Massachusetts Electric Restructuring Roundtable

1
Massachusetts Electric Restructuring Roundtable

• October 24, 2003
• Gordon van Welie
• President and CEO
• ISO New England Inc.

2
Building Blocks The New England Wholesale
Market Story

• Evolution from NEPOOL - tight power pool
• Single, region-wide reliability and economic
  dispatch since 1971
• Open-Access Transmission Tariff in place 1997
• Creation of ISO New England
• High level of divestiture
• Highly diverse marketplace
• Wholesale market opened May 1999

3
FERC Initiatives for Competitive Markets

• 1996 Order 888 Open access transmission
• 2000 Order 2000 RTO formation. Structure and
  characteristics for delivering wholesale
  competition
• Regional independent entities to operate grid and
  administer markets
• 2002 Market design standardization SMD NOPR
• Standards and timelines aimed at creating a
  national market design
• 2003 Wholesale market platform white paper
• Core market design with regional variation

4
History of RTO Formation in New England

• January 2001 ISO New England and transmission
  owners file binary structure for an RTO based on
  FERCs Order 2000
• Rejected on the basis of inadequate scope and
  independence
• July 2001 FERC mediation to develop a plan for
  a single Northeast RTO, including a merger of the
  system operators in NE, NY and PJM
• Administrative Law Judge questions the
  feasibility
• Boards of ISO-NE and NY ISO determine this to be
  infeasible

5
History of RTO Formation, cont.

• 2002 New England and New York ISOs conduct
  examination of a Northeast RTO encompassing New
  England and New York
• Significant industry opposition leads to
  withdrawal of NERTO
• 2003 ISO New England pursues New England-only
  RTO
• Extensive stakeholder process undertaken
• Petition will be a joint filing with New England
  transmission owners

6
Extensive Stakeholder Process

• The RTO-NE proposal is the result of an extensive
  stakeholder process over eight months and more
  than 50 stakeholder meetings.
• Six working groups were formed to address
  critical issues
• Governance
• Transmission
• Market Participant Service Agreement
• Seams
• Tariff
• Regional System Planning
• The schedules, draft documents and other
  materials (including stakeholder-prepared
  materials) were posted in advance on the RTO-NE
  website (www.rto-ne.com).

7
RTO Governing Documents

• Four primary new documents govern creation of the
  RTO and resulting benefits
• RTO Tariff
• Transmission Operating Agreement
• Participants Agreement
• Market Participant Services Agreement

8
Overview of Structure
9
Key Benefits of an RTO

• Improved authority for ISO New England to ensure
  power system reliability
• Contractual and regulatory certainty for the role
  and authority of the independent system operator
  including
• operational authority,
• codification of operating practices with the
  transmission companies, and,
• regional system planning.

10
Key Benefits of an RTO, cont.

• Improved regional planning process, including
  broader coordination with NY and PJM
• Enhanced market efficiency through one stop
  shopping model for transmission and market
  services and seams reduction agreements and
  activities incorporating Northeastern United
  States and adjacent Canada
• More stable organizational structure for New
  England system operator

11
Enhanced Independence for System Operator

• Authority for new/improved market rules
• Detailed process ensures stakeholder views and
  proposals are considered
• Allows for the priorities and needs of the market
  to be addressed, including continued evolution of
  SMD
• Authority to modify terms and conditions of the
  transmission tariff
• Five year contract to oversee operation of New
  Englands transmission grid

12
Strengthened Operational Authority

• New England remains a single control area with a
  single set of hands on the wheel
• Roles and responsibilities of transmission
  companies and the system operator clarified
• Agreement codifies control of transmission system
  operations
• Clear procedures for operations of the system
  including emergency protocols
• Clarified authority for outage scheduling and
  coordination

13
Improved Authority Over Reliability

• System operator can require transmission
  companies to build reliability based projects
• Clarifies obligation to build
• RFP authority for short-term gap needs
• Encourages investment in transmission
• Single point of operational control with
  documented procedures and responsibilities will
  more effectively protect regional reliability

14
Improved Authority Over Reliability Regional
Planning Strengthened

• RTO will provide increased information to the
  marketplace
• Location-specific information
• Identification of types of resources and interim
  measures to meet reliability
• Interregional planning activities
• First NE/NY regional system plan expected 2004
• Regional State Committee forming in New England

15
Broader Market Scope

• RTO for New England will place a strong emphasis
  on reducing market seams with neighboring regions
  
• Increased scope is designed to increase market
  opportunities and benefit the consumers of New
  England without compromising reliability
• Activities include
• Virtual Regional Dispatch
• Elimination of transmission service export fees

16
Enhances Market Efficiency

• One-Stop Shopping RTO provides one-stop
  shopping for regional and local transmission
  service through unified transmission tariff
• Seams Reduction System operator is better
  positioned to achieve program of seams
  reduction with New York and Canadian provinces
• Congestion Management Strengthened authorities
  for market rules and transmission operations
  allow system operator to minimize congestion for
  the region

17
Transmission Incentives

• FERC has proposed the following transmission
  incentive framework
• RTO participation 50 basis points added to
  Return on Equity (ROE), or a 0.5 increase in
  revenue
• New investment 100 basis points added to ROE, or
  a 1.0 increase and,
• ITC creation 150 basis points added to their
  ROE, or a 1.5 increase in revenue if they create
  an independent transmission company.
• ISO New England is neutral on these incentives

18
Transmission Incentives, cont.

• All transmission incentives must be justified and
  approved by FERC under the just and reasonable
  standard
• Can only be achieved through an ROE review
• ROE review is extensive there is an equal
  potential to lower consumer rates
• Bulk of the transmission incentive framework is
  unrelated to RTO formation
• If achieved, the Transmission Owners have
  quantified that RTO participation incentives
  amount to 5 cents/month for a 500 kWh customer in
  2008

19
Conclusion

• The establishment of an RTO for New England will
  provide certainty to both the enabling
  institution (ISO New England) and the regulatory
  framework surrounding the continued evolution of
  fair and efficient markets and a reliable bulk
  power system for New England
• Filing will request a FERC order confirming
  RTO-NEs status as a Commission-approved RTO and
  accepting the agreements, tariffs and other
  documents contained in the RTO-NE filing

20
Conclusion, cont.

• In the event the Commission does not approve
  RTO-NE as a compliant RTO, the Filing Parties
  request acceptance of the RTO-NE documents on the
  basis that they will permit the ISO to comply
  with the Commissions SMD White Paper
• Target filing date is October 31, 2003.
• The present situation cannot continue New
  England will be harmed if the present regulatory
  uncertainty is allowed to persist