Dale McMaster, President & CEO Alberta Electric System Operator November 2006 Alberta: Canada’s First Competitive Electricity Market

2 Presentation Overview  An introduction to Alberta  The structure of the electricity industry  Transmission Policy and its implementation

3 Alberta the Centre of Western Canada

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5 Alberta’s Electric Industry  More than 21,000 km transmission  Single control area of 660,000 km²  Interties to B.C. (up to 780 MW) & Sask. (up to 150 MW)  Over 280 generating units  9,580 MW system peak  About 200 market participants  11,734 MW internal generation capacity net to grid BC Alta Sask

6 Alberta’s Electricity Generation Net to grid % % % Wind % Wood waste % Other % Total 11,734 (MW) (year-end 2005)

7 Transmission Interconnections Import Export  British Columbia MW  Saskatchewan MW Note: Intertie capability varies with system operating conditions including the generation pattern

8 Alberta Outlook: Load and Supply  A Bit of History:  More than 3,000 MW of new generation added to the system since 2001  4.2% average annual growth rate over the past five years for energy and peak demand  4.9% year-to-date growth in energy  10-year Outlook: 2007 to 2016  3% average annual growth rate in energy and peak demand  requirement for about 3,800 MW of new generation by 2016

9 Competitive Restructuring competitive forces competitive forces natural monopoly Generation Transmission Distribution Functional Separation Vertically Integrated Utility natural monopoly Retail

10 Evolution to Competition Timeline Electric Utilities Act passed May 1995 June 1995 Jan May 1998 June 1998 Aug Jan Power Pool Council (PPC) formed EUA takes effect Power Pool begins operation Independent PPC & Market Surveillance Administrator appointed Independent Transmission Administrator appointed Gov’t auctions rights to formerly regulated generator output (PPAs) PPAs go into affect Retail Competition begins June 2003 AESO formed

11 Electric Utilities Act Minister of Energy Appoints BP and AESO Boards, EUB Chairman & MSA Market Surveillance Administrator (MSA) Balancing Pool (BP) Wholesale Energy Market Alberta Electric System Operator System Operator Alberta Energy & Utilities Board (EUB) Regulates AESO’s Transmission business Alberta Industry Structure Transmission System Development and System Access Service

12 The AESO: Background  Created as part of electric industry restructuring  Our mandate is defined by legislation Do not own transmission or generation assets Independent of industry (no commercial interests) “not - for - profit” organization Act in the public interest  Our mission: The AESO facilitates a fair, efficient, openly competitive and sustainable market for electricity and provides for the safe, reliable and economic operation of the Alberta Interconnected Electric System.

13 The AESO: Core Business  Develop and operate Alberta’s real-time electric energy market Facilitate the fair, efficient and openly competitive market for electricity  Direct the operation of Alberta’s power grid to ensure reliability  Plan development of Alberta’s transmission system to ensure reliability and to facilitate the competitive market and investment in new supply  Provide system access for both generation and load customers

14 Transmission System Roles Responsible for system reliability Responsible for reliability of transmission facilities Directs system operation: Operating Authority Operates & maintains transmission facilities Plans transmission system development Builds and owns transmission facilities Develops and implements transmission tariff Revenue collected via AESO transmission tariff Provides system accessConstructs, owns, operates and maintains system facilities providing system access Procures ancillary services AESO Transmission Facility Owners

15 Energy & Utilities Board (EUB)  The EUB is an independent, quasi-judicial agency of the Alberta government  Regulatory oversight of: transmission system development transmission system access AESO transmission tariff - AESO “own costs” and cost of ancillary services and system losses - TFO facility and operating costs generation projects - environmental and siting approvals

16 Transmission Policy: Drivers for change…  Alberta relies on the competitive market to provide investment for new generation  Only one significant transmission line built in the last 20 years  A once robust transmission system becoming inadequate  Increasing transmission congestion: System losses and the associated costs System reliability – voltage stability Reliance on Transmission Must Run (TMR) generation – excessive costs and distortion of the price signal Compromising the competitive energy market  Impediment to the investment in new supply  Potential impact on the economy of Alberta

17 Why was this happening?  Expectation – “the market” would drive the development of the transmission system  The market signals weren’t adequate: Postage stamp transmission tariff “Energy only” real time pool market – single price No significant locational signals -- i.e. no LMP Ineffective system planning - Absence of decision making criteria - Chicken and egg conundrum  Resulted in an over reliance on location critical gas-fired generation and no new transmission  A clear government policy for transmission system development was required

18 The Policy – an overview  Transmission planning must be proactive leading load growth and generation development -- market signals and/or congestion pricing schemes will not result in timely construction of transmission facilities it is appropriate and necessary to align timelines, milestones and commitment of generation and transmission to ensure transmission is developed in a timely manner preconstruction activities (planning, engineering and ROW) to be proactive and aggressive -- costs deemed to be necessary and prudent actual construction to be timed with generation commitment and milestones to assure coincident completion

19 The Policy cont’d…  Transmission must facilitate a competitive wholesale market – system must be reinforced such that about 95% of expected wholesale transactions can be realized without congestion all in-merit generation can be dispatched and virtually all economic wholesale transactions may be realized without congestion under normal operating conditions

20 The Policy cont’d…  Transmission development should eliminate the need for most Transmission Must-Run (TMR) Generation TMR is not to be considered as a substitute for transmission development ISO to be given flexibility to consider TMR where economic or an acceptable alternative to transmission TMR costs to be based on “cost of service” model  Internal transmission should be reinforced to restore the existing inter-ties to their full import/export ratings transmission internal to Alberta should be reinforced so that under normal conditions the existing interconnections can import and export on a continuous basis in accordance with design capability

21 Since Policy Implementation…  AESO has about $1 billion in transmission investment approved and underway  Major Projects Approved: 500 kV Edmonton to Calgary SW System Reinforcement City of Edmonton Reinforcement NW System Reinforcement  Upwards of $3 billion in new transmission could be required in the next 10 to 15 years  Merchant Transmission – planning stage Montana Alberta Tie Line Northern Lights (major DC Transmission from Northern Alberta to the Pacific NW in USA)

22 Summary  Industry/market structure established in 1996 and enhanced in 2003 has served Alberta well  Merging of the market and transmission functions within the ISO provided efficiencies  Independence of the transmission function is essential to develop competition for generation  System operation has remained reliable  The Transmission Policy has proven effective in advancing the “needs” approvals  The “energy only” market structure has provided sufficient incentives for investment in new supply