Future Treatment of HQ Interconnection

1. Future Treatment of HQ Interconnection A Report of the Ad Hoc Working Group of the NEPOOL Reliability Committee to Explore Future Treatment of the Hydro-Quebec Phase I/II Interconnection June 11, 2002 Presentation to NEPOOL Reliability Committee on 6/11/02

2. Overview • Mission/Objective • Description of Work Products • Options for Future Treatment • Conclusions & Next Steps Presentation to NEPOOL Reliability Committee on 6/11/02

3. Mission/Objective • Discuss and develop recommendations for the long-term treatment of the Phase I/II Hydro-Quebec Interconnection Presentation to NEPOOL Reliability Committee on 6/11/02

4. Origin and Composition of Working Group • Working Group, formed in Fall 2001, comprised of NEPOOL Participants, including many Interconnection Rights Holders • ISO New England chaired Working Group • Modeling assistance from Barker, Dunn and Rossi • Legal assistance from Day, Berry and Howard Presentation to NEPOOL Reliability Committee on 6/11/02

5. Work Products • Report • Financial Implications Model • Guide to Model • Support Cost Data • Background Information Presentation to NEPOOL Reliability Committee on 6/11/02

6. Options for Future Treatment • Option I: Continue Current Treatment While Moving to RTO • Option II: Classify Facilities as PTF and Roll Costs into NEPOOL RNS Rates • Option III: Develop Separate Aggregate Interconnection Rights Holders (IRH) Tariff Presentation to NEPOOL Reliability Committee on 6/11/02

7. Option I: Continue Current Treatment While Moving to RTO • Until HQ Interconnection rights and obligations are subsumed and implemented within NERTO and/or ITC tariff... • Facilities remain Non-PTF • Use Rights held and paid for by IRH • Other entities may acquire rights from IRH • Participants Committee continues to establish the value of HQICCs and IRH receive them Presentation to NEPOOL Reliability Committee on 6/11/02

8. Option I: Continue Current Treatment While Moving to RTO (continued) • Advantages of Option I: • Avoids potential need for interpretation of, or amendment to, definition of PTF that would allow inclusion of the HQ Interconnection • Avoids disputes with Asset Owners over their consent to include the facilities into PTF • Consistent with Commission expectation that stakeholders will negotiate resolution of future treatment of facilities in NERTO context Presentation to NEPOOL Reliability Committee on 6/11/02

9. Option II: Classify Facilities as PTF and Roll Costs into NEPOOL RNS Rates • Facilities included in definition of PTF (as interpreted or amended) • Service over facilities offered under NEPOOL Tariff until NERTO Tariff • For rate design purposes, facilities treated as post-1996 assets Presentation to NEPOOL Reliability Committee on 6/11/02

10. Option II: Classify Facilities as PTF and Roll Costs into NEPOOL RNS Rates (continued) • Rate Design Considerations for Option II: • Treat Post-RTG (Post-1996) Costs • Phase-in? • Socialization? • Point-to-point rate allowed? • Impact of ECP reductions from greater tie use? • Impact of loss of transmission revenues? • Consider special case of entities without transmission tariffs whose HQ Interconnection cost responsibility not included in current tariff rates? Presentation to NEPOOL Reliability Committee on 6/11/02

11. Option II: Classify Facilities as PTF and Roll Costs into NEPOOL RNS Rates (continued) • Range of Roll In Cases Considered: • Straight Roll In • Roll In with lost transmission revenues • Roll In with socialization of impact • Roll In with benefits of ECP reductions Presentation to NEPOOL Reliability Committee on 6/11/02

12. Option II: Classify Facilities as PTF and Roll Costs into NEPOOL RNS Rates (continued) • Explanation of Output for Financial Implications Model runs Customers billed by ISO-NE for transmission service under NEPOOL OATT, aggregated, as needed, to match up with corresponding IRH entities Total cost to Network Customer, including new PTF Costs from Roll In of HQ Interconnection Year 2001 DC Support Costs (including PG&E AC and Chester SVC costs) Total current cost (Phase I/II Support Cost, if any, + RNS Cost) Presentation to NEPOOL Reliability Committee on 6/11/02

13. Option II: Classify Facilities as PTF and Roll Costs into NEPOOL RNS Rates (continued) • Observations: • 80% costs ($55 mil./yr.) already paid by customers (local rates) • 20% costs ($15 mil./yr.) would represent an increase in rates • ECP reductions due to increased flows lower net cost • Loss of transmission revenues increase net cost • Relative impact of roll in varies from company to company • Impacts on most significantly impacted Participants could be socialized Presentation to NEPOOL Reliability Committee on 6/11/02

14. Option II: Classify Facilities as PTF and Roll Costs into NEPOOL RNS Rates (continued) • Legal Issues with Option II: • Consent of Asset Owners must either be obtained or removed as an obstacle. • Definition of PTF must be interpreted or amended so as to allow for the inclusion of the HQ Interconnection • Votes to include the facilities in the PTF and roll the costs into NEPOOL Tariff rates would each be subject to appeal and litigation. • Consent of the IRH would be needed. Presentation to NEPOOL Reliability Committee on 6/11/02

15. Option III: Develop Separate Aggregate IRH Tariff • Service offered through single open access tariff filed by IRH • Tariff could be administered and facilities operated by ISO Presentation to NEPOOL Reliability Committee on 6/11/02

16. Option III: Develop Separate Aggregate IRH Tariff (continued) • Limitations • Reaching agreement • Diversity among IRH (some non-jurisdictional) • Legal ties associated with collective tariff may be unattractive to some IRH • Transactional costs of developing & filing tariff • FERC desires single tariff (no “pancaking”) Presentation to NEPOOL Reliability Committee on 6/11/02

17. Factors Considered by Working Group • Makeup of Working Group • NEPOOL Review Board recommendations • FERC Orders • Impending NERTO negotiations and proposal Presentation to NEPOOL Reliability Committee on 6/11/02

18. Conclusions • Issue is Complicated • Impacts of Roll In vary • Strongly held positions • Legal and procedural hurdles for options that change status quo • FERC encouraged stakeholders to address issue in RTO context Presentation to NEPOOL Reliability Committee on 6/11/02

19. Next Step... • Working Group has completed its work • Next step is up to the NEPOOL Reliability Committee Presentation to NEPOOL Reliability Committee on 6/11/02