1. LAREDO RMR EXIT STRATEGY Presentation to Technical Advisory Committee March 4, 2004 Transmission Services Operations

2. © ERCOT 2004 KAD3/04/2004 Goals and Objectives Develop RMR Exit Strategy for Laredo 1, 2 and 3 Short- and long-term plans Maintain reliable service to customers ERCOT Planning Criteria NERC Planning Standards and Guidelines Good Utility Practice Minimize RMR costs before exit implementation 138 kV upgrades/additions underway Additional reactive resources underway RMR Exit Strategy development Thermal studies Stability studies Includes voltage dependent load models Using Transient Stability Assessment Tool and Voltage Stability Assessment Tool from PowerTech Labs Incorporated

3. © ERCOT 2004 KAD3/04/2004 Open Process Short-term alternative proposed at meeting on September 15, 2003 Long-term alternative proposed at meeting on October 10, 2003 CFE/ERCOT Interconnection Study released at October 24, 2003 Report finalized in December ERCOT recommendation released at South RPG meeting February 19, 2004 Comments received February 26

4. © ERCOT 2004 KAD3/04/2004 South Texas

5. © ERCOT 2004 KAD3/04/2004 Laredo

6. © ERCOT 2004 KAD3/04/2004 Laredo Area Load totaling over 400 MW and growing Small commercial and residential Reliability Must Run (RMR) generation Laredo Plant 1, 2 & 3 178 MW (35, 34 & 109 MW) Needed for thermal and voltage transmission limits STATCOM in service +/- 150 MVAR Dynamic reactive support Under Voltage Load Shed (UVLS) in service 25% of load interruption in three steps to protect grid for extreme events No new generation development in area

7. © ERCOT 2004 KAD3/04/2004 Laredo 2003 MW Load

8. © ERCOT 2004 KAD3/04/2004 Application of ERCOT Planning Criteria VOLTAGE COLLAPSE LIMIT WITHOUT GENERATION VOLTAGE COLLAPSE WITH 150 MW CFE TIE TRANSACTION LAREDO OFF-LINE LAREDO AREA PEAK DEMAND PROJECTION VOLTAGE COLLAPSE WITH LAREDO 1 & 2 ON-LINE LAREDO 3 OFF-LINE VOLTAGE COLLAPSE WITH 345 kV LINE VOLTAGE COLLAPSE WITH 150 MW CFE TIE TRANSACTION LAREDO 1 & 2 ON-LINE VOLTAGE COLLAPSE BASE CASE NO OUTAGES (N-0) LIMITS DO NOT INCLUDE OPERATING MARGIN VOLTAGE COLLAPSE WITH LAREDO 3 ON-LINE LAREDO 1 & 2 OFF-LINE

9. © ERCOT 2004 KAD3/04/2004 Operational Requirements for Energy Injection 2003 2007 2009 VOLTAGE COLLAPSE WITHOUT GENERATION 2005 2011 45742 MWH 87845 MWH 18350 MWH 147302 MWH LIMITS DO NOT INCLUDE OPERATING MARGIN VOLTAGE COLLAPSE WITH 150 MW CFE TIE TRANSACTION LAREDO OFF-LINE VOLTAGE COLLAPSE WITH LAREDO 1 & 2 ON-LINE LAREDO 3 OFF-LINE VOLTAGE COLLAPSE WITH 345 kV LINE VOLTAGE COLLAPSE WITH 150 MW CFE TIE TRANSACTION LAREDO 1 & 2 ON-LINE VOLTAGE COLLAPSE BASE CASE NO OUTAGES (N-0) 23.8% 2.8%

10. © ERCOT 2004 KAD3/04/2004 Options Considered to Maintain Reliability Additional static reactive additions – not viable Installed capacity already exceeds MVAR load Large amount needed for small benefit Still susceptible to voltage degradation during faults 138 kV Line from Corpus Christi – not viable 150 mile line upgrade/rebuild of existing 69 kV line Long time to complete will probably require CCN Does not prevent voltage collapse New reliable/available generation in Laredo – not viable 300 to 500 MW maximum due to transient stability limit Two or three independent blocks of 100 to 150 MW each Must have excellent reactive response and ride through capability Maintenance or fuel should not shut down whole plant Local transmission additions may be necessary to incorporate Known for long time without any market solution May not be economic in the current market environment, and no ERCOT Protocol or PUCT rule exists for subsidies

11. © ERCOT 2004 KAD3/04/2004 Options Considered to Maintain Reliability CFE Tie (150 to 300 MW) – feasible Reduces RMR run time with economic energy from CFE Enhances voltage stability with reactive capability incorporated Responds to thermal limits within minutes Operates preemptively to prevent voltage collapse Supports to 2 to 3 years of load growth beyond 2007 345 kV line from San Miguel – feasible Includes 345/138 kV autotransformer Requires CCN and about five years to complete Provides margin for load growth Reduces MW losses (cost savings) Facilitates proposed San Miguel to Laredo to lower Rio Grande Valley 345 kV line which provides second source to Laredo as load grows

12. © ERCOT 2004 KAD3/04/2004 Estimated Cost 150 MW CFE Tie $50 M estimate $0.30 M per MW of increase Includes significant 138 kV system integration costs Subject to bid TCOS $8.3 M Based upon 16.5% annual carrying charge rate 345 kV line from San Miguel to Northeast Laredo $150 M estimate $0.59 M per MW of increase TCOS $ 24.8 M Based upon 16.5% annual carrying charge rate These are functional estimates based upon typical project costs, which are subject to change and should not be presumed to capture the exact amount or timing of projected capital expenditures.

13. © ERCOT 2004 KAD3/04/2004 Comments COMMENTRESPONSE SUPPORT CFE TIE & 345 kV TRANSMISSION Unless we increase the connection capability that makes the area a part of the ERCOT interconnection with greater transfer capability, there would be market power built into any resource in that area. While the relatively short-term reduction in costs would seem to be apparent, that could be lost if the resources with market power began to charge more because they have the ability to do so. MOD will need to monitor FOR We concur that the existing transmission system serving the Laredo area is insufficient to satisfy ERCOT reliability planning criteria. We support construction of a 345 kV line from San Miguel to Laredo and from Laredo to the Rio Grande Valley. We believe that construction of the 150 MW tie should be predicated on the execution of a contract between ERCOT and CFE with terms that are sufficient to maintain reliability in Laredo and at a cost that is more economic than Laredo Plant energy. FOR 345 kV LINE FOR CFE TIE IF ECONOMIC It is important for AEP to work closely with ERCOT on comparing the cost of the Laredo RMR to the extra cost that could be incurred to build the 345-kV to San Miguel to meet several conditions. 1) Expedited construction schedule to meet the earliest possible operational date. 2) Consideration of using mono-poles, which may be requested by landowners, instead of lattice towers. Work on the DC tie and the 345 kV line should run in parallel and the schedule of one should not necessarily impact the schedule of the other. We need both so both should move forward expeditiously. ERCOT should designate the 345 kV line as "critical" as defined in Substantive Rule §25.101(b)(3)(D). FOR

14. © ERCOT 2004 KAD3/04/2004 Comments COMMENTRESPONSE SUPPORT CFE TIE & 345 kV TRANSMISSION We are supportive of recommendations for the Laredo RMR exit strategy. Because of the high growth in both the Laredo and Valley areas, the 345 kV upgrade in Laredo is the first of several steps to improve transmission reliability to the Valley. FOR The proposed DC tie is not expected to provide additional competitive resources in ERCOT. It should be possible for ERCOT to remain as secure using the proposed DC tie in place of RMR units as our current RMR methodology for the next 3 years. In the long run, a loop of higher voltage transmission lines is essential to maintain reliability in Laredo area. FOR We appreciate the analysis performed by ERCOT Staff and AEP Transmission to quantify the reliability problems currently facing the Laredo area and to recommend solutions. A compelling case was presented concerning the voltage stability issue that requires the continued reliance on the Laredo Plant RMR contract in addition to other supplemental injections into the area. Clearly, Laredo is situated with a sizable load that is in relative isolation from the rest of ERCOT. This would suggest a requirement for very long transmission lines to serve the area unless alternatives to traditional transmission investment are also evaluated. However, based on the information provided by ERCOT Staff and AEP Transmission, it is not at all clear that immediately pursuing a 150 MW Tie between CFE and Laredo, while currently pursuing the construction of the San Miguel – Laredo 345 kV line, is the most cost effective of all available alternatives for providing reliability to the Laredo area. Allowing more time for ERCOT stakeholders to evaluate non-traditional solutions to reliability concerns in the Laredo area may very well result in the reduction of total costs of the solution for all customers in ERCOT. Generation has not responded. Very little industrial load to provide LAARS. It is clear to meet reliability and Exit RMR feasible options need to be started soon. Just building CFE Tie does not comport with overall Rio Grande Valley long- term plans. NOT AT ALL CLEAR

15. © ERCOT 2004 KAD3/04/2004 Comments COMMENTRESPONSE SUPPORT CFE TIE & 345 kV TRANSMISSION We support the construction of a 345 kV transmission line to South Texas from the north. This will provide a third source to South Texas as a first step to reinforce the South Texas transmission system, but additional 345 kV circuits will be needed to be constructed such as a Rio Grande cross-valley all the way to the Brownsville area, in order to provide reliability and exit strategy for other RMR (i.e. La Palma) and long-term benefits to the whole South Texas area. We respectfully suggest that a long-term agreement with CFE be consummated before any construction is considered for a DC tie. Potentially this could be more expensive than the existing situation. FOR 345 kV LINE FOR CFE TIE IF ECONOMIC The proposed 345 kV project provides several benefits worth consideration other than its primary purpose to address a reliability problem which is to eliminate a potential voltage collapse. The additional benefits are: 1. Removes the RMR status of the Laredo generating plant; 2. Allows cost savings due to reduced system losses; 3. Provides an initial 345 kV corridor for a potential second 345 kV path from the South Texas valley to the north; 4. Provides long-term benefits and avoids "stop-gap" projects whose associated costs can add up quickly and significantly based on the general knowledge of the area load growth and the limited transmission sources into it. The proposed north termination of this 345 kV transmission line, the San Miguel 345 kV Switchyard, is appropriate as it provides the shortest distance from the Laredo area and has multiple 345 kV sources from the north. The critical designation proposed by ERCOT is of significant importance - especially if the short-term solution to add a DC tie to Mexico is slow to develop or does not materialize as planned. The voltage collapse condition was identified in the studies at load levels that have already been reached in that area. FOR

16. © ERCOT 2004 KAD3/04/2004 Comments COMMENTRESPONSE SUPPORT CFE TIE & 345 kV TRANSMISSION The proposed short-term solution to construct a 150 MW HVDC Tie to CFE provides an interim, cost-effective solution to the area which is quickly reaching the thermal limits of its associated transmission grid. The HVDC Tie can provide quick response when called upon by ERCOT and will provide a viable, cost-effective alternative to the RMR Generation. Although, not a complete solution for the RMR Generation in the long term, it should reduce the need to call on the current RMR solution thus reducing costs to the consumers. The HVDC Tie can be constructed quickly and placed in service to provide immediate support to the area. It is by far the best alternative solution considering the overall magnitude, numerous construction issues, and their associated time delays that must be overcome to complete the long-term transmission solution. The long-term transmission solution, upgrading the 138 kV lines coming into Laredo and along the outer loop, will provide the best overall solution for the area. However, this will not obsolete the benefits of the HVDC Tie. The HVDC Tie will provide the needed reactive support and response needed for the ERCOT grid and create the avenue for emergency assistance and economic market driven transfers of energy between the ERCOT and CFE grids. FOR

17. © ERCOT 2004 KAD3/04/2004 Recommendation Construct 150 MW CFE Tie Comply with ERCOT Planning Criteria and reduce RMR dispatch costs Retain Laredo Generation as RMR Re-evaluate on an annual basis DC Tie may allow release Construct San Miguel to Laredo 345 kV line Projected in-service date of 2010 Establish Highway 59 345/138 kV station Allows the release of Laredo Continue evaluation of Lower Rio Grande Valley impacts Designate “Critical” status for all projects/additions Includes 138 kV additions and static reactive already underway

18. © ERCOT 2004 KAD3/04/2004 Questions, Discussion & Determination Due to its very nature, transmission planning is a continuous process and is constantly changing due to the addition (or elimination) of plans for new generation, transmission facilities, equipment, or loads. Benefits of good planning are not realized until transmission projects are completed and placed in service.