1. New Base Load Generation in RTOs-- Time to Get Real Susan N. Kelly VP, Policy Analysis and General Counsel American Public Power Association NARUC Summer 2006 Meeting

2. Public Power’s Business Model We retain (in fact, embrace) the obligation to serve our end use customers We try to obtain the best portfolio of wholesale power supplies, be they owned, purchased, base, mid, peak, coal, gas, renewable, you name it We aim to serve our customers at the lowest possible cost consistent with high reliability and environmental stewardship We are not-for-profit, with no separate class of shareholders to satisfy

3. Public Power Systems and New Base Load/Renewable Generation 9,955 MW of new public-power owned coal-fired generation proposed to go in service by 2013 Additional long-term power purchase agreements with other suppliers for coal, renewables Looking at biomass, solar, other renewables (CREBs); even looking at nuclear Proceeding in RTO and non-RTO regions

4. What Is Needed to Support New Base Load and Renewable Generation? “Markets” don’t support such new generation, long term obligations do. If projects are not supported by the long- term obligation of the owner/customer to take power, financing is much more difficult This presents an urgent problem for retail choice jurisdictions (many of which are in RTOs)—who can sign on the dotted line?

5. What Is Wrong With This Picture? (From July 24, 2006 “Public Power Daily”) Massachusetts agency proposes new power plant The Massachusetts Municipal Wholesale Electric Co. said July 20 it wants to build a 280-MW power plant in Ludlow, Mass., to beef up supply resources for its 26 member cities. The joint action agency is proposing construction of a natural gas- and oil-fired plant at its Stony Brook Energy Center, home to MMWEC’s existing 520-MW Stony Brook plant. The site already has pipelines, transmission facilities and other infrastructure needed to support the new unit, which is planned for operation in 2010.... The proposed unit “is one small power plant for New England but a large and crucial part of the supply for public power in Massachusetts,” said MMWEC General Manager Glenn O. Steiger. “With MMWEC and the region facing power shortages in the near future, and few new plants under development, building a new unit is a practical and economic choice for municipal utilities,” he said. [Hint: New England added 11 MW of new generation in 2005, per FERC.]

6. Retail Auction Mechanisms Are Not Enough to Support New Investment From November 4, 2005 Fitch Report, “Stimulating Generation Additions in Deregulated States”: “The short tenure of [1-3 year contracts under a New Jersey-style auction] does not provide an assured recovery of the investment over the full life of the unit. In fact the time needed to build a new power plant could equal or exceed the duration of a New Jersey-style auction contract.”

7. LMP “Price Signals” Are Not Enough to Support Such New Investment Original rationale for “Day Two” RTO markets with locational marginal pricing (LMP) was that generators would get “price signals” as to where they should locate new generation Even proponents of Day Two markets have acknowledged this did not happen Considerable unhappiness among my members in RTOs with the operation of Day Two LMP markets—but that is another presentation…..

8. Locational Capacity Pricing—the “Next Generation” of Price Signals… Now RTOs are proposing “second generation” locational capacity pricing mechanisms (FCM, RPM) in the hopes of stimulating needed new generation investment But none provide an up-front, guaranteed revenue stream 20-30 years into the future, or even close My members see them as an expensive experiment based on faith in locational “market signals” that already have failed once to produce the required results, despite big promises.

9. From a Member in An RTO With Retail Choice and A Locational Capacity Market… “ ‘Market signals” are not the reason that [various generators] have built generation [in our service territory] over the past few years, nor is it the reason that [a new developer] will be building a new 350MW CC unit... These facilities have/will be built for one reason – [our] willingness to enter into PPAs of sufficient duration to satisfy the developers.”

10. RTO Regions (Especially Retail Choice Jurisdictions) Must Act Fitch Report suggests “possible alternatives” Carve-out for new generation with assured cost recovery for owners of such generation State-provided loan guarantee for new generation projects Return to a regulated market Continue with competitive markets (notes possible higher price volatility and increased supply disruption)

11. Day Two RTOs Are Not Supportive of Our Business Model Financial rights transmission model exposes members to unhedged transmission congestion No long-term rights are currently available to support new base load generation--big development problem we hope will soon be addressed Capacity markets threaten to sweep us in even though we have adequate generation resources— caught in a paradigm designed to address problems created by retail choice/RTO markets

12. But in a Perverse Way, We Are Responding to Market Signals…. High prices and volatility in RTO-run DA and RT markets appall us These prices “bleed” into bilateral markets, resulting in unacceptable price offers Building generation close to home when possible to avoid transmission congestion Building/buying long-term power supplies to decrease reliance on wholesale markets