1. CMSC Rules Changes under Consideration Market Operations Standing Committee December 3, 2003 PUBLIC

2. Proposed Rule Amendments and Issues Background Facility induced CMSC Reference price for hydroelectric facilities Negative price offers for imports Constrained off imports / exports & scheduling protocols CMSC for constrained off exports

3. Background Longstanding MSP concern about constrained-off payments –Consultation began with discussion paper, in February 2003 –MSP report presented to IMO Board on July 3 –One conclusion and six recommendations Urgent rule for uncontested exports interties –questions about the beneifts to the market from constrained off export CMSC

4. Summary of MSP Recommendations Conclusion: not to pursue removal of constrained off payments at this time Recommendations requiring rule changes: No constrained-off CMSC for generators or loads where it is self-induced Redefine Hydroelectric historical reference price No constrained-off CMSC for negative offers Imports that cannot be scheduled should be removed from stack so they do not receive CMSC payments. Recommendations for working groups: to look at the Niagara 25 Hz sub-system to look at transmission planning issues in Ontario

5. Endorsements from Board The IMO Board endorsed the recommendations authorized IMO to take actions necessary to implement them. At the same time Board approved an Urgent Rule amendment related to negative offer prices for generators Other rules have come to the Technical Panel proposed changes being sent to December Board Working groups under way

6. “Self-Induced” (Facility Induced) Would apply in 4 generic situations, where CMSC is induced by: –dispatch deviations* –inaccurate telemetry –quoted ramp rates for dispatchable load below dispatch threshold* –facility operational constraints lead to limit on dispatch * Initially proposing only rules for dispatchable load –Because of complexity associated with generators –will need further stakeholdering

7. 1 234 5 6 78 9 10 11 Scheduled or Actual Production (MW) 20 MW 29 MW 50 MW Market Schedule Dispatch Actual CMSC Payment Dispatch Deviations Can Lead to CMSC Interval

8. 1 234 5 6 78 9 10 11 Scheduled or Actual Production (MW) 72 MW 70 MW 100 MW Market Schedule Dispatch Actual CMSC Payment Low Ramp Rate Can Lead to CMSC Interval Filter off for 1 interval

9. CMSC Mitigation for hydro Existing price screens do not reflect market conditions and opportunity cost as closely as they might. –Hydro price screens should be 30-days (rather than 90 days). Historical price should be replaced by weighted MCP. Effect will be to broaden safe harbour for constrained on and narrow it for constrained off payments. No hydroelectric screen is perfect. This is better –actual conditions will be discussed with participant

10. Hydroelectric Reference Price Price Market Schedule 0 MCP Offer Price Contributes to current HRP Contributes to proposed HRP

11. Negative Price Offers for Imports Issue: –Potentially large CMSC without efficiency rationale If 50 MW constrained off at -$2000 offer & zonal price $100 CMSC = [50 * (100 -(-$2000))] = $105,000 per hour. Compared with energy payment if scheduled Energy Payment = 50 * $100 = $5000 per hour Rationale for Recommendation: –If payment of zonal price is sufficient for producing energy, it should be sufficient for not producing. Large negative prices are not indicative of costs incurred

12. Negative Price Offers - Proposal Proposed rule to limit CMSC payments to imports –when offer prices are below zero. CMSC calculated assuming a lower price limit –limit is zero $/MWh unless zonal price is less than zero, then limit is zonal price –for fairness / symmetry, applies to positive and negative CMSC, constrained on and constrained off situations Interim application: after-the-fact adjustment –for subset: positive CMSC, > 1 MW constrained off Can monitor if future conditions change if reduced CMSC does not cover constrained off costs

13. Negative Price Offers - Examples Price $/MWh 0 Zonal Price Offer Price Proposed CMSC Applied Limit Case 1: Zonal Price > 0 Generic Case: Import Constrained off from 50 MW (MS) to 0 MW Proposed CMSC not paid

14. Negative Price Offers - Examples Zonal Price Zonal Price = Applied limit Proposed CMSC = $0 Generic Case: Import Constrained off from 50 MW (MS) to 0 MW Price $/MWh Case 2 0 Case 2: Zonal Price < 0 Applied Limit CMSC not paid

15. Negative Price Offers - Examples Generic Case: Import Constrained off from 50 MW (MS) to 0 MW Offer Price CMSC < 0 No Change Potential Limit, below offer; no change IOG will be positive IOG + CMSC ~ zero Price $/MWh 0 Case 3: Zonal Price < Offer Price < 0

16. Constrained Off Imports / Exports - Current Procedure After 2 hour ahead IMO pre-dispatch –IMO notifies NYISO of successful constrained schedule imports and exports NYISO applies these as upper limits –in their hour ahead market. Going into 1 hour ahead IMO pre-dispatch –IMO applies limit for the constrained run only –allows the unconstrained market schedule to float Could be further adjustments –for failures during checkout or new TLRs

17. Proposed Limits on Schedules Proposed rules to recognize such limits –generic: possible changes with New York or others Planned implementation for New York –CS 1  CS 2 [ CS = constrained predispatch schedule] Same as current procedure 2 hr ahead constrained pre-dispatch is limit on 1 hour ahead –MS 1  max (MS 2, CS 2 ) [ MS = predispatch market schedule] 1 hour ahead unconstrained market schedule is limited –physical limit: 2 hour ahead constrained value –economic limit: 2 hour ahead market schedule ensures CMSC for congestion management of physically feasible schedules

18. Limits on Schedules with NYISO - Examples * Old / New MS 1 Limit relevant when 1 hr Ahead predispatch energy price increases, potentially increasing market schedule

19. Implications of Scheduling Limits Constrained schedules not affected since these are already limited May be no impact on market schedule and CMSC –if either CS 2 or MS 2 = offer limit –if 1 hr ahead energy price  2 hr ahead price Or no negative payment impact for import / export –if offer price > 0 real time zonal price negative CMSC case schedule and CMSC change, but IOG and CMSC offset –similar implication for exports except no IOG, so may be net reduction in negative CMSC

20. 25-Hz Subsystem Inefficiency of 25 Hz subsystem a longstanding issue. Time to resolve it CMSC payments reduce incentive to look for solutions; create theoretical potential for gaming –The IMO should lead a working group including Stelco, Hydro One and OPG to resolve this issue in the best possible fashion. If at the end of six months there is no resolution... the IMO Board... should then consider alternatives, including the possible elimination of both constrained off and constrained on CMSC payments to generation on the Niagara 25 Hz system.

21. Transmission Planning IMO, Hydro One, other transmitters and OEB should work together to develop MOU that –sets out appropriate roles /accountabilities in facilitating transmission planning and approval of projects aimed at enhancing efficiency in a competitive market –identifies any changes to market rules, statutory authorities and resources necessary to allow appropriate planning processes to take place Report to respective Boards by end of December –Followed by market participant comment Can consider outage planning & coordination in this working group, if appropriate

22. Constrained off Export Payments - Background When MR-00243 developed to address uncontested export interties, questions raised: The purpose of constrained off payments to exports; and The benefits of these payments to the IMO administered market in light of the Ontario spot market risk of high CMSC payments where bid prices may be high –whether based on high replacement costs or “strategic bid”

23. Initial View Ontario benefits from exports –pay a component of transmission costs (Tariff) –generators receive additional energy payments But there are issues related to –whether there is similar treatment in other markets –may introduce inefficiencies across markets –local market power mitigation process may not control risks

24. Updated View Traders say the CMSC is only mechanism for hedging export risk –where (financially) committed for replacement costs and there is a risk of scarcity pricing in the other market Could likely lead to reduced exporter activity and liquidity in IMO market both import / export Residual issue –there are circumstances where strategic bid prices lead to CMSC compensation which exceeds the risk in the destination market

25. Options for Residual Issue Status Quo –Accept the implied “over-payment” Cap the payments –either a price limit or limit on number of hours of payment Allow a case by case review –allow exporter to receive / keep CMSC equivalent to risk or cost