ERCOT Business Case for Economic Transmission Planning Presented to: ERCOT RPG Meeting

1. ERCOT Business Case for Economic Transmission Planning Presented to: ERCOT RPG Meeting Presented by: Johannes Pfeifenberger Judy Chang March 26, 2013

2. Content • Objectives of the Effort • Similar previous engagements • Work Plan (Tasks 1-7) • Timeline • Appendix (Tools, Example Metrics)

3. Objectives of this Effort Review long-term system assessment (LTSA) process and develop recommendations to enhance/expand business case for (and include additional methods of valuing) transmission. • Provide ERCOT with a careful review and critique of the existing LTSA transmission planning process • Investigate key stakeholder and industry-wide concerns • Review LTS and compare to processes in other jurisdictions • Provide ERCOT options for expanding its planning processes to include more comprehensive assessments of transmission expansion benefits • Develop and demonstrate methodologies for valuing additional (non-conventional) transmission-related societal benefits • Assist ERCOT in optimizing the use of its modeling platforms and tools • Identify the strengths and weaknesses of models and tools • Recommending “best practices” in modeling applications and procedures • Enable ERCOT deliver repeatable study results in future LTSA planning cycles • Review and critique post-processing tools and automation procedures • Conduct workshop to educate stakeholder and present results and recommendations

4. The “Business Case” for Transmission • Effective planning for economic and public-policy projects requires developing a proper analytical approach to evaluate projects • Projects often present different options (with different benefits and costs) that can meet the same objective • Some projects serve different purposes and offer different benefits that require different analytical approaches to quantify of explain • Standard analytical tools capture only a portion of economic benefits and can limit the scope of benefit-cost analyses • Lack of established evaluation processes also limits the approach to only using “standard” analyses • We helped numerous clients in similar engagements to improve their analytical approach and planning frameworks for new transmission, including developing methods to quantify “non-conventional” benefits. • Clients include planning authorities, both traditional and independent transmission owners, and industry groups: SPP, ITC, ATC, AEP-ETA-Exelon, SCE, WIRES, AWC, Cleanline, Greenline

5. Similar Engagements: SPP • Helped SPP’s “Metrics Task Force” and improve its planning framework for transmission benefit-cost analyses to support Regional Cost Allocation Review effort by Regional State Committee • SPP previously defined numerous “robustness metrics” that did not monetize benefits and double-counted similar benefits • Helped the task force to: • (1) define limitations of standard benefit metrics • (2) develop methodologies that can monetize additional benefits • (3) avoid double-counting of similar benefits • Task force confirmed 5 standard metrics and added 8 new metrics to monetize transmission benefits (shown on next slide) • Also recommended additional benefit metrics for future implementation, including mitigation of weather uncertainty and reduced cycling of baseload units • Now working with SPP to implement recommendations and quantify some of the recommended benefit metrics

6. Similar Engagements: SPP (cont’d)

7. Similar Engagements: ITC Analyzed for ITC both societal and customer benefits for a portfolio of “strategic projects” in the Entergy footprint : • Production cost savings due to congestion and RMR relief • Increased transfer capabilities to Western region, SPP, TVA and associated resource adequacy benefits to Entergy, IPPs, ERCOT, and others • Increased wheeling out and through revenues • Avoided or deferred future reliability projects • Storm hardening in eastern Texas, southern Louisiana & New Orleans • Low-cost options to increase load serving capability in industrial corridors of eastern Texas and southern Louisiana • Economic development benefits • More robust grid, increased system reliability and operating flexibility • Improved market access and competitive choices, including future options for lower-cost renewable generation imports into the region

8. Similar Engagements: Others • AEP-ETA-Exelon: helped AEP improve internal modeling capabilities and quantify wide range of benefits for proposed RITELine project; • AEP-ETA: helped AEP understand full range of benefits provided by proposed regional SMARTransmission overlay • ATC: helped ATC improve internal modeling capability and develop new methodologies to quantify non-traditional benefits in context of several proposed transmission projects and overall planning framework • Southern California Edison: helped quantify and explain wide range of California and Arizona benefits for proposed Devers-Palo Verde No. 2 line • Atlantic Wind Connection: quantify range of benefits related to offshore wind integration grid • Cleanline: conducted renewable integration benefit analysis for its project • Anbaric: helped independent developer improve benefits framework • WIRES: 2011 report on economic stimulus and other benefits of transmission; currently working on report document “best practices” in transmission benefit-cost analyses • SPP RSC: helped develop inter-regional planning and cost allocation framework

9. Workplan: Overview Task 1: Kick-off meeting (Feb 13) Task 2: Review and Critique ERCOT’s Existing LTS Planning Process (mid Feb – end of March) Task 3: Evaluate Existing Production Modeling Procedures, Training, and Planning Results (late Feb – mid April) Task 4: Develop Recommendations and Additional Benefit Metrics (late March – early June) Task 5: ERCOT Staff Briefing (May 17) Task 6: Stakeholder Workshop (June 3) Task 7: Prepare Report (early May – June 30, early July)

10. Task 1. Project Kick-off (completed) • Confirmed the scope of the analyses and proposed tasks • Agreed on a detailed work plan • Identified key ERCOT staff that will be available to provide data and technical information • Identified key ERCOT, stakeholder, and other documents and data that need to be considered in the review effort • Assemble a list of stakeholders that should be interviewed

11. Task 2. Review and Critique ERCOT’s Existing LTS Planning Process (ongoing) • Review ERCOT’s current process for screening economic transmission projects over its long-term study horizon • Interview ERCOT planning staff to ensure complete understanding • Interview the investors and other stakeholders identified during the kick-off meeting to obtain their thoughts about existing planning process, concerns, and possible improvements • Identify gaps and options to address them

12. Task 3. Evaluate Existing Production Modeling, Training, and Planning Results (ongoing) • Review relevant documentation • Interview ERCOT staff and meet with ERCOT staff on site (and, where efficient, over Web-Ex) to review: • Production cost modeling procedures, including a review of how each modeling tool is being used. (e.g., PROMOD IV, UPLAN, and KERMIT.) • In-house training materials and methodologies • Preliminary modeling results of ERCOT’s most current economic planning efforts • Identify strengths of current analytical and modeling capabilities and identify gaps that should be filled to improve planning process

13. Task 4. Develop Recommendations and Additional Benefit Metrics • Recommend improvements to existing planning and screening process • Propose potential refinements to existing methodology, calculations, and metrics associated with production cost savings • Develop and propose additional metrics of potential benefits to be used in evaluating the societal benefits • Describe and demonstrate through examples how to calculate the new metrics based on existing ERCOT modeling tools and additional analyses • Explain how value metrics and evaluation techniques fit with ERCOT’s cost recovery mechanisms • Consolidate findings and draft recommendations

14. Task 5. ERCOT Staff BriefingTask 6. Stakeholder Workshop • Conduct day-long on-site meeting with ERCOT staff to review our draft findings and recommendations, prior to workshop • Include demonstration of the proposed additional benefit evaluation methods • Work with ERCOT Long Term Study Task Force to host on June 3, 2013 (initially April) a workshop to educate the stakeholder community about the “business case” for economic transmission projects • Draft PowerPoint presentation for stakeholder workshop and finalize with ERCOT input • Present and lead discussions at the workshop (summarize all of the tasks, findings, and recommendations)

15. Task 7. Prepare Report • We will draft a report that documents the results of our assessment of ERCOT’s long-term economic planning process, including recommendations. • Draft report documenting results of our assessment and recommendations • Begin with an outline by first week of May for ERCOT project team feedback • Prepare initial draft by second week of June and obtain ERCOT’s feedback • Final draft of report on June 30, 2013 (originally May 2013), with last round of feedback and finalizing edits by mid July

16. Timeline: Feb ’13 – July ’13

17. Important Step: Stakeholder Input • We welcome your input and are currently interviewing stakeholders. • Please reach out to Greg or directly to us to set up a time.

18. About The Brattle Group / Contact Information Climate Change Policy and Planning Cost of Capital Demand Forecasting and Weather Normalization Demand Response and Energy Efficiency Electricity Market Modeling Energy Asset Valuation Energy Contract Litigation Environmental Compliance Fuel and Power Procurement Incentive Regulation Rate Design, Cost Allocation, and Rate Structure Regulatory Strategy and Litigation Support Renewables Resource Planning Retail Access and Restructuring Risk Management Market-Based Rates Market Design and Competitive Analysis Mergers and Acquisitions Transmission • The Brattle Group provides consulting and expert testimony in economics, finance, and regulation to corporations, law firms, and governmental agencies around the world. • We combine in-depth industry experience, rigorous analyses, and principled techniques to help clients answer complex economic and financial questions in litigation and regulation, develop strategies for changing markets, and make critical business decisions. Johannes Pfeifenberger (hannes.pfeifenberger@brattle.com) Judy Chang (judy.chang@brattle.com) 44 Brattle Street, Cambridge, MA 02138 617-864-7900 (www.brattle.com)

19. Content • Brattle Project Team • Work Plan (Tasks 1-7) • Timeline • Information Needs • Appendix (Tools, Example Metrics)

20. Common Tools Supporting Economic Analysis • Several types of standard modeling tools provide relevant inputs to economic analyses of transmission projects • Custom analyses frequently needed for certain transmission benefits (e.g., ancillary service costs of balancing intermittent resources)

21. Production Cost Models • Security-constrained dispatch simulation models or “production cost models” are the most widely-used tool used to assess the economic benefits of transmission projects. Production cost models: • Measure changes in production costs, power flows, LMP, and congestion • Allow for different definitions of “benefits,” reporting of different “metrics,” but provides incomplete picture of total transmission-related value Limits of production cost models are easily overlooked: • Despite fancy modeling tools, results often driven by assumptions and simplifications (no long-term effects; no transmission outages; no transmission losses; contracts often ignored) • Different (often simplistic) benefit metrics can produce very different results • Limited number of scenarios/cases does not capture disproportional benefits under stressed market conditions and extreme contingencies • Production cost modeling does not capture investment cost impacts (e.g., generation retirement and additions; access to lower-cost generation) • Many “other” transmission benefits not captured in modeling efforts

22. Example: Diverse Benefits Wide-spread nature of transmission benefits creates both planning and analytical challenges

23. Example: Metrics used in Other RTOs • CAISO TEAM analysis (DPV2 example) • Quantified • production cost savings and reduced energy prices from both a societal and customer perspective • mitigation of market power • insurance value for high-impact low-probability events • capacity benefits due to reduced generation investment costs • operational benefits (RMR) • reduced transmission losses • emissions benefit • Not quantified • facilitation of the retirement of aging power plants • encouraging fuel diversity • improved reserve sharing • increased voltage support • (CPUC Decision 07-01-040, January 25, 2007 (Opinion Granting a Certificate of Public Convenience and Necessity) SPP ITP analysis: Quantified production cost savings reduced transmission losses wind revenue impacts natural gas market benefits reliability benefits economic stimulus benefits of transmission and wind generation construction Not quantified enabling future markets storm hardening improving operating practices/maintenance schedules lowering reliability margins improving dynamic performance and grid stability during extreme events societal economic benefits (SPP Priority Projects Phase II Final Report, SPP Board Approved April 27, 2010; see also SPP Metrics Task Force, Benefits for the 2013 Regional Cost Allocation Review, July, 5 2012.) • MISO MVP analysis: • Quantified • production cost savings • reduced operating reserves • reduced planning reserves • reduced transmission losses • reduced renewable generation investment costs • reduced future transmission investment costs • Not quantified • enhanced generation policy flexibility • increased system robustness • decreased natural gas price risk • decreased CO2 emissions output • decreased wind generation volatility • increased local investment and job creation • (Proposed Multi Value Project Portfolio, Technical Study Task Force and Business Case Workshop August 22, 2011)

24. ATC - Paddock-Rockdale Project • Total benefits exceeded standard production cost savings. • Quantified benefits associated with increased competition, insurance for system failures, and capacity savings. Note: adjustment for FTR and congestion benefits was negative in 3 out of 7 scenarios (e.g. a negative $117m offset to $379m in production cost savings)

25. Example: Electricity Market Benefits vs. Costs Total electricity market benefits of SCE’s DPV2 project in CAISO exceeded project costs by more than 50%