Winter 2013/2014 Reliability Solution Including LNG MWHs N. Jonathan Peress Conservation Law Foundation Greg Lander Skipping Stone NEPOOL Markets & Reliability Committee 1

LNG Is Part of the Solution and Should be Considered LNG was an important reliability resource in 2012/13. An assumption that similar or greater quantities will be available next winter creates unnecessary reliability risk. LNG can be used to buttress gas supplies at multiple delivery points and alleviate performance anxiety/deliverability uncertainty in the control room. LNG is a lower cost resource than fuel oil and will open up ISO’s reliability procurement to many more units; thus enhancing competition among providers. LNG has a lower emissions profile than other fuels and will not raise operational limits due to permit conditions and other environmental regulatory considerations. 2

Design Principles and Mechanics- Mirror ISO-NE Fuel Oil and Dual Fuel Proposals ISO seeks and Generators offer “Reliability Energy” which is defined as a maximum quantity of MWs per hour and MWH’s per Month of Reliability Energy in each month of Dec-Feb –The Reliability Energy is generated through LNG supplies delivered to Tennessee and/or Algonquin at location(s) to the east of any respective west to east constraints on Tennessee or Algonquin. Reliability Energy is offered by month, or for all months and, for a Reliability Unit, ISO-NE may select any or all months for which offered. ISO- NE/Reliability Unit agreement period is “Reliability Period.” ISO-NE will review the Reliability offers and once a Reliability Unit offer is accepted, ISO-NE will: –Pay Monthly Fixed Charge (subject to Penalty Provision(s) below) determined at the end of each month –Determine daily, throughout Reliability Unit’s Reliability Period, whether to utilize the MWHs procured. 3

ISO will review the offers and award the MWH allotment to Reliability Units in its discretion, up to 4.2 million barrels of oil (LNG- equivalent is ~24 Bcf). Resource selection optimized based on selection criteria –Minimize cost –Location –Historical availability and performance –Total capacity of resources Once selected, Reliability Unit will be required to demonstrate as of 12/1/13, contractual option/commitment for LNG supplies for the amount of MWs per hour and MWHs for each month in Reliability Period. 4

If Reliability Unit has a standing offer at the start of its operating day on its primary fuel and switches to LNG with ISO’s approval (or at ISO-NE’s request), the forecaster will substitute the LNG fuel reference cost as the supply offer for the duration of operations that operating day (as per ISO-NE’s dual fuel procurement construct) For hours during which LNG fuel reference costs are reflected in offers or re-offers, Reliability Generator either: –A) re-directs flowing west to east pipeline gas to alternate unit (to the extent Reliability Unit has west to east flowing gas scheduled for delivery),or, –B) provides demonstration that Generator’s nominated west to east pipeline gas was not scheduled by pertinent pipeline. –Note that together “A” & “B” ensure LNG results in incremental, Reliability Energy 5

Offer Price Components Fixed monthly amount based on maximum monthly MWHs committed comprised of: –LNG Supplier “Option Charge” (i.e., fixed cost levied by LNG supplier) –Inventory risk premium (e.g., selling uncalled supply at spot) –Profit for providing this service Each bid will also include the offer price for the Reliability Energy - $/MWH- for the month Note re: risk premium: Unit has a “Take-or-Pay” obligation with LNG Supplier in order to manage its Reliability obligation to ISO-NE. That said, historically, the advance purchase cost of LNG is often more economic than daily quoted market prices of delivered gas. 6

Other Provisions: LNG MWH Reliability Units Follow ISO- NE’s Proposed Procurement Construct Once the MWH allocation has been determined by ISO- NE, it will be published and released to the Resources (Reliability Units(s)). Each Resource (Reliability Unit) must have its agreed upon December inventory on site on December 1, –presents contractual proof to ISO-NE 7

Penalties At the end of each month, penalties will be calculated based on that month’s performance. Resources (Reliability Units (s)) will be entitled to retain payment(s) from the program based on: –Performance during such month, with commitment and dispatch as a baseline –ISO-NE will evaluate, based upon Reliability Unit supplied information it obtained from LNG Supplier and/or pipeline, whether or not contracted LNG supplies delivered to Tennessee and/or Algonquin were used to meet obligations in hours during which LNG fuel reference costs are reflected in offers or re-offers If so, Reliability Unit retains payments If not payments of Fixed Charge in Month proportionately reduced/returned to ISO-NE by Reliability Unit 8

Program Completion On earlier of March 1, 2014 or end of respective contracted Reliability Period, Reliability Unit released from its winter obligations to the program. Note: at no time does ISO-NE take or acquire title to LNG supplies. All Resources (Reliability Units (s)) are still subject to the rules and regulations of the existing market structure before, during, and after the procurement period. 9