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  1. NewEnergy Strategist® Michigan Public Service Commission February 28, 2005

  2. Market Supply Financial Uncertainty Customer Strategist - Integration Has Its Advantages • Strategic Planning with a Single Model

  3. Fully Integrated Strategic Analysis Customers Producers Transmission Financial Performance Applications Resource Mix Evaluation and Optimization Portfolio Risk Management Supply Contract Bid Analysis Customer Retention and Profitability Applications (continued) Competitive Market Assessment Regional and International Market Analysis Co-generation Profitability Strategic Business Planning Corporate Restructuring Merger & Acquisition Analysis Asset Management Financial Forecasting Stranded Investment Cross Subsidization /Lost Revenue NewEnergy Strategist® - Corporate Strategic Planning

  4. Strategist Modules • Supply and Demand Analysis Modules • Load Forecast Adjustment (LFA) • Generation and Fuel (GAF) • Differential Cost Effectiveness (DCE) • Financial Analysis Modules • Capital Expenditure and Recovery (CER) • Financial Reporting and Analysis (FIR) • PROVIEW™ Resource Optimization

  5. Power Portfolio Components • Owned Generators • Includes thermal, hydro, and pumped storage units • Fuel contracts may be modeled with floor, ceiling, take-or-pay, or pipeline limits • Emissions allowance credits may be used to offset the cost of releasing SO2, NOx, or other effluents • Power Contracts • Includes block energy purchases and sales contracts, call and put options, and fully dispatchable purchases • Contracts may be firm or non-firm • Costs/revenues may be input with energy rates, capacity rates, or both • Demand Controls • Interruptible load with costs, restrictions, and “payback” characteristics • Conservation and marketing programs with costs, market penetration, and hourly load impacts

  6. Power Portfolio Analysis • Market Dispatch • Companies (or a single pool) may buy from and sell to spot energy markets • Market interchange is based on load requirements, expected marginal generating costs, and transmission limits, tariffs, and losses • Multi-Company Accounting • A single pool may be dispatched with company interchange based on split savings • Companies may be dispatched with transmission constraints/losses/tariffs between them, with interchange based on market clearing prices • System Reliability / Emissions Constraints • Commitment and spinning reserve requirements • Automatic Maintenance Scheduling • Emissions Cap

  7. Capital Projects • Capital Expenditure and Recovery Module (CER) • Model the total capital budget of a utility and perform revenue requirement, profitability and Internal Rate of Return Calculations for new capital additions • Help assess the viability of incremental acquisitions and investments • Ability to model project-specific financing • Used to calculate capital requirements for PROVIEW alternatives • Passes all information based on NEW capital additions to the Financial Reporting and Analysis Module

  8. Financial Statements • Financial Reporting and Analysis Module • Completely integrated financial analysis • Retail revenues transferred from the Load Forecast Adjustment Module • Fuel, O&M, emissions, purchased power costs, and wholesale revenue transferred from the Generation and Fuel Module • Capital additions are transferred from the Capital Expenditure and Recovery Module • Assets and Liabilities are modeled to develop beginning balance sheet • Automatic financing logic can be used to issue new short term and long term debt • Proforma financial statements generated (Income Statement, Balance Sheet and Statement of Cash Flows)

  9. Optimization,Resource Plans Financial Planning, Consolidation andAnalysis PROVIEW DP Resource Optimization PowerBase Holding Company Capital ExpendituresRecovery LoadForecast Adjustment Generationand Fuel Financial Reportingand Analysis ClassRevenue EEI Data Processor Marketing Program Design Differential Cost Effectiveness Marketing Integrated Strategic Planning

  10. Load Forecast Adjustment Module (LFA) Function: Represent Customer Demand for Production Cost and Financial Analysis Applications: • Incorporate load research data • Analyze strategic conservation and marketing programs • Create data for demand-side/supply-side planning • Model direct load control programs • Evaluate impact of rate feedback • Represent single or multi-company load • Analyze Load Growth/Decline

  11. Sample Structure Company COMPANY LOAD CLASS Commercial Residential Industrial Small Commercial Large Commercial Electric Heat DLC Water Heaters Non-DLC Water Heaters Chemical Comp LOAD GROUP

  12. Sample Structure Company COMPANY Customer Demand LOAD CLASS Customer Demand LOAD GROUP

  13. Integration with Other Modules Load Forecast and Adjustment Module (LFA) Company Load Generation and Fuel Module (GAF) Production Costs Marketing Capitalized Costs Sales, Coincident / Noncoincident Peak Requirements Rate Feedback Capital Expenditure & Recovery Module (CER) Incremental Capital Expenses and Rate Base Marketing Expensed Costs Financial Reporting and Analysis Module (FIR) System Revenue Requirements Class Revenue Module (CRM)

  14. Generation and Fuel Module (GAF) Function: Calculate Company and System Production Costs Applications: • Perform Unit Profitability Studies • Model Power Pool Operations • Create Market Price Curves • Evaluate Unit Bidding Strategies • Determine Portfolio Value and Risk • Examine Alternative Technologies • Evaluate Off-System Sales/Transactions • Examine Emissions Compliance • Evaluate Generation Fuel Mix • Analyze Alternate Fuel Price

  15. GAF Process Flow • Seasonal Load Curves • Load Modifiers • Transactions • Hydro Generation • Marginal Cost Dispatch • Storage Unit • Dispatchable Transaction • Direct Load Control • Network Economy Interchange • System Aggregate Pointers • Probabilistic Thermal Unit Dispatch • Reliability Calculations

  16. Network Economy Interchange Transco 100% ownership of line System Genco Disco Transco 50% 25% Transco 25% ownership of line Transfer Points 300 MW 150 MW Market A Market B 500 MW 800 MW

  17. $/MWH Buyer’s Savings Seller’s MC Market Clearing Price Buyer’s MC Seller’s Profit MW Interchange NEI Methodology • NEI with no losses, connection charges or transmission constraints Buyer pays = Interchange * MCP Seller receives = Interchange * MCP

  18. Upper Peninsula Ontario North West MAPP South East - Areas - Tie Lines ECAR Representation of Michigan

  19. Thermal Unit Dispatch • The GAF will dispatch generating units in economic order as adjusted or constrained by the following: • Must run units • Commitment • Penalty factors • Emissions adders • Multiple fuels • Spinning reserve • Fuel limits • Bid price MW Most Expensive Cheapest Hours

  20. Capital Expenditure and Recovery Module (CER) Function: • Model the total capital budget of a utility and perform revenue requirement, profitability, and IRR calculations • Help assess the viability of incremental acquisitions and investments • Pass all information based on NEW capital investment to the FIR • Transfer the Base Year Revenue Requirements for Proview alternatives Applications: • General Capital Budgeting • Comparison of Alternative Projects • Modeling the System Incremental Revenue Requirements • Bond Sizing for Project Specific Financing • Expansion Planning Analysis for PROVIEW

  21. Financial Planning and Analysis • Evaluate financial, rate and shareholder impacts of: • Market Structure • Transition Plans • Mergers, Acquisitions, Divestitures • Capital Costs • Business Unit Structure • Alternative Construction Programs • Fuel Cost Scenarios • Produce planning studies in a short period of time • accurately reflect the long-range financial structure of the company • automatic financing • capital retirement and expense forecasts • revenue determination • taxes • run and manage multiple scenarios

  22. Transferring Data Between Modules • Data can be transferred automatically between modules in Strategist. • Linking the GAF and the CER enables the user to model construction expenditures for planned resource additions. • Linking the LFA and the CERwill allow the user to evaluate the financial impact of strategic marketing plans that have capitalized costs. • Linking the LFA and the FIR allows load and demand information to be transferred to the FIR for the calculation of revenues. • Linking the GAF to the FIR transfers the O&M, fuel, and purchased power expenses, and generating unit revenues. • Linking the CER and the FIR transfers the capital expenditures, book depreciation, tax depreciation, deferred taxes, insurance costs, property taxes, and construction work in progress balances. • Linking the CER and PROVIEW transfers the Base Year Revenue Requirements and a Revenue Requirements Profile calculated for a future expansion project in the CER to the alternative in PROVIEW.

  23. Assess the profitability and risk of diverse resource portfolios Manage alternative choices for the use / disposition of existing assets Compare power purchases and sales opportunities Develop optimal mix of owned and purchased resources Evaluate transmission/generation/DSM tradeoffs Evaluate impacts of changes in reliability / environmental constraints PROVIEW Function: To determine the most cost effective mix and timing of possible future resources Applications:

  24. Power Portfolio Optimization • PROVIEW Optimization Module • Considers economics and constraints of adding new resources or demand side management programs • New Thermal, Hydro, and Storage Units • New Power Contracts • Conversions of Existing Units • Transmission Line Upgrades • Demand Side Management Programs • PROVIEW optimizes the company’s (or pool’s) various alternatives while targeting the objective function: • Minimization of Utility Revenue Requirements (i.e. production and capital costs) • Minimization of Average Rates • Minimization of Total Resource Cost • Minimization of Societal Costs

  25. How does PROVIEW perform its optimization? • PROVIEW utilizes a proprietary dynamic programming algorithm to perform a sequence of interrelated decisions • All possible combinations of new alternatives (type, amount, and timing), subject to input constraints, are given a comprehensive analysis over the planning period • Each plan’s capital cost impacts are evaluated using an Economic Carrying Charge methodology, assuming infinite replacement-in-kind for new alternatives • Plans are ranked for the study based on the present value of the selected objective function

  26. PROVIEW Expansion Constraints • System and/or Company Constraints: • Reserve Margin % • Emergency Energy • Loss Of Load Hours • Emissions Released • Emission Allowances Sold • Alternative Constraints: • Annual Minimum and Maximum Added • Cumulative Minimum and Maximum Added • Restricted Alternative Combinations: • Mutually Inclusive/Exclusive (enforced over the entire planning period) • Simultaneously Inclusive/Exclusive (enforced each year) • Dependent and Chained Alternatives

  27. PROVIEW Reporting and Analysis • Comparison Reports show plans side-by-side, ranked by either the Planning Period total or Study Period total (including End Effects) • After an optimization, the top plan is automatically set up in the database, and the System Cost Report shows year-by-year production and capital costs • Any plan generated by PROVIEW (not just the optimal one) may be set up in the database for further analysis • PROVIEW can automatically run an input number of top plans and produce full financial reports over the planning period

  28. Strategist Planning Studies • Analyze resource decisions • Supply-side and Demand-side • Build new resources • Buy existing resources • Refurbish/Repower/Mothball/Retire plants • Financial options / futures contracts • Environmental compliance options and costs • Evaluate financial, rate and shareholder impacts of: • Customer load • Capital costs • Alternative construction programs • Interest rate scenarios • Fuel cost scenarios

  29. Optimization,Resource Plans Financial Planning, Consolidation andAnalysis PROVIEW DP Resource Optimization PowerBase Holding Company Capital ExpendituresRecovery LoadForecast Adjustment Generationand Fuel Financial Reportingand Analysis ClassRevenue EEI Data Processor Marketing Program Design Differential Cost Effectiveness Marketing Integrated Strategic Planning