Ensuring the Next Generation of Transmission Gets Built

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Ensuring the Next Generation of Transmission Gets
Built

• Paul J. Halas
• Senior Vice President
• Business Development
• National Grid USA

2005 Western Conference of Public Service
Commissioners June 20, 2005
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National Grid UK
Gas transmission system
Electricity transmission system
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National Grid US

• In Northeastern US
• Owns and operates electricity transmission
  and distribution systems.
• Owns and operates gas distribution.
• Member of New England RTO.
• Long term incentive based rate plans in
  NY and NE.
• 3.2 million electric and 500,000 gas
  customers.
• Reduced controllable costs by 20 real
  between March 2002 and March 2005.

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National Grid

• Strategy
• Asset based network provider
• - Operational expertise
• - Managing regulatory relations
• - Disciplined approach to capital management
• Exploiting our skills and assets via
• - Organic growth of existing businesses
• - Energy networks assets and businesses
• - Selected network related businesses
• Market Capitalization
• - Approx. 30bn

Current shape of National Grid (Proforma based
on operating profit)
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Current State of US Electricity Transmission

• US investment is falling behind the rest of the
  world.
• US investment is not keeping up with need.
• High level of fragmentation of transmission
  ownership and management.
• Has a substantial impact on customers.

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US Transmission Investment 1975 to 2003

• Over the period 1975 through 2003 the average
  annual decrease in transmission investment was
  50m per year.

Source Eric Hurst
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US Transmission Investment
Source Investment by Edison Electric Institute
members only. (EEI member companies serve
approximately 70 of the load in the contiguous
US.)
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Normalized Transmission Investment US vs. UK
Reflects investment in 230kV and above
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US / UK Investment Comparison

• US planned investment 2004-08 is 4.6 M/GW/Yr.
• This compares to UK equivalent planned investment
  of 16.5 M/GW/Yr.
• UK is outspending US by 360.
• This continues trend of last 4 years where UK
  outspent US by 350.

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Global Investment Rates
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Is US investment keeping up with need?

• Congestion is still generally rising
• PJM congestion costs per MWhr have increased on
  average 64 per year and have totaled 2.2Bn over
  the period 1999 to 2004.
• NY congestion costs have increased on average 50
  per year over three years 2001 to 2003 totaling
  1.5Bn over the period.
• NE constraint costs are roughly 200M a year
  which includes reliability compensation to
  generators.
• In comparison, UK congestion levels peaked above
  350M/Yr during the 1990s, then through
  incentive mechanisms have been managed down to
  less than 50M/Yr.

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UK Congestion Costs
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US Transmission is Fragmented

• There are 450 separate transmission owning
  entities in the US.
• There are over 100 control areas and, of course,
  there are at least 51 regulators.
• Transmission was built to connect generation and
  load in utility footprints . . . not to move
  power across regions.
• Multiplicity of jurisdictions and the lack of
  effective regional planning are also significant
  factors.

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US Customers are Impacted

• US Reliability is significantly worse than
  international comparators
• US energy unsupplied 0.0066, vs.
• European average energy unsupplied 0.001.

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The Generation Gap

• First generation of transmission built by
  discrete utilities to deliver power from
  proprietary generation to load part of bundled
  cost of delivered power, regulated by single
  jurisdiction.
• The next generation must deliver higher volumes
  of power across vast expanses and must
• Improve reliability to regionalized delivery
  area.
• Permit access to broader range of power sources,
  including renewables and lower cost traditional
  sources.
• Be regulated by multiple state and federal
  regulators.
• Be paid for by multiple users.

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Impediments to Transmission Investment

• Structural issues Fragmentation Vertical
  Integration.
• Lack of effective regional planning
• addressing both reliability and economics
• facilitating fuel diversity such as renewables
• Rate uncertainty cost allocation and
  sufficiency of returns.
• Lack of clear demarcation between transmission as
  a market platform and the market participants.
• Divided jurisdictions PUHCA / Siting / Cost
  recovery.

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The Dilemma, an example
Company A has a power source valuable to the
market, e.g. renewable or low cost generation
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The Dilemma, an example
Company A has a power source valuable to the
market, e.g. renewable or low cost generation
Company C has a need / desire to access power
from Company A.
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The Dilemma, an example
Company A has a power source valuable to the
market, e.g. renewable or low cost generation
Company C has a need / desire to access power
from Company A.
Company B geographically and electrically
separates Companies A C.
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The Dilemma (contd)

• In current system
• Company B has no incentive to build, in fact may
  resist on basis of NIMBY.
• With regional planning, but unreformed cost
  allocation
• Company Bs customers may be forced to pay for
  footprint transmission from which they get
  disproportionately low benefit.
• Moreover
• If Company B is vertically integrated, it might
  feel a fiduciary responsibility to resist
  transmission being built as it could damage the
  value of its generation.

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Ideal Structures for Efficient Power Flows
POWER TRANSACTIONS
TRANSMISSION
SUPPLY/ GENERATION

• Bilateral contracts, or
• Open market

• Fully competitive
• No requirement for RMRs
• Limited need for regulatory oversight or market
  monitoring

• Independent platform for market
• For profit, but regulated and under regional
  planning
• Operational and ownership synergies

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Ideal Structures . (cont.)

• Get the Basics Right
• Secure system operation.
• Competitive wholesale retail markets without
  market power mitigation fixes.
• Economic benefits to customers.
• Adequate investment for long term asset/system
  health.
• RTOs are a good start, but not end state
• RTOs in east are effective at making equally
  available what transmission capacity there is,
  but not yet effective in increasing transmission
  capacity in either short or longer time scales.
• International Experience
• Not-for-profit transmission administration
  proving inefficient due to inability to exploit
  ownership/operations synergies and lack of cost
  accountability.
• Merchant transmission model is working in limited
  niche, and re-regulating transmission everywhere
  else.

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The Optimum (and ultimate?) Transmission Platform

• Characteristics independent, for-profit,
  asset-owning (big slabs), regionally planned,
  regulated.
• Benefits
• More transmission will be built singular focus
  and no competition for capital.
• Smarter, more efficient grid management,
  including scale synergies and active management
  of grid to facilitate trade in all timescales.
• Greater assurance of open access, as transmission
  owner is indifferent to identity of source and
  sink.
• More competitive markets minimizing need for
  market mitigating measures (price caps, FTRs,
  ICAP and RMR payments).

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How do we get there?

• Step 1 Empower Independent Regional Planning
  Authority
• With scope to evaluate both reliability and
  economic needs and opportunities.
• With power to order transmission improvements to
  be effected by incumbent utilities or third
  parties.
• Step 2 Establish equitable, predictable cost
  allocation regime
• To ensure beneficiaries of improvements pay for
  them.
• Avoid case-by-case adjudication as that would
  lead to quagmire and prevent necessary
  improvements.
• Recognize value of both reliability and economic
  impacts of improvements in formulaically
  assigning costs.

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How do we get there? ... (contd)

• Step 3 Stimulate Transmission investment
• Recognize the risks and time involved in planning
  and developing significant transmission
  improvements, and allow commensurate return.
  Recognize and reward the value of the independent
  regional planning process.
• Step 4 Move towards improved Transmission
  business structure
• Higher returns for independently owned/operated
  transmission systems and improvements.
• Allow incentive returns in transmission asset
  acquisitions, which returns invariably go to
  seller of transmission assets.
• Step 5 Self-sustaining incentives
• Large independent transmission entities can be
  incentivised to deliver enhanced performance with
  Performance Based Rates.
• Incentives can be targeted on customer benefits.

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Adequate Incentives

• Incentives for transmission investment
• Ensure RoEs are at the high end of the range.
• Should reflect prompt and full recovery of
  investment, perhaps accelerated return through
  depreciation or, in appropriate cases, CWIP .
• Does not need to be tied to RTO if appropriate
  planning regime is in place.
• Incentives for independence and consolidation
• Reward moves in the right direction based on
  end-state market structure.
• A sliding scale is needed to reflect incremental
  moves toward independence based on particular
  facts and circumstances.

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Summary and Takeaways Points for Ongoing
Consideration

• Increase scope and functionality for
  transmission focused companies.
• Regional planning both reliability and
  economic.
• Recognition that transmission is a market
  platform not a market product.
• Clarify cost allocation/cost recovery issues.
• Share vision and policy across regulatory
  jurisdictions, both State and Federal.

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Questions? paul.halas_at_us.ngrid.com Tel
508-389-3059