VisTaTech Center Schoolcraft College September 14, 2006 Partners in Business Meeting 2007 Attachment O

2 Meeting Purpose On January 1, 2007, ITCTransmission will have new rates in effect based on projected net revenue requirement and load. Today’s meeting is to review with you the formula rate input projections and cost details.

3 AgendaAgenda Brief Overview of the Filing and Order Gregory Ioanidis Attachment O Summary Gregory Ioanidis Details of the Inputs Nisha Chopra Details of the True-Up Mechanism Gregory Ioanidis

4 Attachment O Filing ITCTransmission Attachment O Filing On May 17, 2006, ITCTransmission and the Midwest ISO jointly filed proposed tariff sheet revisions to allow ITCTransmission to recover its revenue requirement on a current basis under its Attachment O formula rate with a true-up mechanism.  The components and calculation of rates under forward looking Attachment O have not changed other than conforming changes to implement a projected revenue requirement with a true-up mechanism. Under historical Attachment O, the rates that went into effect June 1 st were based on the prior year’s net revenue requirement and load. Under forward looking Attachment O, rates will go into effect on a calendar year basis (January – December) and will reflect the projected net revenue requirement and load for that year.  A true-up calculation comparing actual billed revenues to actual net revenue requirement will be completed for each calendar year. The true-up, along with interest, will be included in the rate that goes into effect two years later (e.g. the 2007 true-up amount and associated interest accrued will be included in the rate that goes into effect in 2009). FERC conditionally accepted the filing on July 14,  A Compliance Filing was made on August 14, 2006 and accepted by FERC on September 6, The 2007 Attachment O was posted on the MISO OASIS on September 1, 2006.

5 1/1/06 1/1/071/1/08 Charge Projected 07 RR Calculate projected 07 RR 1/1/09 Charge Projected 08 RR Calculate projected 08 RR Calculate projected 09 RR and actual 07 True-Up Charge Projected 09 RR ± Actual 07 True-Up + Interest Forward Looking Attachment O Forward Looking Attachment O Timeline (2007 Example)  August 2006 Calculate 2007 billing rate based on projected 2007 Net Revenue Requirement (“RR”)  September 1, 2006 Post rate on OASIS  January 2007 – December 2007 Apply 2007 billing rate to monthly peak load  August 2008 Calculate 2009 billing rate based on 1) Projected 2009 net RR; and 2) Actual 2007 true-up with interest (comparing actual 2007 Billed Revenues to actual 2007 net RR)  January 2009 – December 2009 Apply 2009 billing rate based on projected 2009 net RR +/ true-up with interest

Projected Allowed Return 79,870, Projected Recoverable Operating Expenses 162,627, Projected Gross Revenue Requirement 242,498, Projected Rate Base (1)(2) 741,675,502 Projected Weighted Average Cost of Capital (3) % 2007 Projected Allowed Return 79,870,834 + Step 2 Step 1 (1)Includes new in-service property, plant and equipment additions in rate base (2)Includes the Revenue Deferral in rate base (3)Weighted average cost of capital based in part on FERC accepted return on equity 2007 Projected Gross Revenue Requirement 242,498, Projected Network Load 112,104 MW 2007 Network Billing Rate $2.099/ kW-Mo 2007 Projected Revenue Credits 7,238,000 – Step 3 Using Attachment O to Derive the 2007 Billing Rate Forward Looking Attachment O

7 Step 1A – Establish Rate Base Rate Base Item2007 Projected Amount Change from 2005 (as rounded) Explanation Gross Plant in Service$ 1,185,274,000$ 199,527, month average balances Less Accumulated Depreciation 511,439,000 46,943, month average balances Net Plant in Service 673,835, ,584,000 Plus Deferred Taxes (57,867,000) (15,187,000) Higher net deferred tax liability primarily attributable to increases in property additions Plus Revenue Deferral 40,776,000 (6,962,000) Unamortized balance reduced by amortization Plus ADIT Deferral 45,956,000 (6,061,000) Unamortized balance reduced by amortization Plus Land Held for Future Use 6,723,000 0 Plus Working Capital 7,839,076 (318,924) Attachment O Calculation (1/8 of O&M) Plus Materials & Supplies 20,893,426 4,121,426 Higher inventory balances due to higher capital levels Plus Prepayments 3,520,000 1,352,000 Higher insurance prepayments for higher asset base Total Rate Base$ 741,675,502$ 129,528,502

& 2007 Additions to Rate Base 2006 Major Projects 2006 ADDITIONS TO RATE BASE $148 million 2007 ADDITIONS TO RATE BASE $147 million System Capacity Improvements Lenox Switchyard Wyatt with DVAR Wixom-Quaker 230kV Majestic-Madrid – Madrid portion Infrastructure Improvements Breaker Replacement Program Microwave Relay Communication Transition RTU Migration St. Antoine GIS Replacement 2007 Major Projects System Capacity Improvements Golf Station Coventry 230kV Expansion Majestic-Madrid – Majestic portion Placid Station Expansion Erin to Stephens 120kV Durant Infrastructure Improvements Breaker Replacement Program Caniff GIS Replacement Midtown GIS Replacement 120kV Gas Cable Termination Replacements

9 Step 1B – Establish Rate of Return & Allowed Return RatioCost2007 Projected WACC Change from 2005 Explanation Equity60%13.88%8.33% Debt40%6.10%2.44%.28% Higher interest rates due to the market Rate of Return 10.77%.28% Rate Base741,675,502 X Return10.77 % = Allowed Return 79,870,834 Calculation

10 Step 2A – Determine Recoverable Operating Expenses Expense2007 Projected Amount Change from 2005 (as rounded) Explanation Operating & Maintenance Expense $ 30,208,000$ (11,492,000) Future work pulled ahead in 2005; back to base level in 2007 Plus Administrative and General Expense 32,504,608 8,944,213 Higher due to staffing ramp up, higher outside services expense including Sarbanes Oxley compliance & higher insurance costs Plus Depreciation Expense 26,493,000 (3,270,000) Lower projected depreciation rates, partially offset by higher asset base Plus Amortized Revenue Deferral 11,934,000 0 No change in annual amortization amount Plus ADIT Adjustment 3,030,000 0 No change in annual amortization amount Plus Payroll Taxes 740, ,000 Increased staffing Plus Property Taxes 21,645,000 8,925,000 Higher asset base Plus Other Taxes (Other than Income Taxes) 2,800,000 2,436,000 Onset of Michigan Single Business Tax in late 2005 Plus Income Taxes 33,272,924 5,796,924 Higher taxes on higher return Total Recoverable Operating Expenses $ 162,627,532$ 11,440,137

11 Step 2B – Establish Revenue Requirement Allowed Return79,870,834 + Total Recoverable Operating Expenses 162,627,532 = Revenue Requirement242,498,366 Calculation

12 Step 3A – Establish Billing Rate Credits2007 Projected Amount Change from 2005 (as rounded) Explanation Point to Point5,513,000(14,823,000) Lower MISO revenue distribution (e.g. expiration of SECA revenue, elimination of sub-regional rate adjustment, MISO market start up, etc.) Rent1,725,000(56,000) Lower rental revenue Total Revenue Credits 7,238,000(14,879,000) Gross Revenue Requirement 242,498,367 - Revenue Credits7,238,000 = Net Revenue Requirement 235,260,367 Calculation

13 Step 3B – Establish Billing Rate Net Revenue Requirement235,260,367 / Divisor112,106,000 kW = 2007 Rate$2.099/ kW-Mo 2007 Projected Load Change from 2005 Explanation Sum of 2007 Monthly Coincident Network Peak Loads 112,106,000 (kW) 1,247,004 (kW) MPSC Case U adjusted for certain point to point (112,106 MW) Calculation

14 January 1, 2007 Rate Analysis Capital Projects Revenue Deferral Revenue Credits Annual * Variance (in $/kW/month) * Change in revenue requirement associated with other ratemaking items (e.g. O&M expense, depreciation, etc.). ** Unit charge adjustment reflecting fluctuations in sales from base period. Sales ** Adjustment The $2.099/kW-Mo rate (effective January 1, 2007 through December 31, 2007) is shown below. Property, Payroll & Other Taxes (0.008) (0.056)(0.022)

15 MISO Pricing Zone Rate Comparison (1) (1) MISO TO’s Cost Year 2005 Cost Yr 2005 Rate Cost Yr 2007 Rate

16 Actual 2007 Load 2007 Billed Revenues Over/(Under) Collection Plus Interest (1) Step 1A Step 1B Step Over/(Under) Collection 2007 Billed Revenues – Step 1 – Determine 2007 Over/(Under) Collection Billing Rate Actual 2007 Net Revenue Requirement Projected 2009 Net Revenue Requirement 2009 Projected Network Load 2009 Billing Rate Step 2 – Determine 2009 Billing Rate (Including 2007 True-Up) True-Up Mechanism (2007 Example) (1) Interest on any over recovery of the net revenue requirement shall be determined based on the Commission’s regulations at 18 C.F.R § 35.19a. Interest on any under recovery of the net revenue requirement shall be determined using the interest rate equal to International’s actual short-term debt costs capped at the applicable FERC refund interest rate.