Proposed Analytical Approach - Modeling Phase 3 - Formation of new team December 9, 2003 Steering Committee Presentation

RMATS S:\MIPoffice\Strategic Analysis\WorkInProgress\RMATS\Transmission Alternatives 2 Draft Proposal RMATS Goals RMATS Deliverable: Commercially Viable Alternatives Clarify Phases 2 and 3 Scope and Approach to Modeling Form Team Cost Assignment/Recovery Issues Economically sound and technically feasible transmission alternatives Criteria and alternatives: Benefits determination Cost Assignment Cost Recovery Need Benefits/beneficiary criteria

RMATS S:\MIPoffice\Strategic Analysis\WorkInProgress\RMATS\Transmission Alternatives 3 Draft Proposal “Commercially Viable” means...  Serves the load  Technically feasible  Maintains or increases reliability/security and price stability  Adds flexibility and robustness to the RMATS network to facilitate competitive wholesale markets  Cost-effective; benefits are commensurate with risks  High probability of cost recovery; investment community is likely to look favorably upon  Likely to pass muster with state regulatory bodies  Likely to pass muster with FERC -- Draft --

Modeling phases 2 and 3

RMATS S:\MIPoffice\Strategic Analysis\WorkInProgress\RMATS\Transmission Alternatives 5 Draft Proposal To meet the RMATS deliverable, Phase 2 of the modeling should include...  Production cost modeling for the system as a whole, using ABB Market Simulator  Focus on variable costs and nodal prices of the system as whole  Two modeling steps: Step 1: Three resource/transmission alternatives to serve load, two alternatives for export. Includes two gas price sensitivities Step 2: Refined alternatives from Step 1. Includes five gas/hydro/load sensitivities  Objective: Arrive at 2-4 alternatives that appear technically feasible and economic from a variable cost/locational marginal price standpoint

RMATS S:\MIPoffice\Strategic Analysis\WorkInProgress\RMATS\Transmission Alternatives 6 Draft Proposal And Phase 3 of the modeling should include...  First-pass cost/benefit analyses for Phase 2 alternatives  Regional economic perspective  Takes into account investment and other fixed costs, as well as variable costs  Should also includes more thorough technical assessment  Sensitivities: –  Emissions/CO2 adders –  Loads –  Gas prices –  Coal prices –  Market prices –  Capex & financing costs

RMATS S:\MIPoffice\Strategic Analysis\WorkInProgress\RMATS\Transmission Alternatives 7 Draft Proposal Phase 3 continued --  Uses 2013 as analysis year; No multi-year cash flows and discounting as a full-fledged cost/benefit study would require  Approximates the beneficiaries  Takes into account findings from cost assignment/recovery team, as available Objective: Arrive at 2-4 alternatives that are “commercially viable” -- that merit detailed planning and financial consideration

Form a cost assignment/recovery team

RMATS S:\MIPoffice\Strategic Analysis\WorkInProgress\RMATS\Transmission Alternatives 9 Draft Proposal To meet the RMATS deliverable, the Steering Committee should also...  Form a cost assignment/cost recovery team  Participants: State Regulators Utilities Developer Representatives FERC staff (consultation)  Purpose: Research, develop, and evaluate cost assignment/recovery alternatives  Scope: Transmission alternatives coming out of RMATS  Reporting relationship: to RMATS Steering Team (at least initially)  Life of team may extend beyond RMATS Recommendation

RMATS S:\MIPoffice\Strategic Analysis\WorkInProgress\RMATS\Transmission Alternatives 10 Draft Proposal Issues the new team would address  Benefits Define “benefits” and “beneficiaries” for this purpose How benefits should be measured How modeling should be conducted  Cost Assignment Current regulatory policies (Federal and State) What other regions are doing Principles/criteria that should apply Methodological alternatives  Cost Recovery Issues Role and policy issues – FERC and States Regulatory impediments and risks to cost recovery What investors require Potential solutions Recommendation