1. Utility Regulation March 10, 2011 Raj Addepalli Deputy Director, Electric, Office of Electric,Gas and Water New York State Department of Public Service rpa@dps.state.ny.us

2. 2 Utility Regulation Table of Contents 1.Key NY Industry Statistics 2.NYISO Market Products

3. Section I New York: Key Electric Industry Statistics

4. Fuel Mix of Generation Capacity Basis 4

5. Fuel Mix of Generation Energy Basis 5

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8. Wholesale Energy Prices 8

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10. 10 NYCA Load Duration Curve

11. 11 NYCA Price Duration Curve

12. 12 Resource Additions Generation: Over 8,000 MW added since NYISO inception, some “merchant” and some supported by regulated entities and public authorities PeriodAddition (MW) 1985-19902,004 1991-19954,794 1996-2000 303 2000-20108,890* Transmission: Over 1,300 MW added Demand Response: Over 2,000 MW of DSR participating in NYISO SCR program; about 260 MW in EDRP program * Includes approximately 1,300 MW of wind generation

13. Section II NYISO Market Products

14. NYISO Wholesale Market Products Energy – Day-Ahead, Real Time Installed Capacity Ancillary Services –Operating Reserves –Regulation –Blackstart –Voltage Support Transmission Congestion Contracts and Virtuals 14

15. Competitive and Cost Based Products Competitive markets set prices for energy, capacity and some of the ancillary services (operating reserves and regulation) Day-Ahead Energy Market has about 95% of the transactions; the remainder is in Real-Time markets Over half the volume settled in the DAM is scheduled through the bilateral market Cost of Service pricing for Voltage Support and Blackstart services Market Power mitigation measures in place where there is potential for manipulation 15

16. Energy Markets NYISO markets use a uniform clearing price auction approach to set competitive energy prices The Day-Ahead Market is a forward market in which hourly LMPs (Locational Marginal Pricing) are calculated for the next operating day based on generation offers, demand bids and scheduled bilateral transactions. The Real-Time Market is a spot market in which current LMPs are calculated at five-minute intervals based on actual grid operating conditions. Uniform Clearing Price auction creates an incentive for producers to lower their costs and bid competitively. They also provide transparency to the marketplace, as all participants are aware of the value of energy The auction is conducted using sophisticated software that simultaneously determines how to serve the load utilizing generators with the combined lowest total production cost 16

17. Installed Capacity Market The NYISO must ensure that sufficient resources are available to meet projected load on a long-term basis. In order to facilitate this, the NYISO administers a capacity market. This market matches buyers and sellers of capacity using the clearing price methodology There are monthly auctions as well as six-month strip auctions Given the constrained nature of the transmission system, the capacity market has locational features, which reflect system reliability requirements that mandate loads in New York City and Long Island to buy a certain percentage of their capacity from suppliers in those areas 17

18. Ancillary Services The two competitively procured services are reserves and regulation Reserves include spinning and non-spinning; 10 minute and 30 minute reserves NYISO selects generating units with the lowest total production cost to provide energy, reserves, and regulation in order to minimize the cost of serving load Reserves and regulation are typically provided by generators; however the NYISO has opened these markets to include loads (demand-side providers) 18

19. Transmission Congestion Contracts and Virtuals The owner of a TCC is entitled to receive (or obligated to pay) the difference in the LBMP congestion component between the source and sink of the contract TCCs are auctioned competitively and allow purchasers to lock-in a congestion cost payment Virtuals: Participants effectively buy (or sell) power at the day-ahead price and then sell (or buy) it back at the real-time price without having to actually produce or take delivery of the power 19

20. 20 Installed Capacity Market Installed Capacity (ICAP) market construct has been in place since the inception of NYISO Effectively, three markets - - New York City, Long Island, Statewide NYC and LI more constrained with higher HHIs Voluntary forward auction frequencies: summer and winter six-month strips, monthly auctions; mandatory spot auction for the next month; spot prices are determined by the use of demand curve construct Loads have to satisfy their ICAP obligations

21. Installed Capacity Market Developed to ensure that sufficient resources are available to meet projected load on a long-term basis LSE’s are required to purchase an amount of capacity based on their forecasted contribution to it’s transmission district peak load + an additional amount to cover IRM (installed reserve margin) System reliability requirements mandate loads in NYC and Long Island buy a certain percentage of their capacity from suppliers in their own area 21

22. 22 Use of Demand Curve in ICAP Introduced in 2003 Primary goals: –Reduce volatility in ICAP prices and thus provide more certainty in revenue stream to sellers and help attract new entry –Reduce potential for market power of both buyers and sellers –Help keep economic units from retiring prematurely

23. 23 Demand Curve (contd) Three year cycle for updates of the key parameters First cycle: June 2003- April 2005; 2 nd cycle: May 2005- April 2008; 3 rd cycle: May 2008- April 2011; currently working on 4 th cycle: May 2011-April 2014 Cost of new entry, energy and ancillary service offsets, slope of the curve key variables of debate NYISO Market Monitor to file periodic compliance reports to FERC on how DC is working

24. 24 Market Power Given the slope of the Demand Curve, there could an incentive for some of the generators to withhold some capacity and still be better off financially with the resulting higher market price although they sell less quantity This results in an outcome that is not as competitive as it could be FERC imposed market power mitigation rules on all sellers to address this issue; at the same time, FERC imposed buyer market power rules as well

25. 25 Other Current ICAP Issues Buyer-Side market power Role of Forward Capacity Markets for Resource Adequacy purpose Additional Locational ICAP Requirements