Improved Cost Recovery Framework for Critical Infrastructure Protection

1. june 13, 2019 | WESTBOROUGH, MA Jonathan Lowell (413) 540-4658 | jlowell@iso-ne.com Interconnection Reliability Operating Limit Critical Infrastructure Protection Cost Recovery

2. Generators designated by the ISO as “critical” to the determination of Interconnection Reliability Operating Limits (IROL) must meet higher North American Electric Reliability Corporation (NERC) Critical Infrastructure Protection (CIP) standards than “non-critical” generators • These costs cannot be competitively offered and recovered through the energy and capacity markets • ISO is exploring a new tariff mechanism that would allow “IROL-critical” generators and similarly-situated transmission facilities to recover costs approved by FERC • Today’s discussion • Change in cost recovery framework • Annual filings based on prior year actual costs • No need to separately identify recurring vs non-recurring costs • High level discussion of “interested party” review process

3. Cost recovery framework Based on stakeholder feedback, revised to include changes to simplify the process of reviewing and filing incremental CIP costs

4. High level outline of revised ISO and designated facility CIP cost recovery filings New - 6/13/19 TC Meeting • ISO makes a 205 filing to implement a new Schedule 17 for incremental CIP cost recovery. Schedule 17 will include: • Provisions for ISO’s role as billing and collection agent for IROL-CIP Costs • Review process requirements • Eligibility conditions, which will include having a FERC-accepted formula rate and review process that minimally include all elements required by Schedule 17 • Cost allocation • Sample formula rate template • A designated facility would make an initial 205 filing seeking FERC acceptance of a formula rate for its IROL-CIP Costs • To be eligible for compensation under Schedule 17, the facility’s FERC-accepted formula rate would need to include, at a minimum: • The cost categories identified in the Schedule 17 formula rate template • A review process that meets or exceeds the requirements as delineated in Schedule 17 • A designated facility may add cost categories, as necessary, to its proposed formula rate to reflect compliance costs that do not fit into the ISO-identified categories • Of course, additions would need to be described in sufficient detail to allow for FERC to accept or reject inclusion in the formula rate

5. High level outline of cost recovery filings (cont.) New - 6/13/19 TC Meeting • After the initial 205 filing, the IROL-critical designated facility would make annual “informational” filings, consistent with its FERC approved formula rate. • Note that annual filings need not be on a calendar year basis • Following an IROL-designated facility’s informational filing • The facility notifies the ISO and confirms when the updated rate is in effect • The ISO would then perform its role as billing agent to commence CIP cost payments and charges • Accepted prior-year actual costs would be amortized over 12 months • FERC accepted legacy costs would also be amortized over 12 months

6. Classification of costs are modified to simplify filings and stakeholder review process New - 6/13/19 TC Meeting • Original classification: • Incremental “medium impact” CIP compliance costs identified as either recurring or non-recurring • Filings required at least every 3 years based on projected annual costs plus historic actual costs • Stakeholders suggested this would require a true-up mechanism • Proposed new classification: • Still includes only incremental CIP costs • No segregation of costs by recurring versus non-recurring • No projected or forecasted costs • Instead, a designated facility’s initial filingwould group costs into two categories: • Prior-year actual costs • Historical costs from periods preceding the prior year (referred to, for convenience, in the remainder of this presentation as “legacy costs”) • Subsequent annual informational filingswould only include prior-year actual costs • No need to ever address legacy costs again after the initial filing

7. Illustration of proposed cost classification New - 6/13/19 TC Meeting

8. Pros and cons of the modified cost recovery framework New - 6/13/19 TC Meeting • Cost review is facilitated because no projections, forecasts or estimates are required. Actual costs can be more easily identified with specificity and precision • The need to reconcile forecasts with actuals is eliminated • Annual informational filings will be more frequent than the 3-year update cycle originally proposed, but stakeholder comments indicate this is generally seen as simpler and less burdensome • Compensation and charges will lag actual expenditures by a year and the several months needed for pre-filing review and FERC action • Recovery of legacy costs can be definitively addressed in the initial filing, and need not complicate future annual filings

9. When a facility retires or is “un-designated” by the ISO… New - 6/13/19 TC Meeting • How best to handle payments when a facility becomes no longer IROL-critical mid-year? • Since prior-year actual payments would only reflect costs while the facility was IROL-designated, payments can continue through the end of the 12-month period • In this circumstance, a final informational filing would be made by the facility when it was no longer IROL-designated • Treatment of common costs • Since actual costs are paid in arrears, informational filings will be able to track actual spending correctly if a facility retires or become no longer IROL-critical

10. Interested party review process

11. Formula Rate Pre-filing Review Process New - 6/13/19 TC Meeting • Each IROL-designated facility’s initial 205 filing to establish its formula rate will need to include protocols that, at minimum, provide for an interested party review process as part of each future annual informational filing • Schedule 17 will establish minimum requirements to be met by the review process for the incremental CIP costs to be eligible for Schedule 17 compensation • Specific minimum requirements are still under development, but are expected to contain: • A notification of intent to file, and draft redacted filing (if confidential information included) posted on ISO web site. Anyone will be able to subscribe to be notified whenever new content is posted. Requests to receive the confidential version are made to and addressed by the facility owner (not the ISO) • 15-day (or greater) advance notice of a webex-style (or equivalent) briefing provided by the facility owner • 60-day review period following the briefing for information requests and responses before submitting the annual informational filing • Request for 60-day comment period from date of filing

12. Iso recommendation on cost allocation

13. Cost Allocation - Key Points from March TC Meeting Restated from 3/27/19 TC Meeting • NERC “medium impact” CIP standards that IROL-critical facilities must meet apply to a very limited set of resources: • Enhances reliable operation of the grid, but does not directly benefit the facility itself • Provides no competitive advantage • Cannot be minimized or avoided by actions under the facility’s control • Since non-designated facilities need only meet “low impact” requirements, IROL-designated facilities cannot recover “medium impact” costs through competitive markets • Accurate IROLs allow the ISO to maximize reliable utilization of the transmission system • Beneficiary Pays is the most relevant allocation principle • Users of the transmission system, i.e. transmission customers, are the beneficiaries of a reliable, maximized transmission grid • Transmission system usage in this context can best be measured by Monthly Regional Network Load and monthly average Through or Out Service • Incremental CIP compliance costs are not a transmission cost, but it is correct and efficient to allocate these costs to transmission customers as beneficiaries • Charges for incremental CIP compliance costs will be clearly labeled and separately identified on ISO customers’ Monthly Non-Hourly Charges statements.

14. Alternative Stakeholder Allocation Proposal Restated from 3/27/19 TC Meeting • The stakeholder proposal to allocate these costs to the ISO Self-Funding Tariff Schedule 3 is inconsistent with the purpose of the Self-Funding Tariff (i.e., to fund costs incurred by the ISO). • Incremental CIP costs are not costs incurred by the ISO. They are costs incurred by Market Participants to meet NERC requirements

15. Conclusion • The ISO is evaluating a new OATT schedule that would enable the ISO to act as a billing agent for IROL-designated facilities’ incremental CIP costs accepted by FERC • ISO is working towards a solution where each IROL-designated facility seeking compensation submits compliance costs to FERC using a sample formula rate template with annual informational filings based on actual incurred costs • ISO’s Schedule 17 Section 205 filing will support, with independent expert testimony, the general description of cost categories that should minimally be included in the facility’s formula rate template • Each IROL-designated facility would need to incorporate and support these categories in the facility’s individual formula rate, plus any additional categories appropriate to that facility • IROL-critical facilities must make initial Section 205 FERC filings to establish a FERC-accepted formula rate for the facility • Procedural and information-sharing details to facilitate pre-filing notification and review are still under consideration

16. Stakeholder Schedule

17. Jon Lowell (413) 540-4658 | jlowell@iso-ne.com

18. Acronyms Used in this Presentation • BES = Bulk Electric System • CIP = Critical Infrastructure Protection • CoS = Cost of Service • ERO – Electric Reliability Organization • IROL = Interregional Operating Limit • NERC = North American Electric Reliability Council • NPCC = Northeast Power Coordinating Council • OATT = Open Access Transmission Tariff