1. Electric Utility Basics An overview of the electric industry in New England and the operation of consumer-owned utilities 1

2. What we will cover today: 1.The electric industry in New England and how it works 2.How electric utilities distribute electric power 3.How is the cost of electricity determined? 4.How do the parts of a public power utility “fit together?” 2

3. New England’s Electric Power Grid A tightly integrated power system serving 14 million people More than 300 generating plants 8,000 + miles of high-voltage transmission lines 13 interconnections with systems in New York, Quebec and New Brunswick More than 31,000 megawatts of power supply A summer peaking system (28K MW in August 2006) More than 400 “participants” in NE power markets Up to $11 billion in energy market value 3

4. We’re all connected 4

5. A few words about “deregulation” For the past century in US, electricity has been provided by monopoly companies Beginning in the 70s, political pressure built to open the electric energy industry to competition In the 90s, federal and state laws began to “break up’ the monopolies and allow “non- utility generators” to sell electricity 5

6. Deregulation (cont.) To enable non-utility generators to sell their electricity: Power Markets were developed Independent System Operators were formed Transmission lines were “opened up” to all electricity users And customers were given a choice (in some states) of their electric energy suppliers Deregulation provides choices in the energy markets: Market Prices vs. “Cost-of-Service” 6

7. Deregulation does not mean no regulation Only the cost of wholesale power is not regulated (if sold in competitive markets) State Public Utility Commissions still regulate distribution costs FERC still regulates interstate transmission costs NERC regulates reliability activities Municipal Light Boards and Cooperative Boards still regulate their utilities Market monitors oversee power market operations 7

8. The four major elements of an electric grid: Generators – who produce electricity Transmission Companies – who transport electricity from generators to distributors Distribution Companies – who move electricity to the end-users Demand- which is the amount of electricity consumed by the end-users (also called “load”) 8

9. A simplified grid: 9

10. What “fuels” are used to produce electricity in NE? 41% from natural gas 21% from oil 15% from nuclear power 9% from coal 5% from pumped storage 5% from hydro 4% from all other (wind, solar, biomass, etc.) 10

11. Who are the “players” in the NE electric industry? Generators (Entergy, NextEra, Dominion, etc.) Transmission companies ( NU, NSTAR, VELCO, etc.) Distribution companies (municipals, co-ops, IOUs) Retail aggregators and large industrial customers (Hannaford, UMass, Cape Light Compact, etc.) Power brokers, marketers, traders (Dynergy, Sempra) Banks and other financial institutions providing capital to the above (Barclays Bank, JP Morgan) Demand response aggregators (EnerNOC, Comverge) 11

12. What are the major organizations involved in the NE electric grid? (You will know them by their acronyms) FERC (Federal Energy Regulatory Comm.) NERC (North American Electric Reliability Corp.) NPCC (Northeast Power Coordinating Council) ISO- NE (Independent System Operator of New England) NEPOOL (New England Power Pool) NESCOE (New England States Committee on Electricity) NECPUC (New England Conference of Public Utility Commissioners) 12

13. So, how do distribution utilities obtain their power supplies? They generate their own (if legally able to) They enter into purchase power agreements (contracts) to buy it from generators or marketers They purchase in competitive electricity markets 13

14. A few minutes on NE electricity markets Three major markets: Energy Markets – used for purchasing and selling electricity using supply and demand to set the price Capacity Markets – used to assure that there will be enough electricity available to meet demand in the future Ancillary Markets – used to assure the reliable production and transmission of electricity 14

15. Energy markets have 2 components: Day- Ahead Energy Market – used to establish financial commitments to produce and consume electricity the day before it is needed Real-Time Energy Market – used to balance differences between the scheduled (day- ahead) amounts and the actual required amounts 15

16. Example of “Load Curve” for a Peak Day 16

17. How do energy markets work in NE? Generators bid their plants in at the cost they are willing to sell their power for each hour All bids are “stacked up,” from lowest to highest The price for each hour is set at the point where the bids to sell equal the total demand for that hour All generators selected receive the same hourly price This is done for every hour in 8 separate load zones around NE 17

18. The 8 pricing zones in New England 18

19. Energy costs are also locational in nature: “Locational Marginal Pricing” is used in NE: While energy costs are the same throughout the region, two other “costs” are added to final price: Congestion Costs – which reflect the additional costs incurred due to transmission congestion in each location Line Losses – which are calculated to reflect the amount of energy “lost” during transmission to specific location 19

20. Locational Marginal Pricing in action: 20

21. A little about capacity markets These markets pay generators for being available when needed Capacity requirements are projected out for three years Annual auctions are held to “purchase” the capacity needed in future years (if purchased, generators receive payments for being available, and are penalized if they are not available Demand Response programs (DR) can also bid into these auctions 21

22. What is “Demand Response?” Changes in electric usage by customers from their normal consumption patterns This can be done by reducing usage, or shifting usage to off-peak hours, either manually or with “smart” grid technologies New companies (“aggregators”) are emerging which contract directly with customers to participate in Demand Response programs Generally, customers who participate in such programs receive cash payments from the aggregators (in addition to reduced energy costs) 22

23. A little about ancillary markets These are for services that support the reliable transmission of power from seller to purchaser; (highly technical in nature) Reactive power and voltage control Scheduling and dispatch Load following Loss compensation Energy imbalance System protection 23

24. A few more acronyms for you IOU LSE TRANSCO DISCO GENCO RTO PJM MISO AMI REC EPA DOE OASIS IPP RPS RGGI 24

25. So, that’s a brief overview of the electric grid and power markets in New England Now, Steve Socoby will describe how this electric power is actually distributed to individual customers like you! 25