Economic Planning Criteria Question 2 1/7/2011 Joint CMWG/PLWG Meeting

1. Economic Planning CriteriaQuestion 2 1/7/2011 Joint CMWG/PLWG Meeting March 4, 2011

2. Question 2 Assignment: Consider questions related to market design and possible levers to tune economic calculations: • Should the Consumer Benefit metric even be used?What will lead to the right balance of resolving congestion through transmission build vs. generation build, given the energy only market design?Where should the risk reside? Should there be dependence on a market solution, rather than having the certain cost of building transmission?What method ensures long-term viability of the market (generation and transmission co-exist) and the consumer is cost effective served?How do we calculate the quantity of benefit? (discount rate, should there be one, and should it apply to Societal Benefit, Consumer Benefit, or both?)How certain are transmission cost estimates?How certain are transmission congestion studies?How does the use of SPSs and RAPs fit in, or do they? Note: items shown in orange are reserved for a later discussion by ERCOT staff and/or TDSPs.

3. A) Use of the Consumer Benefit metric • The concept of minimizing delivered cost of power to loads (i.e. Consumer Benefit) metric has been in use since the inception of the Economic Transmission Planning at ERCOT as seen in the statement below from the first ERCOT Power System Planning Charter and Processes document that was approved at the October 9, 2003 TAC meeting: • …These components contribute to local congestion costs currently “uplifted” or socialized, in a similar manner to wires charges, and therefore fall into the desired optimization mix necessary to minimize energy delivery costs… • At the May 4, 2006 TAC meeting the transmission expansion benefit metric was expanded to include Societal Benefit as the primary metric with the Consumer Benefit metric as the backstop1: Quantify SS & CS over life of project No No NPV of SS > NPV of TCOS NPV of CS > NPV of TCOS Reject Project Yes Yes RPG Recommend Project Approval RPG Recommend Project Approval The use of the Consumer Benefit metric for economic transmission planning decisions is a concept that has always been foundational in ERCOT, given that wires cost are paid for on a ‘load ratio share’ basis by all loads in ERCOT 1) Note that for purposes of economic evaluations, an indication of the NPVs of Societal and/or Consumer Surplus will be used and based on the best estimates available using planning judgment from the transmission cases available.

4. B) & C) Finding the right balance: Trans vs. Gen • It is desirable to find an economically optimal balance between transmission expansion to cover localized load growth vs. generation siting • In practice, the desire to find this optimal balance is often complicated by a myriad of externalities, such as: • Permitting constraints associated with emissions considerations near major load centers • A specific load center experiencing import constraints may benefit from new generation siting locally; however, there is already plenty of generation in the market located outside the load center • When ERCOT completed its independent review of the Houston Import study in August 2010, they performed a number of sensitivity studies, • One of these sensitivities aimed to determine if pending generation additions in Houston would better resolve the congestion problem • Ultimately, the Houston gas plant expansion scenario was not found to be an effective substitute to transmission build from the Consumer Surplus metric perspective While it is always a good idea to consider the potential for pending generation siting to resolve congestion, and factor this into the project approval process, it should not become a barrier to consumers (via the Consumer Benefit metric) utilizing transmission build to lower their delivered cost of load into growing load centers 3

5. D) Can transmission build into load centers actually drive more generation out of the market, increasing cost to load? • During the August 2010, TAC / Board review and subsequent endorsement of the Fayetteville-Zenith 345 kV project to increase import capability into Houston (utilizing the Consumer Benefit metric) • Concern was expressed by some market participants that this may lead to more of the less economically efficient generation in Houston being mothballed or retired • This is a logical question, given that market clearing prices in Houston (relative to the rest of ERCOT) will be reduced by the new 345 kV import path • However, the converse is also true, in that prices outside Houston will no longer be unnecessarily depressed associated with the ongoing congestion into Houston • There is significant historical evidence that the severity of congestion into the Houston zone and South zone in 2008 and 2009, depressed North and West zone prices relative to Houston and South • Potentially contributing to more mothballing and/or retirements there To appropriately answer the question about transmission build into load centers leading to less efficient generation exiting the market, will require an examination of market impacts on both sides of the constraint in order to understand the net effect. 4

6. D) Can transmission build into load centers actually drive more generation out of the market, increasing cost to load? During the time period of ’09 and ’10, there were approximately 7,381 MW of generation that Suspended Operation. Likely, related to the expectation of continued N-H and N-S congestion, over 80% of this capacity (6,019 MW) exit was located in the North and West zones. Thus, it is important to consider generation impacts on both sides of the constraint of interest to answer this question. 5 Notes: 1) Permian Basin 5 & 6 were RMRd by ERCOT and were removed from RMR status as of 12/1/2010. 2) Units that had their suspension start after summer peak in a specific year are shown as leaving the market for the following year (i.e. this is a summer specific representation of unavailability)

7. H) How does the use of SPSs and RAPs fit in? • Some market participants have raised the question about whether or not SPSs and RAPs are compatible with the Energy Only Nodal Market design • Specifically, they are raising the question of whether or not, their use has the net effect of prematurely eliminating a transmission constraint that some generator is benefiting from and thus may leave the market afterwards • The Nodal Operating Guides provide specific guidance on this issue in Section 5.3 (2): • The contingency studies will be performed for reasonable variations of Load level, generation schedules, planned transmission line Maintenance Outages, and anticipated power transfers. At a minimum, this should include projected Loads for the upcoming summer and winter seasons and a five-year planning horizon. The TSPs involved should plan to resolve any unacceptable study results through the provision of Transmission Facilities, the temporary alteration of operating procedures (i.e., RAPs), temporary Special Protection Systems (SPSs), or other means as appropriate. As was discussed on the prior side, it is important to consider the price distorting impacts on both sides of the constraint to properly answer this question. Additionally, why should consumers be subjected to unnecessarily high prices associated with congestion that could easily, inexpensively, and quickly be resolved through the temporary use of SPSs and RAPs? 6