Transmission - Energy Policy Enabler or Obstruction?

1. Transmission - Energy PolicyEnabler or Obstruction? Emerging Issues Policy Forum Amelia Island, Florida November 10, 2009 John Bear – CEO

2. The current transmission system is an obstacle to energy policy, … The system was not designed for its current use The amount of congestion on the system limits delivery of economic generation and impedes the ability to meet current state renewable standards Transmission congestion costs are obfuscated by financial transmission rights The lack of a robust regional backbone makes the system inflexible to meet future requirements (e.g., carbon policy)

3. … However, a revitalized transmission grid can enable current and future energy policy decisions • Transmission planning must • Be both bottoms-up and top-down – covering the whole interconnection • Account for multiple possible policy futures by seeking the path of “least regrets” • Follow a consistent objective – Enable the lowest, reliably delivered cost of energy • Barriers to transmission construction must be addressed • Cost allocation / recovery • Incremental planning – no losers • Siting approval • Emerging technologies must be embraced • Synchrophasors • High Voltage and Ultra-High Voltage transmission • Direct Current (DC) lines

4. Historically, the electric system was developed on a company by company basis • Traditional Electric System Development (Generation and Transmission) • Planned at a single company level (sub-regional) • Designed for single company use • Funded at company / state level • Decision criteria • Meet local requirements (i.e., load growth) • Use local natural resources • Few national policy issues (e.g. Clear Air Act) • Limited regional use 4

5. The resulting generation portfolios reflect the nature of resources within each region… WEST MISO NYISO ISO-NE Coal Nuclear Gas Hydro CALISO Wind Other PJM 5 ERCOT SOUTH SPP

6. …While the transmission system reflects the desire to move energy from a company’s generation to the load it serves – without a robust “backbone” 6

7. Given the advent of regional markets with centralized commitment and dispatch of generation, our “point-to-point” transmission system is being asked to perform in a “networked” environment - It is quickly becoming as antiquated as the National Highway System of 1950 National Highway System Interstate Highway System

8. The advent of energy markets has improved the efficiency of the wholesale energy market, but savings are limited by transmission congestion Midwest ISO Congestion History TLR Level 3A-5A and Bound Flowgates • Midwest ISO • Congestion • Centralized market commitment and dispatch of generation provides between $600 million and $700 million in annual production cost savings • Congestion costs in 2007 and 2008 averaged $570 million – reducing the potential savings that the market could achieve A robust modernized transmission grid would reduce the congestion costs. 8

9. That congestion constraint is becoming more problematic as wind from either the Great Plains or Off-Shore attempts to find its way to urban loads • The Great Plains States hold the highest capacity (most economic) wind in the Eastern Interconnection • However, these states are located away from urban areas • National or state renewable energy policy will create operational and transmission issues

10. As the generation fleet becomes more “regional”, grid planning must recognize that change and look at the whole interconnection – this is particularly true as renewable energy is integrated Midwest ISO Transmission Expansion Plan - Renewable Scenario Joint Coordinated System Plan and Eastern Wind Integration and Transmission Study • Scope: Develop transmission plans to regionally meet a 20% federal renewable energy mandate requiring approximately 50 GW of wind generation • Participants: MISO stakeholders Regional Generation Outlet Studies Eastern Interconnection Planning Consortium • Scope: Develop transmission plans to meet a 20% federal renewable energy mandate for much of the Eastern Interconnect (Eastern 2/3 of the United States) requiring approximately 91 GW of wind generation • Participants: Numerous Transmission Planning Authorities in the Eastern 2/3 of the United States and the U.S. Department of Energy • Scope: Develop transmission plans for wind mandates in 9 states requiring approximately 38 GW of wind generation • Participants: MISO stakeholders, state regulators and Governors • Scope: Develop comprehensive planning process/group for Eastern Interconnection-wide planning • Participants: 22 Planning Authorities in the Eastern Interconnection RGOS I RGOS II, MTEP Renewable Scenario RGOS I RGOS II, MTEP Renewable Scenario EWITS EWITS JCSP JCSP

11. Facing uncertain but emerging energy policy, transmission planning must proceed by finding the “path of least regrets” • While each likely policy future would have a unique optimal transmission system, all of the policy futures have some common elements • Transmission planning should pick those common elements for near term project • This “path of least regrets” minimizes the risk of creating stranded assets while shortening the lead time needed for any policy implementation

12. A consistent transmission design objective is required- Minimize the total delivered cost of reliable energy • Currently various jurisdictions have differing goals Examples include: • Minimize investment risk (seek shorter payback horizon) • Maximize carbon reduction (replace coal production) • Maximize local economic development (install wind directly within the RPS State) • Maximize economic value (seek lowest, reliably delivered cost to customer) • In this arena, local utility planning to maximize short term local benefits and/or economic development , will ultimately increase costs throughout the region and stagnate growth

13. Transmission construction barriers must also be addressed to encourage development • Once the “path of least regrets” transmission plan is identified to enable the lowest, reliably delivered cost of energy it is critical there are still obstacles to getting it build • A regional tariff that matches who benefits with who pays • Backbone projects that support the whole system must be recognized as such • Transmission that delivers renewable energy to meet RPS requirements must be funded by those requiring the energy • Cost recovery mechanisms must reduce investors’ financial risks • Transmission siting can not frustrate development or significantly impact costs

14. New technologies can improve the reliability of the transmission grid and allow expansion of technology with unique operating characteristics • Many emerging technologies (e.g., intermittent generation, storage technologies, PHEVs, demand response) hold tremendous promise to reduce peak generation requirements, reduce our dependence on foreign energy and address climate change • Enabling transmission technologies must be introduced in order to capture the benefits of these emerging technologies • Synchrophasors – to improve the monitoring of the grid and allow rapid response to changes from intermittent generation • Direct Current / High Voltage / Ultra-High Voltage transmission lines – As generation sources move further from our load centers and more of those generation source are intermittent, new transmission technologies will enable the cost effective and reliable delivery of that energy

15. We must address the following issues now so that our transmission system is capable of enabling energy policy decisions – current and future • Transmission planning must • Be both bottoms-up and top-down – covering the whole interconnection • Account for multiple possible policy futures by seeking the path of “least regrets” • Follow a consistent objective – Enable the lowest, reliably delivered cost of energy • Barriers to transmission construction must be addressed • Cost allocation / recovery • Incremental planning – no losers • Siting approval • Emerging technologies must be embraced • Synchrophasors • High Voltage and Ultra-High Voltage transmission • Direct Current (DC) lines