Transmission: the Critical Link

1. Transmission: the Critical Link Delivering the Promise of Industry Restructuring to Customers Janet Gail Besser, VP, Regulatory Affairs, Transmission Presentation for MA DOER Roundtable Boston, MA September 23, 2005

2. Transmission and Long-Term Resource Adequacy • Transmission often left out of resource adequacy debate* • Role of transmission is misunderstood • Therefore, potential contribution of transmission to resource adequacy is overlooked *Though it’s subject to much debate on its own

3. Transmission’s Role • Transmission is the critical link for delivering the benefits of restructuring to customers • Transmission is a market facilitator, not a market product • Reliance on market mechanisms to induce transmission investment will lead to inadequate system • Niche role for merchant transmission • Policies that recognize role of transmission as market enabler must be implemented to ensure reliable and economic system

4. Benefits of Restructuring Undermined by Insufficient Transmission Investment • Insufficient transmission preserves protected power markets, diminishes competition, and threatens reliability • Such conditions… • Increase congestion • Create opportunities for market power • Restrict customer choice • Lead to higher costs • Increase need for regulated intervention in the market to avoid reliability problems (and mitigate prices)

5. Transmission Enhances Long-Term Resource Adequacy • Transmission connects capacity and load (with help from distribution) • Larger, more integrated markets / electricity systems enhance reliability • Diversity of loads and load shape • Diversity of generation / capacity resources and availability • Transmission can also lower overall costs of electricity and reduce locational capacity cost differences • Transmission cost is small % of total bill • Robust transmission system is especially important in market context

6. Inadequate Transmission Produces Market Problems • Transmission constraints preserve protected markets and create opportunity for exercise of market power. • This prompts need for mitigation which, in turn, prevents some generators from recovering costs. • Retirements in constrained areas are a concern. • RMR contracts used to preserve reliability • Regulated generation undermines market • NYPSC proceeding to explore policies/requirements governing generation retirements • Inability to recover capital costs leads to dependence on capacity market designs that are often very expensive for customers.

7. Transmission – The Path to Successful Markets • Enhances reliability • Enables trade • Facilitates fuel diversity, including renewable energy • Reduces load pockets • Increases customer choice • Reduces need for regulatory intervention into markets • Leads to lower and more stable overall electricity prices

8. The Roadblocks to Adequate Transmission • Planning and pricing policies that view transmission as a market product vs. market enabling infrastructure • Ignore the “Commons” nature of transmission • Rely on voluntary participant funding • Attempt to identify specific beneficiaries • Fragmented nature of transmission ownership / operation • Lack of independence of transmission from generation • Lack of adequate financial incentives • State vs. federal jurisdictional issues • Siting • Cost recovery

9. Policies That Support Transmission • Robust regional transmission planning processes for reliability and economics • Fair and workable cost allocation processes, recognizing transmission as market enabler • Federal and state cooperation on cost recovery and siting • Incentives to induce adequate investment

10. Regional Transmission Planning • A robust planning process should: • Identify reliability and economic needs of the system • Contain well-defined timelines for approval of cost-effective regulated transmission remedies to identified needs • Fully value the benefits of transmission, including enhanced reliability, reduced market power, lower overall electricity prices, environmental improvements, and facilitating energy policy

11. Upfront Cost Allocation Mechanism • Should be clear, well-defined, repeatable • Avoids case-by-case allocation that invites endless debate and litigation • Costs should be allocated broadly to reflect: • Transmission’s widespread benefits • That transmission’sbeneficiaries change over time • Regional cost allocation should include reasonable costs incurred to site projects • New England is a good example • Caution on regional v. local allocation

12. Federal/State Cooperation • FERC and states must work together to provide certainty of cost recovery to transmission owners. • Including incentives for cost-effective transmission investment • States should adopt siting policies that recognize broad benefits of transmission • Contribution to resource adequacy • Delivery of low-cost remote generation • Access to renewable resources • Greater customer choice • Enhanced reliability • Federal backstop authority may be required in some cases

13. Conclusion • Transmission is market enabler, not market product • Inadequate transmission investment is key obstacle to delivery of restructuring’s benefits to customers • Policies must recognize role and importance of robust transmission infrastructure • To ensure reliability and long-term resource adequacy • To reduce customer costs • In both organized and traditional electricity markets

14. Questions? Find Transmission: The Critical Link at: www.nationalgridus.com/transmission_the_critical_link/