Projected Supply and Demand Balance and Ensuring Long-Term Resource Adequacy in New England

1. Projected Supply and Demand Balance and Ensuring Long-Term Resource Adequacy in New England Department of Telecommunications and Energy Chairman Paul G. Afonso September 23, 2005

2. Electricity Projected Growth in Electricity Demand in NE 1.5% p.a. Source: Dept. of Energy, EIA, Annual Forecast, February 2005.

3. Electricity Natural Gas Could Become Almost 50% of All Fuels Used for Electric Generation Natural Gas Oil Coal Hydro Nuclear Renewables Other If ALL future capacity is gas-fired (1) Current Summer Capacity (1) 2012 1A little more than half of gas-fired capacity has some limited ability to burn oil (limited by oil storage and environmental regulations). Source: 2004 from EIA (summer capacity); 2012 assumes Reference Load (50/50) from CELT 2004 Forecast, ISO-NE, October 2004 and assumes a 12% reserve margin, with ALL incremental capacity gas-fired.

4. Electricity New Transmission Lines Source: Connecticut Light & Power Company 12C Application Presentation, ISO-NE Stakeholders Meeting, Marlborough, MA February 7, 2005

5. Electricity New Transmission Helps Boston Reserve Position WITH NStar 345 kV line 7 Salem thru 2011 Typical Minimum Reserve Level Reserves BEFORE NStar 345 kV line & Dominion agreement on Salem Source: RTEP 04 Report, October 2004, “50/50” Case”

6. Electricity Major Massachusetts Transmission Projects

7. New Generation We Rely on the Private Sector to Build New Power Plants • Under the 1997 MA Electric Industry Restructuring Act, regulated utilities no longer have an obligation to build power plants. With wholesale prices set by market forces, unregulated developers must deploy capital to build new plants. Thus, we rely on market forces to ensure adequate supplies of electricity. • In the initial 5 years following Restructuring over 8700 MW of new capacity was added across New England with the result that New England as a whole has surplus capacity • In Massachusetts just under 4000 MG of new capacity was added, including 9 large new plants—including in the Boston area the Sithe Mystic and Weymouth plants and the Mirant Kendall Square plant • In addition, the new capacity has allowed the closure of several older, less efficient and/or more polluting plants

8. New Generation We Rely on the Private Sector to Build New Power Plants • However, new power plants have often been located far from population centers where electricity demand is highest. The location of power plants influences both the reliability and price of electricity. • New transmission helps deliver power to where its most needed. Location-dependent price signals encourages the siting of new plants nearer to demand centers. Without new investment, current capacity surplus will be eliminated by demand growth. • To be most effective, new capacity needs to be added in the right place, in the right amount, of the right type and built at the right time. Not all of these criteria were met in the post-restructuring capacity boom.

9. New Generation • Deficits in peaking resources are likely to occur first. Need to develop demand reduction programs and distributed generation in the face of large financial and institutional barriers. • The challenge is to address the inherent risk of investment in peaking resources which have low and uncertain utilization rates by either raising short-term price caps or some sort of subsidy • Deficits in overall resources may come if market forces don’t adequately reward investment. The FERC has required there be, as of next October, an incentive mechanism (known as Locational Installed Capacity or “LICAP”) to reward the provision of generating capacity. • LICAP, however, may be costly and does not guarantee new generation

10. New Generation LICAP Alternative - NERAM • A broad coalition of parties from New England have developed a capacity market alternative to the LICAP market proposed by ISO-NE. • The alternative, the New England Resource Adequacy Market (“NERAM”), is a region-wide capacity market fully integrated with the locational “contingency” reserves market being developed by ISO-NE. • The proposed capacity market is based in large part on a market design previously developed by ISO-NE, NYISO, and PJM.

11. New Generation Objectives of NERAM • Capacity prices set by competition in market • Capacity payments for performance; facilitate development of sufficient resources • Promote regional resource adequacy • Integration of capacity and reserve markets • Promote demand response and energy efficiency • Support restructuring goals by not shifting ownership risk to customers

12. New Generation Capacity MarketOverview and Key Provisions • Use of an open auction format with a single clearing price to procure capacity resources • Multi-year planning horizon for the capacity auctions, allows new capacity to participate • Multi-year compensation/ performance commitment for capacity resources • Auction process reflects the amount to be procured as established by states/ISO-NE/stakeholders • Financial and development qualifications apply to auction participants to assure availability – substantial penalties for non-performance

13. New Generation Locational Contingency Reserves Market • Provides price signals for resources that can address locational reliability needs (for contingency coverage) and provide operating flexibility • Minimizes the need for RMR agreements • Addressing the locational reliability needs through locational reserves facilitates implementation of the more efficient region-wide NERAM

14. New Generation Advantages of NERAM vis-a-vis LICAP • Market based prices, rather than administratively determined • Requires advanced commitment from resources that they will be developed and will participate in the market; LICAP is a monthly market with no commitment from resources beyond the specific month. • Targets the exact amount of capacity needed to satisfy reliability criteria region-wide; LICAP target is 5.4% above the needed capacity level. Targeting the exact amount of capacity saves ratepayers an estimated $150 million per year.

15. New Generation Advantages of NERAM vis-a-vis LICAP (cont.) • Obviates market power by having a region-wide market that allows new capacity and demand response to participate; LICAP short term planning horizon is not likely to attract new investment. • Targets locational payments only to resources that are needed to maintain local reliability; LICAP makes locational payments to all resources. • For the above reasons, NERAM is a more cost-effective, less expensive solution to ratepayers than LICAP.