE) $8.3 $4.0 4.9% 0.100 13.1% 2.2% 26.6% 5.9% $3,298 $1,781 $5,870

NU Curve (Cap at 1.6x Net CONE) $8.3 $2.5 5.6% 0.095 13.6% 2.5% 26.7% 6.6% $3,327 $2,055 $4,798

NU Curve (Cap at 1.5x Net CONE, right shifted toe) $8.3 $2.3 6.6% 0.100 13.4% 2.6% 30.8% 8.2% $3,319 $2,162 $4,595

Mass. Attorney General 's Office Curve $8.3 $2.5 6.3% 0.100 13.4% 2.5% 29.7% 7.8% $3,316 $2,080 $4,807

MA DPU Curve $8.3 $2.4 14.6% 0.140 11.8% 2.6% 47.9% 16.9% $3,272 $2,043 $4,552

MA DPU Curve (tuned to 1-in-10 LOLE) $8.3 $2.0 6.8% 0.100 13.5% 2.8% 31.2% 7.9% $3,321 $2,310 $4,413

NRG Curve w/ Cap at 2x Net CONE $8.3 $4.5 13.4% 0.060 15.4% 2.1% 7.5% 0.7% $3,379 $1,735 $6,490

NRG Curve w/ Cap at 1.5x Net CONE $8.3 $3.2 24.6% 0.060 15.7% 2.3% 8.7% 1.1% $3,389 $1,747 $5,063

NextERA (Cap at 1.5x Gross CONE) $8.3 $3.9 4.2% 0.095 13.3% 2.1% 25.8% 5.1% $3,313 $1,765 $5,908

Candidate Demand Curves

Initial Candidate Curve $8.3 $3.7 5.1% 0.100 13.1% 2.2% 28.9% 6.1% $3,309 $1,795 $5,703

ISO Recommended Curve (w/ Net CONE = $8.3) $8.3 $3.3 13.8% 0.100 13.2% 2.3% 28.2% 7.0% $3,320 $1,830 $5,297

Price Reliability Price * Quantity

Notes:Average prices do not account for potential reductions in the cost of capital supported by more gradual demand curves; Net CONE is assumed constant.The reported Price * Quantity is the system price multiplied by the system total quantity and does not reflect zonal price differentials.

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Responses to Stakeholder Questions and CommentsCustomer Cost Impacts of Net CONE Error

▀ Administrative Net CONE will affect not only reliability but also customer costs by changing the procured quantity (however, this will not change long-run average price, which will be set by the true Net CONE)

▀ With ISO-NE’s recommended curve, over-estimating Net CONE by 25% would increase customer costs by $32mil/yr; underestimating Net CONE by 25% would reduce costs by $53mil/yr

▀ Flatter curves are more susceptible to errors in net CONE, having greater customer cost increases with over-estimated Net CONE and lower reliability with under-estimated Net CONE

Customer Cost Increase

Customer Cost Decrease

True Net CONE

Administrative Net CONE is Too High Administrative Net CONE is Too Low

UnitsISO

Recommended Curve

SteeperCurve

FlatterCurve

ISO Recommended

Curve

SteeperCurve

FlatterCurve

Administrative Net CONE ($/kW-m) $13.85 $13.85 $13.85 $8.31 $8.31 $8.31

True Net CONE ($/kW-m) $11.08 $11.08 $11.08 $11.08 $11.08 $11.08

Procured Quantity (MW) 33,290 33,312 33,362 33,290 33,312 33,362

Excess (Deficit) Procured Quantity (MW) 239 136 524 (398) (226) (874)

Customer Cost with Accurate Net CONE ($mil/yr) $4,426 $4,429 $4,436 $4,426 $4,429 $4,436

Customer Cost with Over/Under-Estimated Net CONE ($mil/yr) $4,458 $4,447 $4,506 $4,374 $4,399 $4,320

Customer Cost Increase/Decrease ($mil/yr) $32 $18 $70 ($53) ($30) ($116)

Note: Both the flatter and steeper curves are simple, straight-lined curves without a kink to create a slope around NICR that is either flatter or steeper than the recommended curve

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Responses to Stakeholders Response to Wilson Critique

▀ Wilson proposes three modeling changes:1. Reduce assumed shock sizes to 70% (small impact)2. Introduce more supply elasticity (small impact)3. Assume more supply will be procured on a short-term

basis in the reconfiguration auctions (larger impact)

▀ Impacts on LOLE (see right):− Directionally, all three changes would reduce assumed

uncertainties and estimated LOLE (allowing for a left- or down-shifted demand curve)

− Wilson implements these modeling changes in a simplified Monte Carlo analysis that further reduces estimated LOLE

▀ Response:− Revisions 1 and 2 are within a reasonable uncertainty

range, however we opt not to make these changes which are not as tightly grounded in historical evidence as our current approach (see following slide)

− Revision 3 is a speculative change that posits a strong market response that has not been previously observed and does not consider the offsetting impact of load forecast error; we therefore strongly caution against this approach (see following slides)

Modeling Approach

LOLE LOLE Increase

(Decrease)1. Brattle Model 0.100 --

2. Wilson Model Brattle Assumptions

0.090 (0.010)Compared to [1]

3. Wilson ModelR1: 70% shock sizeR2: More supply elasticity

0.086 (0.004)Compared to [2]

4. Wilson ModelR3: Add short-term supply

0.083 (0.007)Compared to [2]

5. Wilson ModelR1: 70% shock sizeR2: More supply elasticityR3: Add short-term supply

0.084 (0.006)Compared to [2]

Estimated LOLE with Initial Candidate Curve

Source: Wilson, slide 12.

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Responses to StakeholdersWilson Revision 1: 70% Shock Sizes ▀ Wilson argued that our supply-demand independence assumption would overstate

shocks, and that future shocks would likely be lower▀ To more fully evaluate this argument, we compared net shocks (supply minus demand)

in All FCAs and compared that to the net shocks in our Monte Carlo modeling ▀ Comparison shows that our approach does not overstate shocks

Supply (Below Cap) minus NICR in Actual FCAs Modeled Distribution of Net Supply Shocks (supply shock – NICR shock)

Note:Total offer quantity sourced from ISO-NE’s website (see FCA Auction Results) while offer quantity below cap was provided directly by ISO-NE. Demand quantity based on NICR for each FCA.

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Responses to StakeholdersWilson Revision 3: Add Short-Term Supply

▀ We view the addition of short-term supply as speculative:− Relies on logical arguments, but no historical evidence that additional, previously unoffered short term

supply will consistently materialize in a short market− A more comprehensive review of PJM data show supply consistently contracting by 6,000 – 9,000 MW

between the base auction and last incremental auction (see below), although these results are only reflective of long-market conditions

− Does not consider the offsetting impact of load forecast error− Biggest modeling impact is to eliminate the most problematic low-reliability extremes from results

Year Auction Price Price Participant Offers Participant Cleared Participant Unleared Offer IncreaseSell Offers Buy Bids Sell Offers Buy Bids Net Sell Offers Buy Bids Above BRA

($/MW-d)($/kW-m) (MW) (MW) (MW) (MW) (MW) (MW) (MW) (MW)

2012/13 BRA $16 $0.50 145,373 n/a 136,144 n/a 136,144 9,230 n/a n/a1st IA $16 $0.50 7,086 9,339 1,689 1,749 (60) 5,397 7,590 (2,144)2nd IA $13 $0.40 6,448 11,560 838 3,215 (2,377) 5,610 8,345 (2,842)3rd IA $3 $0.08 5,569 7,459 2,404 4,383 (1,979) 3,166 3,076 (6,098)

2013/14 BRA $28 $0.84 160,898 n/a 152,743 n/a 152,743 8,155 n/a n/a1st IA $20 $0.61 7,471 16,446 2,387 4,882 (2,495) 5,084 11,564 (684)2nd IA $7 $0.21 6,073 16,386 1,997 5,599 (3,602) 4,076 10,787 (4,577)3rd IA $4 $0.12 5,526 6,372 2,703 3,168 (465) 2,823 3,203 (8,726)

2014/15 BRA $126 $3.83 160,486 n/a 149,975 n/a 149,975 10,511 n/a n/a1st IA $6 $0.17 11,126 13,231 4,240 6,850 (2,610) 6,887 6,381 6152nd IA $25 $0.76 6,039 11,133 2,910 4,476 (1,567) 3,129 6,657 (7,082)

2015/16 BRA $136 $4.14 178,588 n/a 164,561 n/a 164,561 14,027 n/a n/a1st IA $43 $1.31 6,773 21,305 4,172 5,987 (1,816) 2,602 15,317 (7,253)

2016/17 BRA $59 $1.81 184,380 n/a 169,160 n/a 169,160 15,220 n/a n/a

PJM RTO System Wide Clearing Price and QuantityAnnual Resource Prices, Quantities in UCAP MW

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Appendix

▀ Mass AGO Updated Curve▀ Northeast Utilities Updated Curve▀ NextEra Updated Curve

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Updated Stakeholder Curves Mass AGO Updated Curve

Curve ParametersCap Kink Foot

Prices% of Net CONE 1.60x 1.15x 0.00x$/kW-m (w/ Net CONE = $8.3) $13.3 $9.6 $0.0

Corresponding Quantities in FCA7Reserve Margin 9.0% 12.1% 21.5%% of NICR -2.8% 0.0% 8.3%MW 32,053 32,968 35,711

Price * Quantity

Average Standard Deviation

Frequency at Cap

Average LOLE

Average RM

RM St. Dev.

Freq. Below NICR

Frequency Below Min. Acceptable

Average

($/kW-m) ($/kW-m) (% of draws) (%) (%) (%) (% of draws) (% of draws) ($mil/year)

Initial Candidate Curve $8.3 $3.7 5.1% 0.100 13.1% 2.2% 28.9% 6.1% $3,309

Vertical at NICR $8.3 $5.7 28.3% 0.124 11.6% 1.2% 28.3% 6.3% $3,283

Mass. Attorney General's Offi ce Curve $8.3 $2.2 0.4% 0.107 13.1% 2.6% 33.7% 9.0% $3,310

Mass. Attorney General's Offi ce Updated Curve $8.3 $2.5 6.3% 0.100 13.4% 2.5% 29.7% 7.8% $3,316

Price Reliability

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Updated Stakeholder CurvesNortheast Utilities Updated Curve

Curve ParametersCap Foot

Prices% of Net CONE 1.5x 0.0x$/kW-m (w/ Net CONE = $8.3) $12.5 $0.0

Corresponding Quantities in FCA7Reliability Index (1-in-x) 1-in-5 > 1-in 100Reserve Margin 9.0% 22.4%% of NICR -2.8% 9.2%MW 32,053 35,985

Price * Quantity

Average Standard Deviation

Frequency at Cap

Average LOLE

Average RM

RM St. Dev.

Freq. Below NICR

Frequency Below Min. Acceptable

Average

($/kW-m) ($/kW-m) (% of draws) (%) (%) (%) (% of draws) (% of draws) ($mil/year)

Initial Candidate Curve $8.3 $3.7 5.1% 0.100 13.1% 2.2% 28.9% 6.1% $3,309

Vertical at NICR $8.3 $5.7 28.3% 0.124 11.6% 1.2% 28.3% 6.3% $3,283

Northeast Utilities Curve $8.3 $2.4 7.6% 0.107 13.1% 2.6% 33.7% 9.1% $3,309

Northeast Utilities Updated Curve - 1.6x Cap $8.3 $2.5 5.6% 0.095 13.6% 2.5% 26.7% 6.6% $3,327

Northeast Utilities Updated Curve - 1.5x Cap (Right Shifted Toe) $8.3 $2.3 6.6% 0.100 13.4% 2.6% 30.8% 8.2% $3,319

Price Reliability

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Updated Stakeholder CurvesNextEra Updated Curve

Curve ParametersCap Kink 1 Foot

Prices% of Net CONE 2.1x 0.7x 0.0x$/kW-m (w/ Net CONE = $8.3) $17.8 $5.8 $0.0

Corresponding Quantities in FCA7Reliabi lity Index (1-in-x) 1-in-5 1-in-15 1-in-100Reserve Margin 9.0% 14.1% 21.5%% of NICR -2.8% 1.8% 8.3%MW 32,053 33,545 35,711

Price * Quantity

Average Standard Deviation

Frequency at Cap

Average LOLE

Average RM

RM St. Dev.

Freq. Below NICR

Frequency Below Min. Acceptable

Average

($/kW-m) ($/kW-m) (% of draws) (%) (%) (%) (% of draws) (% of draws) ($mil/year)

Initial Candidate Curve $8.3 $3.7 5.1% 0.100 13.1% 2.2% 28.9% 6.1% $3,309

Vertical at NICR $8.3 $5.7 28.3% 0.124 11.6% 1.2% 28.3% 6.3% $3,283

NextEra Curve w/ Cap at 1.5x Gross CONE $8.3 $3.9 4.2% 0.095 13.3% 2.1% 25.8% 5.1% $3,313

Price Reliability