1. Providing Reactive Power from Generating Resources: Schedule 2 of the MISO OATT by the OMS Resource Adequacy Working Group OMS Board Meeting at MARC June 16, 2004 Providing Reactive Power from Generating Resources: Schedule 2 of the MISO OATT by the OMS Resource Adequacy Working Group OMS Board Meeting at MARC June 16, 2004

2. INTRODUCTION This presentation will cover the following: FERC Order 888 requirements for unbundling costs of ancillary services, Reactive Power Rates in MISO paid by transmission customers but not collected by MISO, A discussion of the importance of Reactive Power, FERC’s PJM Order regarding allowing non-transmission-owning independent power producers to seek compensation for supplying Reactive Power, Recent events that have focused on need for more sources of Reactive Power, FERC ALJ’s Decision in the Troy case, MISO’s response with a Schedule 21 companion to Schedule 2, Will the new Schedule 21 end the controversy over Reactive Power compensation? MISO’s responses during the frequent debates in the Tariff Working Group, Some of the detail MISO can design to avoid abuse and misrepresentation by Reactive Power Providers.. 1

3. FERC ORDER 888 REQUIREMENTS Starting in 1996, Transmission Providers across the country began filing Open Access Transmission Tariffs at the FERC to unbundle the costs for Wholesale Transmission Services.* * FERC, Promoting Wholesale Competition Through Open Access Non-discriminatory Transmission Service by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, Order 888, FERC Stats.& Regs. [Regs. Preambles 1991-1996] ¶31.036 at 31,705 (1996), on reh’g, Order No. 888-A, FERC Stats. & Regs. [Regs. Preambles 1996-2000] ¶31.048 (1997), on reh’g, Order No. 888-B, 81 FERC, ¶ 61,248 (1997), on reh’g, Order No. 888-C, 82 FERC, ¶ 61,046 (1998) (hereinafter “Order 888”). 2

4. SEPARATING OPEN ACCESS TRANSMISSION FROM GENERATION SERVICES: 1)Companies had to identify assets that were booked in Generation Production (G) accounts that perform primarily a Transmission (T) Ancillary Service function. 2)They had to add the incremental rate to recover the cost of these assets to the Transmission tariff. 3

5. Separating T from G (cont’d) 3)Companies also had to identify assets booked in Transmission (T) accounts that primarily serve a generation production Generation (G) function and subtract the incremental rate for these assets from the transmission tariff. In essence: The unbundled transmission tariff should avoid cross-subsidization among Generation Production (G) and Transmission (T) Customers. 4

6. THE REVENUE REQUIREMENTS FOR UNBUNDLED TRANSMISSION SERVICES MUST BE FILED AT FERC; UNRESOLVED ISSUES MAY BE SET FOR HEARING. The Reactive Power envisioned by FERC in Order 888 as one of six “ancillary services” addresses only reactive power from generation resources. 5

7. REACTIVE POWER RATES IN MISO REACTIVE POWER RATES FOR UTILITIES IN THE MISO FOOTPRINT-- RESULTING FROM CALCULATIONS OF UNBUNDLED COSTS AS FILED IN EACH UTILITY’S INDIVIDUAL OATT AT FERC, CAN BE FOUND ON THE MISO OASIS AS “Ancillary Service Schedule 2.” These rates for Reactive Power are paid by Transmission Customers to the utilities today. They are not collected by MISO. 6

8. * Estimates based on On-Peak rate billed for an average 800 kWh/month ** MISO Rate charged for Sinks external to MISO (non-MISO members) *** ITC (DECO) charges apply for ITC Schedule 2 ANCILLARY SERVICES - SCHEDULE 2 Reactive Supply & Voltage Control - Existing Customer Charges under Current OATTs 7

9. THE IMPORTANCE OF REACTIVE POWER In order 888, FERC noted*: -- Electric power consists of two components. The first, “Real Power” (watts) is the active force that causes electrical equipments to work. -- The second component “Reactive Power ” (Volt-amperes reactive or “VARs”) Is necessary to maintain adequate voltages so that “Real Power” can be transmitted. * Order 888 at 31,707. 8

10. TRANSMISSION LINES NEED TO BE ENERGIZED BEFORE THEY WILL CARRY REAL POWER. REACTIVE POWER PROVIDES THE ENERGIZATION TO MOVE REAL POWER. ACCORDING TO NERC, HEAVY POWER TRANSFERS ACROSS A TRANSMISSION INTERFACE AND HEAVY LOADING ON TRANSMISSION LINES CAN CAUSE VOLTAGE IN AN AREA TO BECOME DEPRESSED IF SUFFICIENT REACTIVE SUPPLIES ARE NOT AVAILABLE TO THE SYSTEM.* UNLIKE REAL POWER, REACTIVE POWER CANNOT BE TRANSMITTED EASILY OVER LONG DISTANCES AND IS BEST SUPPLIED LOCALLY. *Michael J. Zimmer, “Reactive Power Capability-A Challenge to Grid Reliability” at Michael.J.Zimmer@bakernet.com (Washington, D.C. at 1 9

11. FERC ALLOWS NON-TRANSMISSION-OWNING INDEPENDENT POWER PRODUCERS TO SEEK COMPENSATION AT FERC UNDER SEC. 205 OF THE FPA FOR REACTIVE POWER PROVIDED BY THEIR GENERATORS; UNRESOLVED ISSUES MAY BE SUBJECT TO HEARING. In a 2000 PJM case, FERC allowed non-transmission- owning independent power producers to “unbundle” their costs of providing Reactive Power as an ancillary service from their generating resources for inclusion in a Transmission Provider’s OATT.* * PJM Interconnection L.L.C., Docket No. ER00-3327 (September 25, 2000) (unpublished letter order), as cited in 105 FERC ¶ 61,250. 10

12. RECENT EVENTS HAVE FOCUSED ON A NEED FOR MORE SOURCES OF REACTIVE POWER: The Bi-National Task Force Final Report found that August 14, 2003 Blackout—affecting nearly 10% of the Eastern Interconnection’s entire load, began with declining voltages during a warm summer afternoon of consistently increasing air conditioning demand and power transfers into FirstEnergy, a member of MISO. With the loss of just one generating unit in a high demand load pocket, FirstEnergy had no additional generation to provide the needed Reactive Power Support.* *U.S.-Canada Power System Outage Task Force, Final Report on the August 14, 2003 Blackout in the United States and Canada: Causes and Recommendations (April 2004) at 31,. 11

13. More recent events have focused on a need for more sources of Reactive Power (cont’d) The Bi-National Task Force Final Report also recommended that NERC require the utility to confirm that all non- utility generators in its area enter into contracts …committing them to producing increased or maximum reactive power when called upon by FirstEnergy or MISO to do so.* * Id., at 151. 12

14. The FERC ALJ’s Decision in the Troy LLC Complaint Case (Docket ER03-1396-000): On April 21, 2004, FERC ALJ Cintron certified an uncontested Agreement and Settlement BETWEEN Troy L.L.C. (an affiliate of Dominion Power in Virginia) and FirstEnergy, MISO, the Midwest Standalone Transmission Companies and Calpine. Article 2.3 of the Settlement states that MISO shall tender revisions to its OATT Schedule 2 providing terms and conditions under which a generator is eligible for compensation for its reactive power capability 13

15. IN RESPONSE, MISO HAS MODIFIED ITS SCHEDULE 2 FOR REACTIVE SUPPLY AND VOLTAGE CONTROL FROM GENERATION RESOURCE SERVICES MISO intends to preserve existing zonal rate design for transmission service and “grandfather” existing Schedule 2 revenue requirements of generators within the MISO footprint. Consistent with FERC’s intentions in its earlier PJM ruling, MISO will seek to preserve the filing rights of non- transmission owning independent generators seeking compensation for reactive power and voltage control from their generation service* For this purpose, MISO introduces a separate schedule: Schedule 21.* * Holsclaw e-mail to Tariff_wg@lists.midwestiso.ORG (April 23, 2004)Tariff_wg@lists.midwestiso.ORG 14

16. THE NEW MISO SCHEDULE 21 WILL PROVIDE COMPENSATION FOR FERC- FILED REVENUE REQUIREMENTS FOR SUPPLYING REACTIVE POWER The new Schedule 21 companion to the existing Schedule 2 is specifically designed to capture the terms and conditions for compensating non- transmission-owning generators, including those generating utilities separated from their former transmission assets by corporate restructuring. 15

17. Will the introduction of the new Schedule 21 end the ongoing controversy over Reactive Power compensation? The Vertically-integrated transmission- owning companies insist that MISO – Institute a “needs” test to determine if and when reactive power is needed by non-transmission-owning companies, and Institute an additional ‘testing procedure” to determine the VAR capability of a generator. 16

18. DURING THE FREQUENT DEBATES IN THE TARIFF WORKING GROUP, MISO HAS RESPONDED: No MISO “needs” test will be included in the Schedule 2 modification (now known as companion Schedule 21), Under Sections 205(b) and 203 of the FPA, rates, charges, and services of transmission and wholesale generation sales are to be nondiscriminatory. Non-transmission-owning generators must file their revenue requirements at FERC. Parties may (and do) intervene in these cases to argue for hearing of contested issues. 17

19. During the frequent debates in the Tariff Working Group, MISO responded (cont’d): Additional testing will not be required. Interconnection of new generators, under MISO’s compliance with FERC Order 2003, will include feasibility, system impact and facilities studies. Under an Order 2003 Interconnection Agreement, the interconnecting generator must be willing to supply VAR support. 18

20. MISO can design the details of the Tariff terms and conditions in order to avoid abuse and misrepresentation by Reactive Power providers: State regulators may want to review the “response time” requirements in the new Schedule 21 to assure there is no unwarranted delay or lag in a generator’s response to MISO’s call for reactive power and voltage control, State regulators may want to review the terms and conditions of any penalties imposed by MISO for a non- response by a generator to MISO’s call for reactive power and voltage control. 19

21. Any Questions?