1. Getting Renewables To Market - Do We Need a New Approach To Transmission Development? NARUC – Staff Subcommittee On Accounting & Finance May 4, 2009 Zolaikha Strong Manager, Federal Regulatory Affairs Edison Electric Institute

2. Electricity – Driver Energy Consumption

3. President Obama’s Views Climate Change Energy Efficiency Smart Grid Renewable Energy Standard 25% by 2025 Overhaul of Federal Efficiency Codes Increased Government Support 80% reduction by 2050

4. Transmission Issues In The 111 th Congress Siting Should FERC be granted full siting authority similar to gas pipeline siting, or should siting authority be limited to higher voltage lines? Planning Should there be a planning requirement? If so, should it be regional or interconnection-wide planning? Should renewable energy projects get priority access? What is role of the federal utilities in building new transmission? Cost Allocation Should federal legislation include a cost allocation formula for new transmission projects? Should cost recovery be addressed in federal legislation? Other Transmission Issues Should FERC be designated as the lead federal agency? What should be the role of the states?

5. Transmission Legislation Proposed Senate Majority Leader Harry Reid (D-NV) Energy and Natural Resources Committee Jeff Bingaman (D-NM) - Chair Byron Dorgan (D-ND) House Energy and Commerce Committee Henry Waxman (D-CA) - Chair / Ed Markey (D-MA) Jay Inslee (D-WA)

6. Senate Bill: Reid Designate National Renewable Energy Zones (NREZ) Siting, cost allocation, & planning apply to projects within NREZ 75% of the capacity of transmission projects are available for renewable generation Interconnection Wide Planning FERC designate regional planning entity to prepare interconnection wide green transmission projects plans in East and West FERC Additional siting authority limited to green transmission projects States Can recover planning costs Have entry points access if transmission line goes through the state Federal Transmission Utilities Agree to finance projects within 3 years if private entity has not committed $10 Billion in Bonding Authority

7. Senate Bill: Bingaman (Draft) FERC Federal siting for transmission facilities that operate at 345 kV or is a renewable feeder line Lead agency to coordinate federal authorizations and environmental reviews Interconnection Wide Planning Authority States Participate in Planning Process Can recover planning cost Cost Allocation Regional planning entity submits plan for cost allocation; Otherwise FERC will institute proceedings to broadly allocate costs to: All load serving entities within interconnection or Load serving entities within part of the interconnection

8. House Bill: Waxman & Markey (Draft) Bottom Up Regional Planning Objective Facilitate the deployment of renewable generation of electricity while ensuring reliability, reducing congestion, ensuring cybersecurity, & providing cost effective electricity FERC Lead agency under new FPA section 216 Resolve planning conflicts among entities Within three years, provide a report to Congress on the results of the regional grid planning process and any recommendations on the appropriate federal role.

9. House Bill: Inslee (Draft) FERC Federal siting for transmission facilities that operate at 345 kV or is a renewable feeder line Lead agency to coordinate federal authorizations and environment reviews Interconnection Wide Planning By Multi State Transmission Authorities Cost Allocation FERC apply mechanism for allocation and recovery of project costs Project costs allocated on a pro rata basis on load to all load serving entities in the interconnection

10. American Recovery and Reinvestment Act Total: 78 Billion

11. Renewables

12. Transmission / Smart Grid

13. Demand for Electricity 13 Increase 27% by 2030

14. State Renewable Portfolio Standards (RPS )

15. 15 Differences in Renewables Geothermal looks and acts like a base load steam plant. Very easy to operate and transmit Wind is highly dynamic and requires careful attention for both load & generation balancing and voltage control. Expensive dynamic voltage devices are often needed Solar Thermal is intermediate of the two above. Easier to control and predict than wind but susceptible to dark unless storage is added. Large scale Solar PV (100 MW+) is scary due to it’s almost immediate on/off characteristics. Also susceptible to dark. Note: not spinning

16. National Wind Potential Wind Density High Low Source: National Renewable Energy Laboratory

17. Wind Energy: Challenges & Opportunities Siting and transmission: optimal renewable resources usually not near transmission or load Transmission expansion FERC’s 888 pro forma transmission tariff creates challenges for non- traditional generation, especially intermittent resources like wind. Point-to-Point transmission service: Choices include long-term firm or non-firm Wind needs something in between FERC policies can advance State initiatives and public desires : Grid Interconnection Transmission Services Encouraging wind infrastructure development

18. Generation – What’s Being Built? Source, Ventyx, Inc., The Velocity Suite

19. Rapid Growth of Non-Hydro Renewables Source: DOE, Energy Information Administration 3% in 2008, up from 2.5% in 2007

20. Non-Hydro Renewables Operating Capacity Source: Ventyx Inc, The Velocity Suite

21. Current Renewables Investment Renewables have a long way to go to displace fossil fuels and meet RPS targets

22. Renewable Energy / Transmission Needs Addressing Renewable Needs Renewable Energy Is Often Located Far from Major Markets. Planning / Building Is Often Very Expensive, Time Consuming, Risky, & Expensive Transmission Needs Current Transmission Infrastructure Is Aging Cost of Building Transmission Siting Policy To Expedite The Development of Transmission In A Reasonable Time Frame More Efficient Process For Projects In The Generation Interconnection Queue

23. State / Federal Issues Multiple state and Federal approvals add to risk and Delay Some states are working to streamline transmission planning by creating renewable energy zones BLM is working to streamline transmission siting and permitting on Federal land through coordinated permitting and environmental impact statements

24. Siting & Approval Challenges With Renewable Projects

25. Queuing Issues In wind-rich areas, the queue backlog is a concern Needs regional solutions Needs to avoid preferential treatment Needs to allow for flexibility – e.g., step outs, open seasons In wind-rich areas, the queue backlog is a concern Needs regional solutions Needs to avoid preferential treatment Needs to allow for flexibility – e.g., step outs, open seasons

26. RTO / ISO Interconnection Que In 2007, wind energy represented about 30% of all new generation coming on line Currently, wind, solar and other renewable resources dominate the interconnection queues, particularly in the Midwestern and Western regions and New York

27. INTERCONNECTION PROCESS & COST ALLOCATION Multi-month interconnection studies to determine system impacts and estimate transmission costs contribute to risk and delay If interconnection requests require upgrades, the generator triggering the expansion can be required to pay all or most of the costs up-front ("participant funding") Financing costs can range from a few million to tens of million of dollars Generators are repaid over a period of 5-20 years, but this does not start until the project achieves commercial operation — which takes 3- 5 years or more

28. COST ALLOCATION & QUEUE ISSUES Generators with substantial upgrade costs may withdraw from the interconnection queue. When this happens, lower queued projects are restudied Queue reshuffling leads to more delays Generators risk meeting milestones in power sales contracts, lose revenues and continue to incur financing costs The Midwest Independent Transmission System Operator — which operates the power grid in a large part of the Upper-Midwestern US estimates that it will take until 2050 to complete studies of generation in the existing queue

29. Aging Transmission Infrastructure “Rising Utility Construction Costs: Sources and Impacts” Edison Foundation/Brattle Group Report 70 % of transmission lines are 25 years or older 70 % of power transformers are 25 years or older 60 % of circuit breakers are more than 30 years old http://www.globalenvironmentfund.com/GEF%20white%20paper_Electric%20Power%20Grid.pdf

30. Current Industry Capital Expenditures U.S. Shareholder-Owned Electric Utilities  “Environment” expenditures are primarily related to generation resources, therefore expenditures on generation make up nearly 50% of total.  “Gas-Related” expenditures include pipelines, processing and exploration.  “Other” includes expenditures that do not specifically relate to any one category. Source: EEI Finance Department

31. Average10% Reduction in Capex for ’09 p = projected 84.384.1 ? ($ Billions) Source: EEI Finance Department, company 10-K filings, and company presentations

32. Recent Unit Transmission Costs VoltageCostCapacityCost (kV) (Thousands of Dollars/Mile) (MW)* (Millions of Dollars/GW-Mile)* 230$2,076.5 500$5.46 345$2,539.4 967$2.85 500$4,328.22,040$1.45 765$6,577.65,000$1.32 Assumptions, Sources, and Notes: Source is EEI’s “Transmission Projects at a Glance”, January 2008. Projects that use underground lines, have more than three segments, or have significantly mixed voltage levels are excluded. The cost of projects is assumed to be given in 2007 dollars unless specified, and has been adjusted using the 2007 to 2008 percentage change in the Handy-Whitman Index. *Based on a subset of projects where capacity was reported. Gigawatt miles are calculated by multiplying the capacity of the line (in GW) times the length of the line (in miles).

33. TRANSMISSION COST IMPLICATIONS Participant funding increases developer risk and raises costs to consumers Renewable energy developers are at risk for transmission upgrade costs until the transmission is built, their plants go into commercial operation, and the utility begins to refund the investment Consumers pay more because: They pay twice — once when the generator finances the project (and factors the cost into its sales contract with the utility), and again when the utility rolls the costs into its transmission rates Developer cost-of-capital is generally higher than for utilities, which drives up costs to consumers

34. TRANSMISSION COST IMPLICATIONS The goals of generation funding policies are to: encourage generators to make efficient siting decisions, and address concerns that generators may cause local customers to pay for transmission to allow the generator to export energy These concerns do not apply to renewable energy because: renewable energy meets state RPS requirements greenhouse gas reduction is a national benefit, and concerns about generator siting can be addressed through earnest money deposits that are refundable when the project achieves commercial operation

35. TRANSMISSION COST IMPLICATIONS Transmission owners are better-positioned to bear the financing risk: They can recover the cost of upgrades through transmission rates after the plant goes into service FERC ratemaking allows transmission owners to recover their construction-related costs as they are being incurred — which developers cannot

36. Transmission Investment (1978-2010) Source: EEI Products & Services

37. Actual and Planned Transmission Investment by Investor-Owned Electric Utilities (2000-2010) Note: From 2004 to 2006, the industry exceeded investment projections in their transmission capital budgets. The Handy-Whitman Index of Public Utility Construction Costs used to adjust actual investment for inflation from year to year. The GDP Deflator used to adjust planned investment for inflation from year to year. Data represents both vertically integrated and stand-alone transmission companies. *Planned total industry expenditures are preliminary and estimated from 85% response rate to EEI’s Electric Transmission Capital Budget & Forecast Survey. Actual expenditures from EEI’s Annual Property & Plant Capital Investment Survey & Form 1s. Actual Planned

38. EEI Report: Transmission Projects Supporting Renewable Resources Identifies 31 transmission projects representing $21 billion that will transmit solar, wind, geothermal, or bio-mass electricity. Transmission Projects Supporting Renewable Resources available at: http://www.eei.org/ourissues/ElectricityTransmission/Documents/TransprojRenew_web.pdf

39. Goals To Expedite Transmission Transmission Siting / Planning / Permitting Planning should be open, transparent, and comprehensive Planning should take into account local, sub-regional, regional and interregional considerations. States should work together to facilitate the expeditious siting and permitting of cost-effective multi-state transmission projects needed to accommodate the development of renewable resources. Interconnection Queuing Enable the timely and efficient interconnection of all generating resources, including renewables. FERC consider regional variations to queuing rules not unduly discriminatory and consistent with local and regional planning processes.

40. Goals To Expedite Transmission Transmission Open Access Transmission service for renewable resources should be provided in a manner consistent with federal open access transmission policies, requiring open access for all generation sources which includes renewable resources. Reliability Renewable resources, like other bulk power system generation, must comply with applicable NERC reliability standards. Government Utilities Building Transmission Federal policy regarding renewable resources should not favor government transmission investment over private sector transmission investment and should preserve existing rights of utilities to build and upgrade transmission facilities within their systems.

41. Goals To Expedite Transmission Transmission Investment Incentives Federal regulatory policy should promote construction of new or upgraded transmission facilities that integrate renewable resources by providing transmission investment incentives based on the case specifics of the transmission project. Cost Allocation Transmission cost allocation and recovery mechanisms for renewable resources should provide regulatory certainty and allow for full cost recovery and a reasonable return. FERC should allow transmission cost allocation and recovery approaches which support the building of transmission to help achieve renewable resource goals.

42. Additional Questions? Contact: Zolaikha Strong zstrong@eei.org zstrong@eei.org Additional Information: www.eei.org