The Western Interconnection

1. The Western Interconnection • The West has only one RTO/ISO, the California Independent System Operator, the most costly RTO in the US at $229.2 million in 2004 • RTO’s have not had, in aggregate, the effect of decreasing utility-level operating costs. In California, the transmission operating expenses of the investor-owned utilities have increased substantially since the ISO was formed – 226% for San Diego Gas & Electric between 1997 and 2002, 23% for Pacific Gas & Electric and 134% for Southern California Edison • Most western industry participants’ philosophy regarding RTOs is that the monetary benefits have to outweigh the costs and that reliability and commercial issues affecting power system operations are inextricably linked • Physical transmission rights are an issue as is the ISO’s ability to compel non-ISO participants to curtail their load to assist the ISO in times of resource inadequacy; would those customers who are in the dark qualify the reason as a reliability event or a commercial event? • Nonetheless, western industry participants are continuing to work on the development of RTOs such as Grid West and WestConnect • A substantial amount of time has been spent by many people trying to develop organizations that would 1) reflect where FERC thought it wanted the industry to go and 2) bring together entities (IPPs, TOUs, TDUs and others) to operate under equitable and understandable standards and costs

2. The Western Interconnection • Until such time as RTOs can become cost effective and beneficial to customers, other regional organizations are providing many of the benefits of RTO’s without the costs • SSG-WI – Seams Steering Group/Western Interconnection • RMATS – Rocky Mountain Area Transmission Study • SWATS – Southwest Area Transmission Study • STEP – Southwest Transmission Expansion Plan • CCPG – Colorado Coordinated Planning Group • NWPP/NTAC – Northwest Power Pool/Northwest Transmission Assessment Committee • NWPCC – Northwest Power and Conservation Council • wesTTrans – enhanced OASIS site serving a significant portion of the Western Interconnection • WGA – Western Governors’ Association • WIEB – Western Interstate Energy Board (12 western states (Texas incl) + 3 Canadian provinces – energy arm of WGA) • CREPC - Committee for Regional Electric Power Cooperation • WECC – Western Electricity Coordinating Council • In 2000, after 4 years of work, the 3 existing RTA’s, SWRTA, NRTA and WRTA, and WSCC were collapsed into one organization: WECC • Western Electricity Coordinating Council is the reliability organization covering 14 western states, 2 Canadian provinces and part of one Mexican state with 155 members which include transmission owners, transmission dependent utilities, independent power producers, customer organizations, and regulators

3. The Western Interconnection • WECC’s main function is reliability but as many industry participants are aware, there isn’t a bright line between reliability and “commercial” issues; i.e. reserves are sold as a commercial product but are required to ensure system reliability (recovery as a result of outages or to cover for inaccuracies in load forecasting) • These organizations realize that oversight and coordination of the issues such as transmission studies and plans, need to be provided • Substantial regional diversity in population (loads), resources, and operations – hydro northwest, nuclear southwest, coal in the Rockies, resource deficient California supports a bottom up pyramidal approach • In a December 3, 2004 letter the Western Governors’ Association requested information on what actions have been taken by industry participants in the West to prevent a repeat of the 2000-2001 energy crisis, the 1996 outages and a possible future western black-out • Functions of immediate concern that overlap reliability and commercial issues: • Transmission system planning and expansion • Facility siting, construction, cost allocation and recovery • Resource adequacy – sufficient resources to supply demand • Market Monitoring – avoidance of a repeat of the 2000-2001 energy crisis; and • Commercial (transaction) practices • Standard-setting

4. The Western Interconnection • Current status • Western industry participants met on May 24 and concluded that WECC should develop a plan describing what it would do related to the issues outlined and how much it would cost, present the plan to its Board of Directors on fulfilling the need of West-wide transmission planning, resource adequacy and commercial issues • Which of these responsibilities is the Board and membership willing to accept • What additional funding would be required • But, Market Monitoring will not be one of the functions of immediate concern addressed • Acceptance of the additional functions could potentially lead to: • New methods of funding • Changes in governance • Market Monitoring Efforts Underway • PNM • APS • Northwest – SSG-WI • California ISO