Cost Ranges for the Development and Operation of a Day One Regional Transmission Organization PL

2 Study Scope  What this study is  Estimate of Day One RTO investment costs and annual expenses  Framework for discussions about RTO development  What this study is not  Audit of actual RTO costs  Prudence review of expenses  Analysis of the benefits of RTO formation  Many studies have shown the benefits of RTOs

3 Study Approach  Identification of the Minimum Functions of a Day One RTO  Review of Representative Study Group  Development of Investment Costs and Annual Operating Expense Estimates  Comparisons to the Day One RTO

4 RTO Functions by Stage

5 Day One Functions  NERC Functions  Transmission Service Provider  Reliability Authority  Support Functions  Transmission Support  Management

6 Transmission Service Provider  Administers the tariff  Processes transmission service requests  Maintains OASIS site  Approves/denies transmission service requests  Approves interchange transactions  Determines and posts ATC  Allocates transmission losses among participants

7 Reliability Authority  Enforces operational reliability requirements  Monitors all reliability-related parameters within the Reliability Authority Area  Has revision authority for transmission and generation plans  Develops and enforces interconnection reliability operating limits  Approves/denies bilateral schedules  Directs emergency procedures

8 Support Functions  Transmission Support  Settlements and billing  Customer service  Management  Human Resources  Finance  Administrative support  Building operations

9 Representative Study Group  PJM Interconnection  Midwest Independent Transmission System Operator  Electric Reliability Council of Texas  Southwest Power Pool

10 Investment Cost Ranges

11 Annual Operating Expense Ranges

12 Annual Operating Expenses per MWh

13 Average Retail Bill Impact: Nationwide (% of Total $/kWh)

14 Average Retail Bill Impact: Desert Southwest (% of Total $/kWh)

15 Study Findings  The direct impact of a new Day One RTO should be less than one-half of one percent of a retail customer’s bill.  Day One RTOs have required investment of $38 million to $117 million, with annual revenue requirements of $35 million to $78 million.  A new RTO could require $50 to $70 million in investment costs and $50 to $70 million for annual operating expenses.

16 IT Cost Increases  Lack of a clear business plan and project management  Over-customization of software  Incomplete system design  Excessive changes during development  Implementation delays

17 Study Findings  Cost overruns can result from changing plans mid-course, poor project management and extensive delays.  Many of the costs are for reliability- related functions.  Cost data are not accounted for in a standardized manner.

18 Potential RTO Benefits  Many studies have shown the benefits of RTOs—lower costs by 0.5% to 2%.  Few regional studies include the benefits from competition.  Elimination of rate pancaking  Regional planning and more efficient investment  Lower generation costs through better use of existing assets  Technological innovation  RTOs are likely to create greater benefits than have been shown.