Treatment of HQICCs during FCM's Transition Market

1. Treatment of HQICCs during FCM's Transition Market Markets Committee, May 31st, 2007

2. Phase II’s Initial Operation 1990-2001 • A Firm Energy Contract (FEC) was in place • 7 TWH of energy/year (1990 – 2001); • Supporters of the line (the IRHs) received the capacity value in proportion to their support and rights over the line; • IRHs had the right to use their entitlements for firm deliveries; • If they did, it resulted in a reduction of capacity value to them. This occurred when the Vermont utilities delivered the VJO contract over Phase II.

3. Phase II 2001-present • Post Firm Energy Contract • NEPOOL awarded capacity value to IRHs in the form of HQ Interconnection Capability Credits (HQICCs) and was confirmed by FERC; • 1200 MW were awarded for March-November; • Total Capacity Imports of 1800 MW were allowed; • Rules and procedures were established to reduce HQICCs when capacity sales exceeded 600 MW.

4. Phase II Treatment • Since the line went into Commercial Operation, Phase II has been treated differently than other New England ties • Reductions in HQICCs have been allowed and occurred during the FEC and after it expired; • Since transmission Use Rights must be purchased, the IRHs are compensated if their HQICCs are reduced; • This is unlike the NY ties where there is no in-service charge and tie benefits cannot be reduced by firm sales.

5. The LICAP Settlement Agreement • The Settlement Agreement specifically provides for a continuation of the current practices over Phase II during the Transition Period; • This is spelled out in paragraph VIII K reproduced in its entirety in the next slide.

6. Section VIII K of the LICAP Settlement Bold Added During the Transition Period, the total transfer limit of the HQ Phase I/II interconnection with Hydro-Quebec shall be fixed at 1800 MW for UCAP purposes, as set forth below. Except as set forth below in this subsection, the total MWs of HQICCs shall be fixed at 1200 MW March through November and zero MW December through February, shall receive payment in the non-zero months under Part VIII.B and I, and otherwise continue to receive the treatment for determining capacity and availability in effect under the Market Rules (Market Rule 1 Section III 8.3.2 (a) (v)), Tariffs and Manuals as of March 6, 2006. The remaining 600 MW of transmission may be used for UCAP over the Phase I/II interconnection by any supplier that arranges for transmission over the interconnection without reductions in the HQICCs. UCAP above 600 MW may be transmitted only in those months when the HQICCs are 1,200 MW and will result in reductions in HQICCs as provided for under current procedures. Only the remaining HQICCs will receive UCAP payments under Part VIII.B and I. UCAP delivered over the Phase I/II facilities shall receive payment under this Part VIII.B and I. Non-HQICC UCAP delivered over the Phase I/II facilities shall continue to receive the treatment for determining capacity and availability in effect under the Market Rules as they may be modified pursuant to Part VI of this agreement.

7. The LICAP Settlement Agreement • The Settlement was approved by the FERC. • The transition period preserves the status quo; • Sales above 600 MW are allowed; • If sales exceed 600 MW HQICCs are reduced. • For the Transition Market, FERC approved; • 1200 MW of HQICCs.

8. FERC April FCM Order • The FERC order does not apply to the Transition Period; • Transition Period Market rules were not at issue; • The change in treatment ordered for Phase II was not for the Transition Period; • Post Transition treatment of Phase II is covered in other sections of the Settlement Agreement.

9. Conclusion • NStar request should be rejected by Markets/Transmission Committees as it: • Violates the Settlement Agreement; • Has no basis in FERC orders addressing the FCM post transition; • Changes treatment in place for over 15 years.