WestConnect RTOs: Status and Future Initiatives

1. Remarks of Charles ReinholdProject Manager FERC’s Regional Technical Conference Phoenix, Arizona September 24, 2003

2. Topics • Background on WestConnect RTOs Major Initiatives • Status in Light of White Paper • Where Do We Go From Here? FERC Regional Conference -- Phoenix, Arizona

3. Background Major Initiatives of Past Several Years • Create and File Market Design Proposal • Joined with California ISO and RTO West to resolve seams issues • Initiated Cost-Benefit analysis for local regulatory processes • Exploring phase-in of RTO functions prior to RTO formation FERC Regional Conference -- Phoenix, Arizona

4. Efforts to Create Market Design • Lengthy stakeholder process to develop the new market design. • Market design broadly accepted by FERC in order dated October 10, 2002. • Several key market design elements not approved by FERC. FERC Regional Conference -- Phoenix, Arizona

5. Efforts to Create an RTO • Development discussions, focused on DesertSTAR, began in early 1997. • Conversion to WestConnect in mid 2001, with a request for a declaratory order at FERC on October 16, 2001. FERC Regional Conference -- Phoenix, Arizona

6. Arizona Public Service Company El Paso Electric Company Public Service Company of New Mexico Tucson Electric Power Company Salt River Project Western Area Power Administration Southwest Transmission Cooperative WestConnect Participants Filing Entities Funding Entities Participating Entities FERC Regional Conference -- Phoenix, Arizona

7. Efforts to Create an RTO • FERC generally approved RTO formation on October 19, 2002. • Governance structure • Board selection process • Physical rights congestion management model Day 1 • License plate pricing (transition period until 2009) • Transmission Adjustment Component (Western Area Power Administration lost revenues) • Requested additional information on certain design elements. FERC Regional Conference -- Phoenix, Arizona

8. Efforts to Create an RTO - More • FERC did not approve several key elements of the WestConnect proposal. • Suite of Transmission Owner rights contained in TCA • Congestion Management beyond initial operations • Self-Tracking systems • FTRs for native load past Day 1 • Right of first refusal for TOs to build/own new transmission facilities • Elements not approved are critical to securing non-jurisdictional entities’ participation. FERC Regional Conference -- Phoenix, Arizona

9. Efforts to Create an RTO • DOE Cost-Benefit analysis showed costs outweighed benefits for the southwest. • Currently performing a cost-benefit analysis. • Effort includes 16 Study Participants • Will assess costs and benefits of “with” and “without” WestConnect scenarios • Will assess costs and benefits of phasing in RTO functionality prior to creation of independent RTO. FERC Regional Conference -- Phoenix, Arizona

10. Study Participants FERC Regional Conference -- Phoenix, Arizona

11. Efforts to Create an RTO • Phased implementation approach being developed. Current thoughts of key milestones are: • Phase 1: Creation of a common OASIS system with energy trading bulletin board. • Phase 2: Implement a WestConnect grid-wide transmission tariff, a formal transmission congestion management methodology and arrange for independent auditing of Phase 1 and 2 functions. • Phase 3: Create WestConnect RTO, LLC with the tariff, features and functions described in the October 10, 2001 filing. FERC Regional Conference -- Phoenix, Arizona

12. Wholesale Market Platform – White Paper • Issued April 28, 2003. • Latest Commission direction on market design. • Significant differences from Standard Market Design proposal: • Regional variation • Cost justification FERC Regional Conference -- Phoenix, Arizona

13. WHITE PAPER ISSUES CATEGORY: Independence/Governance • All public utilities are to join an RTO or ISO. • RTOs must meet independence requirements of FERC Order 2000. • Each RTO must have an independent market monitor and clear rules on market participant conduct. FERC Regional Conference -- Phoenix, Arizona

14. WHITE PAPER ISSUES CATEGORY: Tariff Administration and Design • RTOs must administer its own transmission tariff. • RTOs must provide a forum for state officials to participate in decision-making. • RTOs should eliminate export fees in the absence of identifiable trade imbalances. • Limit liability of RTOs to direct damages resulting from gross negligence. FERC Regional Conference -- Phoenix, Arizona

15. WHITE PAPER ISSUES CATEGORY: Interregional Coordination (Seams) • RTOs must pursue interregional coordination. CATEGORY: Transmission Upgrade Cost Treatment • State and local authorities may play a role in determining regional pricing policy with regional flexibility in choice of cost allocation methodology. FERC Regional Conference -- Phoenix, Arizona

16. WHITE PAPER ISSUES CATEGORY: Transmission Planning • RTOs to produce planning assessments of the regional grid. CATEGORY: Regional Adequacy • Regional flexibility to determine appropriate regional adequacy mechanisms with participation of state and local regulatory authorities. FERC Regional Conference -- Phoenix, Arizona

17. Transmission Owners Concerns • Major presence of non-jurisdictional transmission owners in the region • Consensus and collaboration required to have all transmission owners participate • FERC’s “takeaways” from WestConnect design significantly slowed the forward momentum that existed for full RTO implementation • SMD-like market, with its centralized energy markets, not viewed as necessary or cost justified in the southwest • Large implementation costs and protracted implementation timelines for RTO development FERC Regional Conference -- Phoenix, Arizona

18. Transmission Owners Reassessment • Need to provide real benefits to wholesale transmission system users while keeping costs and benefits in proportion • Many issues raised by RTO formation are contentious, raise jurisdictional issues, and will not be resolved in the near term (access for native load, divestiture of operational control/authority, financial risk, etc.) • Building incrementally on what works today, enhancements to the wholesale market can be realized in months rather than years • Interest in a phased-in approach is growing. Includes many TOs outside the historic footprint of WestConnect FERC Regional Conference -- Phoenix, Arizona

19. Phased Approach to Market Enhancement • Phased Approach Key Principles • Initially implement only those wholesale market elements that add value for users of the system • Defer low benefit/high cost activities and contentious issues • Create organizations, hire staff, acquire hardware/software only when and as necessary • Implement additional market elements when needed and cost-justified FERC Regional Conference -- Phoenix, Arizona

20. WestConnect RTO Phased Approach Phase 1 New Regional Common Market Interface Phase 3 RTO,LLC Phase 2 Grid-wide Tariff • One stop shopping for transmission access • Remove redundant OASIS sites • Secondary Market for transmission rights • Bulletin Board – • Energy Related • Services: Congestion management & ancillary. • Parallel Path Flow • Mitigation • Regional Planning • Participation • Auditing of ATC • calculations & • transmission • service requests • Interregional “Seam” • Coordination continued • Form small • organization • Establish zonal, rate based tariff • Establish market monitor/auditor function • Formal Congestion Management • Establish • Independent • Board • TOs transfer • operational • authority • Consolidate • Control Areas • Real-time energy • & ancillary services market FERC Regional Conference -- Phoenix, Arizona

21. Opportunities and Issues • Additional phases may be defined and other beneficial changes to the approach may become apparent as the concept evolves • Participants will remain flexible and be willing to make changes around the edges of the original concept • Independence • FERC has other ideas • Exploring ways to acquire oversight function • “Seams” concerns must continue to be discussed and resolved, including the development of a regional planning process and creation of a west-wide market monitoring entity FERC Regional Conference -- Phoenix, Arizona

22. Where Are We Now ? • Continuation of seams efforts with SSG-WI • Planning • Congestion Management • Market Monitoring • Cost benefit analysis underway. 1Q 2004 • Phase 1 OASIS Implementation. Contracts have been signed with third-party vendor. 1Q 2004 FERC Regional Conference -- Phoenix, Arizona

23. Where Do We Go From Here? • Complete Cost-Benefit analysis. • Implement RTO functionality in phases. • Form RTO when cost effective. FERC Regional Conference -- Phoenix, Arizona

24. Contacts and Information • WestConnect RTO • Charles Reinhold – Project Manager • reinhold@globalcrossing.net • 208-253-6916 • www.westconnectrto.com • SSG-WI • www.ssg-wi.com FERC Regional Conference -- Phoenix, Arizona