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 FERC’s 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 England’s 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-NE’s 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 Commission’s 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