APRIL 9-10, 2013

Mario DePillis and Bob LauritaINTERNAL MARKET MONITORING

Establishing Reference Levels under Intra-Day and Hourly Offers

Background (Current Process)

• The IMM uses independently calculated price indices, such as the Intercontinental Exchange’s (ICE) Next-Day gas price, in calculating generator Reference Levels.

• Participants can consult with the IMM and request their Reference Level be calculated based on a fuel price that is different than the index fuel price.

• Participants have 2 opportunities per day to consult with the IMM prior to submitting a Supply Offer:– At least one-hour prior to the close of the Day-Ahead Energy

Market offer deadline and– At least one-hour prior to the close of the Re-Offer Period

• Consultation is a manual process. Communication between the IMM and Participants is through e-mail and telephone.

Intra-Day Offers

• Participants will have up to 26 opportunities per day to submit Supply Offers:– Day-Ahead Energy Market– Reoffer Period– Up to 24 hourly offer periods

• Some Participants may want to consult with the IMM regarding their expected fuel costs and Reference Levels prior to submitting a Supply Offer.

• The IMM’s consultation process needs to be adapted to work with the new intra-day offer design and the increased frequency of Supply Offer submittals.

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Objectives

• The IMM consultation process should allow Participants additional flexibility to reflect expected fuel costs in their Supply Offers.

• On the other hand, the IMM consultation process should not enable Participants to avoid mitigation and exercise market power.

• The IMM’s consultation process must balance these two objectives.

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IMM Proposal Additional Supplier Flexibility

• Participant Requested Fuel Price:– Prior to the Supply Offer deadline for any market (i.e., Day-Ahead,

Reoffer and Hourly), a Participant may enter a fuel price for the IMM to use in calculating the Resource’s reference level if the Participant believes its actual fuel costs will exceed the IMM’s index-based fuel price by a large enough margin to put the Resource at risk of inappropriate mitigation. • The requested fuel price must be exclusive of Resource specific fuel

transportation costs or LDC tariff charges.– Why? The IMM already accounts for LDC and similar charges in its Reference

Level calculations• The requested fuel price must be greater than the fuel price index by the

lesser of 10% or $2.50/MMBtu.– Why? Current mitigation thresholds already account for small fuel price

changes. – $2.50/MMBTu addresses condition of high heat rate, high fuel cost units that

will trip the $25/MWh threshold before reaching the 10% threshold

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IMM ProposalAdditional Supplier Flexibility

• eMarket Interface– Participants can enter their requested fuel price through an interface

in eMarket at any time.

• Consultation on Market Conditions– Participants can consult with the IMM, during normal business hours,

regarding system and market conditions impacting fuel costs and price uncertainty.

• Additional Cost Recovery– If the IMM calculates a unit’s Reference Level using a fuel cost lower

than the Participant’s Requested Fuel Price and the unit is mitigated, the Participant can request additional cost recovery (consistent with its Supply Offer) from the Commission pursuant to Section III.A.15 of the Market Rule.

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IMM ProposalAvoiding Mitigation and the Exercise of Market Power

• Price Risk and Uncertainty:– The IMM will establish a “price uncertainty” factor for each Index Fuel

Price.– The IMM will update the factor prior to or within the operating day based

on system and market conditions, which may be indicated by one or more of the following: • Consultation with Participants on market conditions• Information from fuel suppliers and fuel transportation providers• Constraints and outages on the fuel transportation systems• Traded fuel prices and volumes• Possibility of short-notice gas purchase• Current and forecasted non-generation fuel demands• Current and forecasted weather conditions• Fuel system capacities and reserves

– The factor will be used to evaluate reference levels for resources that submit a requested fuel price.

– The factor will be updated as frequently as hourly.– Participants will know the index fuel price plus the factor applicable to

their Resource in the eMarket interface at the time Supply Offers are submitted.

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IMM ProposalAvoiding Mitigation and the Exercise of Market Power

• Reference Prices– If a Participant believes their expected fuel costs will be less than or

equal to the Index Fuel Price, there is no need to enter a fuel price requested price and their unit’s Reference Level will be calculated based on the index fuel price.

– If a Participant believes their expected fuel costs will exceed the index fuel price, the Participant can enter a fuel price and their unit’s Reference Level will be calculated based on the minimum of the fuel price or index fuel price plus the “price uncertainty” factor at the time.

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Examples

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IMM ProposalAvoiding Mitigation and the Exercise of Market Power

• The IMM will use two tests to review Requested Fuel Prices.

• The review will take place ex post and not impact mitigation decisions.

• Test 1: Supply Offer Consistency– The implied fuel cost of the Participant’s Supply Offer should not

differ from the Requested Fuel Price by more than 10%.

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IMM ProposalAvoiding Mitigation and the Exercise of Market Power

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IMM ProposalAvoiding Mitigation and the Exercise of Market Power

• Consequences

– If a Participant fails either Test 1 or Test 2 twice in a rolling 12 month period, the Participant will be prohibited from submitting Requested Fuel Prices for that Resource for a period of six (6) months.

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Examples (Continued)

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