Rate Design Proposal for SPP: Integrated Transmission Plan and Priority Projects Mike Proctor CAWG May 27, 2009

2 Overview 1.Proposed Focus 2.Highway/Byway Two-Part Rate 3.Illustrating Two-Part Rate

3 1. Proposed Focus Upgrades Included Relationship of Upgrades to Beneficiaries Benefits and Usage Initial Focus –GI Cluster Results –Modeling Considerations

4 Upgrades Included Priority Projects - “low hanging fruit” from among: –Projects identified in the Cluster Studies for Grouped Generation Interconnection Requests (GIQ) –Projects that routinely show up as needed in the Aggregate Study Process or projects that address known congestion –Projects needed to integrate SPP’s west and east transmission systems. Integrated Transmission Plan (from the Integrated Planning Process): –All the above that are cost beneficial over a forty-year period (in contrast to “low hanging fruit”). –Reliability Upgrades Approach for Rate Design: Focus on a Highway/Byway rate design to see if a proposal is feasible for application to both.

5 Relationship of Upgrades to Direct Beneficiaries

6 Benefits and Usage Benefits from most upgrades will be proportional to usage. –This is particularly true for generation interconnections and transmission service for new DRs. Usage is defined for these transmission services by MWs of generation. HOWEVER, AND THERE IS ALWAYS A “HOWEVER” If certain sub-regions within SPP are more highly congested than others, then upgrades that relieve that congestion will likely provide greater benefits to sub-regions where: the load downstream from the congestion in the form of lower purchased power costs, or the generators upstream form the congestion that now have greater access for selling their low-cost power. It is difficult to determine where congestion will be after an EHV Overlay / Integrated Transmission Plan is put into place. –Don’t want to make upgrades now that are not needed when the EHV Overlay / Integrated Transmission Plan is ultimately put into place.

7 Initial Focus for Priority Projects Transmission Upgrades that Combine: – Generation Interconnections with –New Designated Wind Resources Delivers the new Wind to loads throughout the SPP region –Benefits Load via new Wind DRs Avoids difficult issues about trapped generation associated with market- based wind and upgrades needed to “fully” deliver wind generation to the SPP EIS market.

8 GI Cluster Study Results GI/DR Projects –How much wind? –Deliverable to whom? Proposal: Waxman RPS Bill 20% deliverable to all Load by 2020

9 Modeling Considerations Every Load (TC) is modeled to receive delivery of same % of wind generation Determine upgrades required to achieve this delivery –Start with 2022 required upgrades at 20% wind energy –Determine timing of sequences of upgrades. Requires “smart” approach to modeling overloads –Should be modeled at expected maximum capacity factor from wind and should take into account relationship of maximum wind to load. Look at relationship of existing wind to SPP load and calculate this relationship by seasons.

10 Highway/Byway: Two Part Rate Two Part Rate Structure Why Have User Fees for Highway? Why Put User Fees on New Generators? Renewable Energy Credits

11 Two-Part Rate Structure Funding of Highway Upgrades –Any upgrades 345 kV or above are funded through a region-wide postage stamp rate User (Access) Fee for Highway Upgrades –New Generators: $X/kW/Month for access to Highway Designated Resource: Load pays the access fee for the Generator –Note: This is not a zonal rate, it is a direct assignment of costs to the load that designates the resource –This includes both Network and PTP service for transmission customers for loads within and external to SPP. –Other Point-to-Point Service Current rate design would role in the costs of upgrades to PTP rate. (Need further discussion at a later time as to whether or not this is sufficient.) –User fees are revenue credits that offset the region-wide postage stamp rate Byway Upgrades –Any upgrades below 345 kV are allocated to either Zonal rates, or Directly assigned to a load or generator

12 Why Have User Fees for Highway? Benefit is proportional to Use of the system. Much like a toll fee on a toll highway, but not mileage based. More like an access fee. The use of the highway by load may be disproportional, particularly due to: the timing of the upgrades, and use of wind generation by loads – absent a federal RPS. –The user fee helps to match the costs with the benefits. If a national RPS is adopted, then there is less of a need for a user fee, but market-based wind generation poses an additional problem (discussed in next three slides).

13 Why Put User Fee on New Generators? If new generator is a designated resource, either to loads within SPP or Exports out of SPP, then the load will pay the user fee. Market-based generation –Places a usage charge for market-based generation in SPP that may also be sold for renewable energy credits (RECs) rather than as designated resource. All Market-Based Generators benefit from access to the SPP EIS market through LIP revenues Because of operational issues there is a limit to the benefits that market-based generation provides to the load wihtin SPP. Load outside SPP can receive benefit from wind generation within SPP without taking PTP transmission service through the purchase of RECs. –Example: Illinois has RPS that can be met via RECs.

14 Wind Deliverability Issues If load can purchase RECs from wind generation in SPP without having to take delivery of the energy: –Wind energy will be generated and delivered into the SPP market –Wind generator will be paid LIP in SPP and REC revenues from the load, but –Wind generation will not be scheduled for delivery into the load area Load gets RPS benefits without paying for the transmission Operational issues/costs remain in SPP Without deliverability - high likelihood of trapped generation

15 Illustrating Two-Part Rate Determining User Fee Ball Park Estimate for User Fee Impact of User Fees Over Time Comparing Rates for Equal and Unequal Usage Incorporating External Use The Advantages of the User Fee

16 Determining User Fees (For purposes of Illustration Only) Based on an estimate of the long-range design for the SPP system. –What are the total revenue requirements for this system? –What is the capacity of this system? –As a bench mark, set the user fee for new generators at 50% of the estimated cost per kW for the upgrades. Determining the Percentage –Previous studies showed about a 33% use of the SPP system from designated resources to load. –This percentage is likely to increase significantly with load designating wind as a resource. Assuming a 20% (percent of energy) RPS, the percentage of use of the system for designated resources is likely to be at least 50%.

17 Ball Park Estimate of User Fee Costs: –Mid-Point Designs 2 & 4 of the EHV Overlay ran approximately $5,306 Million. –Using a levelized fixed charge rate of 12.5%, the resulting levelized annual revenue requirements would be $663 million per year. Postage Stamp Rate –The 12 CP load in 2007 was around MW-month. This is projected to 20i4 at a load of 35,208 MW-month. –Dividing this into $663 million per year result in a postage stamp rate of around $19/kW-year or $1.57/kW-month. User Fee –Quanta assumed 13.5 GW of wind generation plus an addition of 4,664 MW of nuclear generation in the high nuclear case. This gives a conservative estimate of total capacity of 18,164 MW of generation. –Dividing $663 million per year by 18,164 MW gives a cost of approximately $36/kW-year, or $3/kW-month. –Using 50%, the user fee would be $1.50/kW-month, which is approximately the same as the postage stamp rate. A WORKABLE ALTERNATIVE APPEARS TO BE: SIMPLY SET THE USER FEE EQUAL TO THE POSTAGE STAMP RATE.

18 Impact of User Fees Over Time Assumes All Upgrades on 2015 Note: The above calculation assumes all new generation would be subject to user fees. The PS Rate decreases due to increases in load and user fees. The User Rate is equal to the initial PS Rate.

19 Comparison of Rate Paid for Equal and Unequal Usage Note: With the added usage fees the PS rate drops to $1.33/kW-Mo, but the average rate stays the same. Note: With unequal use, the higher use pays above the overall average rate, and the lower use pays below that rate. The denominator in these calculations is the Load

20 Incorporating External Use Note: If the Use rate is allowed to decrease with the PS rate, then external use will pay less than internal use. Note: If the Use rate is set equal to the overall average rate, then external use will pay more than internal use.

21 The Advantage of the User Fee It is simple to apply and non-discriminatory –Applies to all new Generation Interconnections –Does not differentiate between requests except by the MWs of the request –Simply applies the postage stamp rate to MW use –Simple revenue crediting mechanism to calculate PS and User rate It takes into account non-uniform use of the system –Issue: When the upgrades are built and who gets access to these upgrades first –Issue: States with RPS that are required to designate wind as a deliverable resource vs. those that are not –If use is uniform (proportional to load), then load ends up paying the same overall rate. It takes into account non-DR use of the transmission system –Issue: RECs to meet RPS where there are no PTP revenues from customers outside of SPP; e.g., Illinois has RPS that can be met with RECs. –Issue: Wind Generators benefiting when load in SPP may not see enough benefit from added generation to justify the cost.

22 Summary 1.Focus on combined GI & DR to determine upgrades that integrate new wind into the SPP footprint on a region-wide basis. 2.Postage Stamp 345 kV and above cost as a funding mechanism to get upgrades built. 3.Apply a simple usage rate to ensure that load outside SPP footprint that benefits from the added wind generation supports the costs of making these upgrades.

23 For Future Discussion Instead of a two-part rate (funding by load and usage/access by new generation), consider a one-part rate (just usage/access for both) where both load and generation pay. –Include all generation, both existing and new –Include all load Rate = Total ARR/(Load MW + Gen MW) –Lots of details to work through, but hope to have ready for next CAWG Meeting.