1. Economic Criteria for Transmission Planning in the ERCOT Region Public Utility Law Seminar DeAnn Walker August 3, 2012

2. History of Economic Criteria for Transmission Planning in ERCOT Late 2004 - ERCOT began to investigate appropriate transmission planning criteria for the ERCOT Nodal market  ERCOT prepared a White Paper and proposed criteria to the Regional Planning Group.  Congestion Management Working Group considered the issues March 2006 - Wholesale Market Subcommittee approved use of the societal impact or consumer benefit criteria by the Regional Planning Group May 2006 - Technical Advisory Committee approved the use of the two economic tests for transmission planning. January 2009 - ERCOT Board adopted the economic tests by incorporating them into the ERCOT Planning Charter. March 2011 - ERCOT Board incorporated the Planning Charter, including the economic tests, into the ERCOT Protocols. 2

3. Two Historical Economic Criteria Societal Impact Test: Compares a project’s costs to the estimated production cost savings it will create.  When transmission is built, different generation units may be dispatched to meet demand, which changes system-wide production costs.  Estimated production cost savings are measured by comparing the costs of producing generation to meet system demand with and without the transmission project. Consumer Impact Test: Compares a project’s costs to the resulting market price changes to quantify the consumer savings it will create.  Includes changes in production costs, because those affect market prices  Also examines price reductions resulting from reducing congestion costs and mitigating market power. 3

4. Historical Process for Evaluation of Transmission Projects  Reliability – Projects needed to meet reliability criteria If the study showed a need for the project for reliability purposes, then it was approved. If the study did not show a need for the project for reliability purposes, then the Societal Impact Test was applied.  Societal Impact Test If the study showed a need for the project based on the Societal Impact Test, then it was approved. If the study did not show a need for the project based on the Societal Impact Test, then the Consumer Benefit Test was applied.  Consumer Impact Test If the study showed a need for the project based on Consumer Benefit Test, then it was approved. If the study did not show a need for the project based on Consumer Benefit Test, then the project was rejected. 4

5. House Bill 971 in 2011 Session HB 971 required that the PUCT adopt rules to establish “criteria for granting a certificate for a transmission project that serves the ERCOT power region, that is not necessary to meet state or federal reliability standards, and that does not serve a competitive renewable energy zone. The criteria must include a comparison of the estimated cost of the transmission project and the estimated cost savings that may result from the transmission project. The commission shall include with its decision on an application for a certificate to which this subsection applies findings on the criteria.” *Other amendments related to transmission facilities were also made in the bill. 5

6. PUCT Project No. 39537 June 2011 – PUCT initiated a rulemaking to implement HB 971 September 2011 – Proposed rule was published in Texas Register October 2011 – Approximately 240 comments were filed as well as numerous comments filed by Legislators Winter 2012 – Various workshops were held for interested parties March 2012 – PUCT adopted the amended rule The adopted rule included the Societal Impact Test but did not include the Consumer Benefit Test. July 2012 – ERCOT Board approved Nodal Protocol Revision Request 462 that removed the Consumer Benefit Test from the ERCOT Planning Criteria 6

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