FERC Order 2000 Pre-Filing Discussion

1. FERC Order 2000Pre-Filing Discussion October 6, 2000

2. AGENDA • Key Elements of an RTO • Discussions of RTOs Filing on October 15 • Conclusions

3. KEY ELEMENTS OF AN RTO • Remove transmission related impediments to a fully competitive wholesale market • Eliminate the inherent engineering and economic inefficiencies in the current transmission grid • Eliminate the ability for utilities to discriminate in favor of their own generation and marketing activities

4. KEY ELEMENTS OF AN RTO • RTOs are not a goal in and of themselves • The success of Order 2000 will be judged by one key metric – the liquidity of the electricity market • Necessary element of liquid electricity markets is the ability to have firm physical transmission rights to manage forward energy obligations • California highlights that a key policy goal for FERC must be the creation of deep forward markets • RTOs should only do what is absolutely necessary • RTO functions are basically to maintain reliability and to operate real-time balancing mechanism • Power exchange and Transmission exchange are necessary components but not operated by RTO

5. KEY ELEMENTS OF AN RTO • RTOs should provide same transmission service for all customers – Network Plus • All customers of transmission system must be under same tariff, including Bundled Retail • The current OATT distinction between Point-to-Point and Network Service creates a discriminatory model and has failed to support liquid electricity markets or increase reliability • Flow Gate model appears to meet most marketplace needs • RTOs should provide all customers with same flexibility • The current economic advantage of operating a control area must be either ended or provided to all transmission customers • All customers must be allowed to submit new schedules up until start of real-time • There should not be imbalance penalties for hourly liquidation against the RTO

6. KEY ELEMENTS OF AN RTO • RTOs should be designed around “for profit” incentives • RTOs must have the right incentives to operate efficiently and provide “best in class” customer service • RTOs must be able to raise capital to buy or build transmission plant and must facilitate merchant transmission • Relying upon luck and goodwill to ensure that the RTO will want to see liquid electricity markets is doomed for failure • RTOs should be independent from all market participants • Transmission owners must not dictate the development of the RTO business model – why not outsource the function? • Transmission owners must not dictate the RTO service offerings – why not let the RTO design service offerings rather than current incumbents? • RTO arrangements with Transmission Owners must not give any veto power to incumbents

7. KEY ELEMENTS OF AN RTO • RTOs should be fully implemented within 9 months • Implementing RTOs is not about constructing hardware, it’s about putting together and people • More often than not, delays are simply the result of parties chasing “set asides” • Don’t throw away current telemetry and communication infrastructure, just adapt as necessary • RTO should have sufficient geographic scope and configuration • Size matters for transmission pricing and liquid electricity markets • Success is contingent upon facilities included • Bigger RTOs means fewer seams

8. KEY ELEMENTS OF AN RTO DA / HA Energy Market Flow Gate Rights Market RTO Market Monitoring Function Indepent Grid Operator Indepent Market Manager Standard Electronic Scheduling Settlements FERC Transmission Tariff Transmission Owner Agreement

9. WHAT TO EXPECT • Filings will be minimally compliant (if at all) • Process has not been collaborative • Proposed RTOs (in the Eastern Interconnect) are too small geographically • No real attempt to include public power • Utilities maintain control over their transmission facilities and will be able to continue their competitive advantage • Seams issues have not been addressed

10. RTO WEST • Positives • Collaborative development process • Proposed Governance Structure • Large geographic scale with real time balancing market by RTO in a single control area • Potential inclusion of British Columbia and Alberta • Flowpath based, firm physical rights model for congestion management • Transparent pricing with elimination of rate pancaking and through license plate type access fee • Market monitoring role not over reaching - leaves regulation to the regulators • Concerns • Potential re-imposition of volumetric export fee unwinding price system • Initial allocation of FTR’s eliminates transmission rights market by locking all existing capacity forever, i.e., covering existing load, incumbents’ load growth and assuming roll over for all existing contracts • BPA’s assertions of regional preference for transmission used to retain strategic position

11. GRIDSOUTH RTO • Positives • for profit structure • Concerns • No collaboration • Congestion management issues unclear • Geographic scope/configuration too small • Governance - Not sufficiently independent • Operational control not held by RTO until unspecified date • Real-time balancing discrimination

12. SOUTHERN TRANSCO • Positives • Gridco concept is positive, but no details on independence from utility • Concerns • No collaboration • Market structure includes firm transmission rights based on flowgates, but continues use of contract paths for reservation of service • Native load will not be scheduled under the RTO tariff • Insufficient geographic scope • Huge seams issues given current size

13. FLORIDA RTO • Positives • some collaborations • market structure based on a physical flow gate design that encourages bilateral transactions • day ahead market and real time balancing mechanism reflect zonal pricing, not nodal • Concerns • grandfathering of transmission rights is undecided • only limited collaboration • limited geographic scope • mandatory calls on generation

14. CONCLUSIONS • If our information is right, you are probably going to be disappointed with the upcoming filings • FERC needs to start helping Transmission Owners and other incumbents make some “voluntary” decisions • take the lead • initiate Technical Conference on shortcomings • Don’t lose sight of the real goals – liquid electricity markets and manageable transmission risk • To get this right, FERC must require that all transmission uses must be under the same rates, terms and conditions of the same tariff (use Order 888 Remand)