07/31/2007
ISO New England
NEPOOL Participants Committee

2006 ISONE ANNUAL MARKET REPORT
Dr. Hung-po Chao, ISONE’s Director of Market Monitoring, presented the 2006 State of the Market Report. Dr. Chao reported that: 1) the structure of the ISONE-administered markets is now largely complete, and the focus has shifted from design changes to enhancements; 2) the markets supported reliable system operations in 2006; 3) wholesale electricity prices were consistent with expectations; 4) New England’s Demand Response resources provided up to 625 MW of load reduction during the August 2, 2006 record peak load day; 5) the Locational Forward Reserve Markets have provided efficient reserve pricing along with co-optimized energy and real time reserve dispatch and pricing, although the Southwest Connecticut, Connecticut and NEMA/Boston reserve zone targets have not been met; and, 6) New England is progressing toward a complete market structure that will increase investment and improve demand participation. ISONE expects that daily NCPC uplift charges will continue to decline as transmission expansion projects bring more power into import-constrained areas. Although there was active investment in transmission infrastructure in 2006, there was only a 110 MW increase in generation capacity, due primarily to re-ratings of existing resources. However, the anticipated implementation of the Forward Capacity Market has resulted in a “Show of Interest” for the February 2008 FCA of 12,400 MW of new capacity, this includes 2,400 MW of new demand response resources.

FCM STATUS REPORT
Dr. Vamsi Chadalavada, ISONE’s Senior Vice President of Market and System Solutions, presented a status report on efforts to implement the Forward Capacity Market. The FCM project is split into four phases: 1) Phase I - Forward Capacity Auction (FCA); 2) Phase II - Reconfiguration Auctions, Bilateral Contracts and an automated FCM tracking system; 3) Phases III and IV are focused on Real-time systems, Settlement systems and other market features. Phase I, culminating in the conduct of the first FCA in February 2008, is currently on schedule. ISONE has also committed to initiating stakeholder processes in the second half of 2007 to: 1) redesign the Interconnection Queue; 2) improve opportunities for participation by Seasonal Demand Resources; and 3) address how units needed for reliability can be compensated within the FCM.

2007 REGIONAL SYSTEM PLAN UPDATE
Stephen Whitley, ISONE’s Chief Operating Officer, provided an update on the ISONE Regional System Plan (RSP); the RSP provides opportunities for market-based generation, demand-side measures, and merchant transmission resources to address identified reliability needs over a 10-year planning horizon; New England’s Participating Transmission Owners can also make regulated transmission proposals as backstop for regional reliability and market efficiency needs. The Planning Advisory Committee received the initial draft 2007 RSP on July 31, 2007; ISONE will present the 2007 RSP at a public meeting on September 6, 2007.

MARKET AND OPERATIONS REPORT: JUNE-JULY 2007
The New England system peak load of 26,275 MW occurred in hour ending 15:00 on June 27, 2007.
From June 1 through July 15, 2007, natural gas prices fell 13.2% and oil prices rose 5.1%; average RT Hub LMPs fell 1.9% over same the period. July NCPC uplift payments totaled $10.8M; $7.1M of these were due to Local Second Contingency Protection Service ($5.0M in SEMA, $1.5M in CT, $0.6M NEMA, and $23K in WCMA). ISONE is calculating the lowest Operable Capacity Margin, a shortage of 2,850 MW, for the week beginning August 25, 2007. A total of 1,981 Demand Response assets are listed as Ready to Respond with 1,103.8 MW; an additional 92 assets comprising 39.6 MW have been approved but are not yet ready to respond. Four new generation projects have applied for interconnection study since the early July update, representing a total of about 200 MW with projected in-service dates ranging from 2008 through 2011; these include one combined cycle project, one wind project, and two wood-burning biomass projects. In total, 94 generation projects are currently being tracked by ISONE, totaling approximately 12,000 MW. Forward Reserve Market payments of $7.3M in July 2007 were reduced by failure-to-reserve penalties of $427K; there have been no Real-Time Reserve payments through July 15.

FCM: AUCTION RULE REVISIONS – APPROVED
The PC unanimously approved a set of Market Rule 1 revisions pertaining to the implementation of the Forward Capacity Auction. These changes included language that limits to 600 MW the amount of Emergency Generation that may be counted as capacity in the FCA to meet the ICR; if more than 600 MW of the Emergency Generators clear the FCA, their capacity payments would be pro-rated so that, effectively, only 600 MW would be used to meet the ICR. Other changes include: a rule allowing Existing Resources to may obtain multi-year capacity commitments for MWs cleared through Composite Offers with New Resources; a clarification that a second Qualification deposit is not required for offers submitted into the following FCA; an extension of future Existing and New qualification deadlines to avoid overlapping; a requirement that Static and Export De-list bids for a resource must have different prices and must have common rationing election; an option for resource owners to elect rationing at the Bidding Group level; clarifications to the FCA optimization rule; revisions to the reserve margin and loss factors for Demand Resources in FCA; an exemption from the quantity rule for certain de-list bids in the first FCA; a provision for rationing Export bids in the Qualification process in order to fit the available tie capability; a provision that establishes a default bid of 2 X CONE for all Resources once their Financial Assurance is submitted; reallocation of pro-rated MW at the floor price done through bilateral contracts