Massachusetts Electric Restructuring Roundtable Reliability of Bulk Electric Service in the Boston Area: The Role of the Salem Harbor Reliability Agreement Massachusetts Electric Restructuring Roundtable Boston, Massachusetts Friday, June 18, 2004 Donald C. Ryan, Ph.D. Manager, Market Contracting ISO New England Inc. dryan@iso-ne.com

What Is ISO-NE? Not-for-profit corporation established in 1997 Independent System Operator of New England’s wholesale electricity supply (independent of business interests) Regulated by the Federal Energy Regulatory Commission Directs the day-to-day operation of the generation and transmission system Administers the NEPOOL wholesale electric markets and the NEPOOL Open Access Transmission Tariff Responsible for system planning and expansion for a reliable bulk electric power system

Why Is ISO-NE Involved With Salem Harbor? Generators must notify ISO of their plans to retire and ISO must determine whether a retirement would have a significant adverse impact on reliability (Section 18.4 of the Restated NEPOOL Agreement) On April 25, 2003, USGenNE sought approval to retire Salem Harbor Station as of October 1, 2004 On July 22, 2003 ISO’s assessment showed that all of Salem Harbor’s capacity is currently needed to provide reliable electric service to the North Shore (see slide 5) Retirement application denied

ISO-NE’s Role (Continued) If a unit is needed for reliability and cannot retire, ISO-NE and the generator must enter into good faith negotiations for a Reliability Agreement If an agreement is not reached within 90 days, the generator may proceed with retirement plans even though the ISO has said no If an agreement is reached, it (including any financial payments), must be approved by FERC

Salem Harbor Provides For Electric Reliability For Both The North Shore And Greater Boston Import Area

Salem Harbor Status – Reliability Agreement In May of 2004, USGenNE filed a Reliability Agreement for approval by the Federal Energy Regulatory Commission The Reliability Agreement ensures that the Salem Harbor Station units are available to support the reliability of the power system The Agreement provides a framework for financial assistance for constructing environmental equipment if the state requires it for compliance with state emissions regulations Charges flow to network load in the NEMA/Boston reliability region

Salem Harbor Status - MOU In June of 2004, ISO New England filed comments to the filing, and submitted a Memorandum of Understanding The MOU establishes a communications process between ISO New England, state entities, and USGenNE The MOU allows for coordination of information among these entities to continually assess the need for the Reliability Agreement in light of progress on transmission and generation upgrades

Why Did ISO-NE Negotiate A Reliability Agreement With USGenNE? To preserve the reliability of the electric power system in the Boston Area Once the determination was made that the units were needed for reliability, ISO-NE needed to make appropriate accommodations for the continued operation of the units in the context of the environmental consent order ISO is authorized, subject to FERC approval, to assure the continued availability of generating units that are needed to meet reliability standards

Why Did ISO-NE Negotiate This Type Of Reliability Agreement With USGenNE? It provides for reliability at lowest consumer cost Funding starts only if necessary to allow for continued operation (there may never be a dollar spent for many reasons, including if the transmission projects can be completed fast enough or if USGenNE obtains funding from another source) Funding for the agreement may terminate if the units are no longer needed for reliability MOU ensures communication to facilitate informed decision making Agreement was result of a stakeholder process sponsored by DOER

Details Of Agreement USGenNE proposed a reasonable approach to limit funding to the actual costs of equipment needed to keep the plant operating in environmental compliance Repayment to those who initially paid for the compliance equipment through a mechanism to share a portion of Gross Margin from continued operation

Next Steps Continue open communication with DOER and DEP in the context of the Memorandum of Understanding Monitor Permitting of Transmission Projects and Update Reliability Assessment upon Final Permits Respond to interventions in the FERC docket Additional explanation regarding reliability and 18.4/18.5 process Respond to false assertions that approval of the agreement means that funding will necessarily take place Misunderstandings and mischaracterizations of this Reliability Agreement as a loan instead of cost reimbursement and, under certain defined circumstances, a refund of payments in whole or in part with an allowance for interest (time value of money)

Ensuring Reliability Agreement is a success if reliability is preserved Whether or not the funding takes place Reliability is key whether or not the repayment takes place in whole or in part