Transmission’s Approach to System Planning

1. Transmission’s Approach to System Planning Massachusetts Restructuring Roundtable November 21, 2003 Peter T. Zschokke Vice President

2. Annual Growth in kWh Deliveries(over the last 25 years)

3. Value, Value and More Value • $194 million in annual savings for customers • Approx 2,400,000 MWHs annually • Benefit/Cost ratio of 2.0 for life of programs • 445 MW reduction in peak demand since 1987 • 1.3 million customers served • Economic Development • Environmental Benefits

4. Consensus Points • The answer is Markets • Industry restructured because customers did not like the result from regulation. Especially Integrated Resource Planning • Markets promise products that better meet customer needs

5. Structure of Market is Vital • Generators and demand-side resources must compete on a level playing field • Wholesale market design necessary • National in scope • Transmission Providers should be independent from generation decisions or demand-side decisions • No favoritism for one solution over another

6. Alternative Approach A • RTO plans for reliability and economic needs • Market Participants and Transmission Providers propose solutions to those needs • RTO makes determination whether regulated transmission is necessary • RTO determination of market failure to provide solution to needs • If so, RTO selects regulated Transmission solution • Regulated transmission solutions’ costs recovered through regulated rates

7. Benefits from Alternative A • Does not assume lack of market solutions is failure • Local solutions may not be cost effective • Remote solutions may be most appropriate • Market is not distorted by regulatory payments • Transmission benefits the region’s market capability and should be funded regionally • Non-transmission resources provide local benefits and should be funded locally • If market barriers exist, market incentives to overcome these barriers are preferable

8. Problems From Alternative B • RFP undermines market response • Merchants will hold out for regulated payments from RFP • Uncertainty over RFP cost allocation may cause customers to turn away from merchant projects • RFP will invite litigation, create gaming opportunities and cause delay • RFP assumes comparable service delivery from disparate products: Not true • Result: Need created from delay waiting for results of RFP • Lastly: RFP winner may not be least cost

9. Alternative B RFPs – Unnecessary and Duplicative • RTO’s needs assessment gives information to market • Ample opportunity for merchant response • Market represents on-going self-executing “RFP” • In cases where market fails, invoke regulated transmission backstop • Opportunity to improve market response - give market more information on cost allocation of regulated solution before-the-fact so customer may better evaluate their options

10. Final Issues • National Grid supports ICAP with regional deliverability requirement not Locational ICAP • National Grid did not and does not support allocation of ISO demand-side program costs to load but to generators • Provides appropriate incentive to generators to be available and avoid these costs • NEDRI missed an opportunity • How can markets be structured to perform these tasks?