Developing a Transmission Expansion Business Model

1. Developing a Transmission Expansion Business Model Steven L. Walton Transmission Grid Expansion and System Reliability Conference Denver, Colorado 22 May 2001

2. Developing a Transmission Expansion Business Model Factors which led to a lack of system expansion. The rational for transfer capability investment. Defining a clear, marketable property right. The gate keepers – siting and rating. The role of alternatives in expansion decisions.

3. Factors Which Led to a Lack of System Expansion • A long period of low load & generation growth: • Forecaster’s Trap – “Have fundamentals changed?” • Integrated Resource Planning – “Is growth a dirty word?” • Utility internal capital restraints: • Downward rate pressure - Rate freezes: • To achieve stranded cost recovery. • To obtain market based price authority. • Upward pressure on earnings.

4. More Factors Which Led to a Lack of System Expansion • Transitional uncertainty – paradigm shifts: • Merchant generation. • Open access tariffs. • Retail direct access. • RTO development. • Resistance to transmission line construction – NIMBY (Not in My Back Yard) • Appearance & real estate values. • Environmental restrictions. • Health & safety fears.

5. Types of Transmission Expansions • Transfer Capability Expansions -- From remote resources to load centers. • Expansion occurs at major system constraints. • Funding of projects should be market based. • Transmission Adequacy Expansion – For service to local load. • Load growth driven lines and substations to feed the distribution system. • Funding of projects should be from load based access fees.

6. Rational for Transfer Capability Investment • Paradigm shift for securing energy supply: • Past – Resources ownership and some purchases. • Future – Forward contracts portfolio. • Forward sale of new transmission construction will also be needed: • Construction drops locational price differentials. • Pre-construction capacity sale to parties benefiting from drop in price spread. • Post-construction trade minimizes cost of right holders.

7. Defining a Clear, Marketable Transmission Property Right • Problem of “the commons”: • Interconnection creates a single system. • Rule required to make benefits separable – quantity & term. • Capital investment decision process: • Forecasts of cash flows – expected investor value. • Risk assessment - certainty of investor value. • Tradability of rights: • Risk mitigation. • Market liquidity.

8. The Twin Gate Keepers – Siting and Rating • Siting processes – Land use issues: • State regulatory boards & commissions. • Federal/State land management. • Eminent domain condemnation. • Ratings processes – Reliability limits: • Transfer capability of the existing system. • Incremental transfer capability of an expansion.

9. Transmission Expansion Alternatives • Demand Response – Price signal to users: • Price driven conservation – Savings capitalized. • Sell backs of contracted demand – Interruptible calls or blocks of energy. • Supply Alternatives -- Purchasers offered contracts from competing firms: • Local suppliers – Gas fired CC/CTs, micro-turbines? • Remote suppliers – Wind, gas, coal energy “farms” • Delivered offering – Supplier funded transmission. • “As Is, Where Is” offerings – Buyer funded trans.