Regional Transmission Organizations: A Primer UW Public Utility Institute Energy Basics Program October 2, 2012 By Bill Malcolm, MISO

RTO Map In the U.S., 65% of end users are served by ISOs or RTOs. In Canada, 50% of consumers are in an ISO.

What do RTOs do? Maintain regional reliability Manage congestion on the grid Provide non-discriminatory wholesale transmission access Operate a wholesale energy market (real-time, day ahead, reserve market) Prepare a regional transmission plan each year Facilitate renewable portfolio standards implementation Monitor the market

RTO Differences Serve one state or province: CA, NY, Alberta, ERCOT (TX) Formed from pre-existing power pools: All except MISO Operate (or will operate) a forward capacity market: New England, PJM, MISO Regulated by FERC: All except ERCOT Serves primarily states that allow customers to choose their retail supplier: ERCOT, PJM, New England, New York Have regional state committee of state regulators: SPP (SPP RSC), MISO (OMS), PJM (OPSI), ISO New England

MISO and RTO History See attached appendix for detail on these FERC orders

History of RTOs - MISO Fast Facts (as of 9/21/12) America’s first FERC-approved RTO Serving 11 states, 1 Canadian province Peak load 98,576 MW Generation capacity 131,581 MW 11,857 MW of wind 1,928 pricing nodes 35 transmission-owner members Based in Carmel, Indiana Governed by an 8 member board Intro to MISO for those not familiar with MISO or a Regional Transmission Organization: MISO is an independent, non-profit organization that has 3 main goals: Operate the transmission grid system reliably Transmission planning for reliability and bringing the lowest cost wholesale power to the consumer; and Managing a wholesale power market that is designed to bring the lowest economically efficient wholesale cost of power to the consumer. We do not buy or sell power, only administer the market; we do not own any transmission or generation, only do transmission planning; we are essentially engineers, business operations personnel and computers. We have 2 offices – Carmel, IN and St. Paul, MN, and are looking to open a new office in the South with Entergy joining us. MISO is an independent, non-profit reliability coordinator for the transmission of high voltage electricity via a security constrained economic dispatch across all or parts of 11 states and the Canadian province of Manitoba. First Regional Transmission Organization (RTO) approved by the Federal Energy Regulatory Commission (FERC) Saving $4.3-$5.7 billion in value from MISO Markets (07-2011) Other Misc. Facts: $23.6 billion gross market charges (2011) Generation Capacity 131,010 MW (market) 142,930 MW (reliability) Historic Peak Load (set July 20, 2011) 103,9750 MW (market) 110,032 MW (reliability) 49,641 miles of transmission

RTO Critical Deliverables What RTOs Do Provide independent transmission system access Deliver improved reliability coordination Perform efficient market operations Coordinate regional planning Foster platform for wholesale energy markets Implications Equal and non-discriminatory access Regional reliability improvements Lower cost unit commitment, dispatch, congestion management Integrated system planning Encourage infrastructure investment, facilitate regulatory initiatives

Cost allocation and recovery Ensuring Valued Transmission is Built Before transmission is built a number of conditions must be met: Consensus on energy policies (current and future). A robust business case that demonstrates value sufficient to support the construction of the transmission project. A regional tariff that matches who benefits with who pays over time. Cost recovery mechanisms that reduces financial risk. Policy consensus Cost allocation and recovery Robust business case

Renewable Portfolio Standards Midwest Region Consensus reached regarding appropriate planning for energy policies. Implementation of renewable portfolio standards across the MISO footprint and the work of many stakeholders, spearheaded by the: Midwest Governor’s Association Upper Midwest Transmission Development Initiative Organization of Midwest ISO States Cost Allocation and Regional Planning Group

Types of MISO Transmission Projects & Cost Allocation Allocation Category Driver(s) Allocation to Beneficiaries Participant Funded (“Other”) Transmission Owner identified project that does not qualify for other cost allocation mechanisms. Paid by requestor (local zone) Transmission Delivery Service Project Transmission Service Request Generally paid for by Transmission Customer; Transmission Owner can elect to roll-in into local zone rates Generation Interconnection Project Interconnection Request Paid for by requestor; 345 kV and above 10% postage stamp to load Market Efficiency Project Reduce market congestion when benefits are 1.25 times in excess of cost Distribute to local resource zones commensurate with expected benefit; 345 kV and above 20% postage stamp to load Baseline Reliability Project NERC Reliability Criteria Primarily shared locally through Line Outage Distribution Factor Methodology; 345 kV and above 20% postage stamp to load Multi Value Project Address energy policy laws and/or provide widespread benefits across footprint 100% postage stamp to load * For additional information see Attachment FF of the Tariff at https://www.midwestiso.org/Library/Tariff/Pages/Tariff.aspx

MISO Multi-Value Portfolio Projects *Total benefit of $7 to $33 billion over a 20-40 year life *Provides benefit cost ratios of 1.8 to 3.0. *Provides annual value of $1.3B vs. cost of $.0.6 B *Total portfolio construction cost of $5.2 billion *Resolves 650 reliability issues *Enables 41 million MWh of wind energy

MISO Wind Utilization **Hourly data. *Sum of Hourly ICCP data *Dispatchable Intermittent Resources (DIRs) allow participation of variable generation such as wind energy to participate in the real-time security constrained economic dispatch process. This allows MISO to order such resources to reduce their output (i.e., dispatch down) thereby mitigating the need for manual curtailments of such generation. **Hourly data.

For More Information on RTOs MISO (misoenergy.org) PJM (pjm.com) CA (caiso.com) ERCOT (ercot.com) New England (iso-ne.com) NY (nyiso.com) SPP (SPP.org) Contact me bmalcolm@misoenergy.org (317) 249-5426

Appendix Key FERC RTO Orders

RTO Regulatory Backdrop RTOs were the product of an extensive regulatory backdrop: Promoting Wholesale Competition Through Open Access Non-Discriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, Final Rule, 75 FERC ¶ 61,080 (1996)(“Order No. 888”) Open Access Same-Time Information System (formerly Real-Time Information Networks) and Standards of Conduct, Final Rule, 75 FERC ¶ 61,078 (1996)(“Order No. 889”) Regional Transmission Organizations, Final Rule, 89 FERC ¶ 61,285 (1999)(“Order No. 2000”) Atlantic City Electric Co. et al. v. FERC, 295 F.3d 1 (D.C. Cir. 2002)

FERC Order No. 888 (April 24, 1996) In Order No. 888, the Federal Energy Regulatory Commission (“FERC”): Required public utilities to file open access non-discriminatory transmission tariffs; and Permitted public utilities to recover stranded costs. Goal of Order No. 888: “Remove impediments to competition in the wholesale bulk power marketplace and to bring more efficient, lower cost power to the nation’s electricity consumers.” Order No. 888 encouraged development of independent system operators (“ISOs”)

FERC Order No. 889 (issued April 24, 1996) In Order No. 889, FERC: Required each public utility to implement standards of conduct to functionally separate transmission/wholesale power merchant functions; and Required each public utility to create or participate in an Open Access Same-Time Information System (“OASIS”). OASIS: Provides information about available transmission capacity, prices, etc. Goal of Order No. 889: “[Ensure] that transmission customers have access to transmission information enabling them to obtain open access transmission service on a nondiscriminatory basis.”

Order No. 2000 (issued December 20, 1999) Sought to address certain problems that remained after Order Nos. 888 and 889. In Order No. 2000, FERC: Amended its regulations under the Federal Power Act to advance the formation of RTOs Required each public utility to make certain filings with respect to forming and participating in an RTO Codified minimum characteristics and functions for RTOs Goal of Order No. 2000: “[P]romote efficiency in wholesale electricity markets and ensure that electricity consumers pay the lowest price possible for reliable service.”

Inter-regional Planning FERC Order 1000: Inter-regional planning and cost allocation, new transmission development rules Regional Planning Requirement to create a regional plan Inter-regional Planning Facilitate evaluation of interregional facilities that may address the needs of neighboring regions Cost Allocation Must incorporate a “beneficiaries pay” cost allocation methodology Costs cannot be allocated outside the region without external party consent Federal Right of First Refusal Federal ROFR rights must be removed from tariffs Regions must create non-discriminatory selection criteria for competing projects/developers