Dale McMaster, President & CEO

Alberta Electric System Operator

November 2006

Alberta: Canada’s First Competitive Electricity Market

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Presentation Overview

An introduction to Alberta

The structure of the electricity industry

Transmission Policy and its implementation

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Alberta the Centre of Western Canada

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Alberta’s Electric Industry More than 21,000 km transmission

Single control area of 660,000 km²

Interties to B.C. (up to 780 MW) & Sask. (up to 150 MW)

Over 280 generating units

9,580 MW system peak

About 200 market participants

11,734 MW internal generation capacity net to grid

BC

Alta

Sask

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Alberta’s Electricity Generation

Net to grid 5770 49% 4604 39%

899 .07%

Wind 298 .03%

Wood waste 133 0.1%

Other 30 0.002%

Total 11,734 (MW)(year-end 2005)

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Transmission Interconnections

Import Export

British Columbia 0-780 0-800 MW

Saskatchewan 0-150 0-60 MW

Note: Intertie capability varies with system operating conditions including the generation pattern

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Alberta Outlook: Load and Supply A Bit of History:

More than 3,000 MW of new generation added to the system since 2001 4.2% average annual growth rate over the past five years for energy and peak demand 4.9% year-to-date growth in energy

10-year Outlook: 2007 to 2016 3% average annual growth rate in energy and peak demand requirement for about 3,800 MW of new generation by 2016

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Competitive Restructuring

competitiveforces

competitiveforces

naturalmonopoly

Generation

Transmission

Distribution

FunctionalSeparation

VerticallyIntegrated

Utility

naturalmonopoly

Retail

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Evolution to Competition Timeline

ElectricUtilitiesActpassed

May 1995

June 1995

Jan.1996

May1998

June1998

Aug.2000

Jan. 2001

PowerPoolCouncil (PPC)formed

EUAtakeseffectPower Poolbegins operation

IndependentPPC & Market Surveillance Administrator appointed

IndependentTransmissionAdministrator appointed

Gov’t auctions rights to formerly regulated generator output (PPAs)

PPAs go into affect

Retail Competition begins

June2003

AESO formed

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Electric Utilities Act

Minister of EnergyAppoints BP and AESO Boards, EUB Chairman & MSA

MarketSurveillance Administrator

(MSA)

BalancingPool(BP)

Wholesale Energy Market

Alberta Electric System Operator

System Operator

Alberta Energy& Utilities

Board (EUB)

Regulates AESO’s Transmission

business

Alberta Industry Structure

Transmission System Development

and System Access Service

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The AESO: Background Created as part of electric industry

restructuring

Our mandate is defined by legislation

• Do not own transmission or generation assets

• Independent of industry (no commercial interests)

• “not - for - profit” organization

• Act in the public interest

Our mission:

The AESO facilitates a fair, efficient, openly competitive and sustainable market for electricity and provides for the safe, reliable and economic operation of the Alberta Interconnected Electric System.

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The AESO: Core BusinessDevelop and operate Alberta’s real-time

electric energy market

• Facilitate the fair, efficient and openly competitive market for electricity

Direct the operation of Alberta’s power grid to ensure reliability

Plan development of Alberta’s transmission system to ensure reliability and to facilitate the competitive market and investment in new supply

Provide system access for both generation and load customers

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Transmission System Roles

Responsible for system reliability

Responsible for reliability of transmission facilities

Directs system operation: Operating Authority

Operates & maintains transmission facilities

Plans transmission system development

Builds and owns transmission facilities

Develops and implements transmission tariff

Revenue collected via AESO transmission tariff

Provides system access Constructs, owns, operates and maintains system facilities providing system access

Procures ancillary services

AESOTransmission FacilityOwners

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Energy & Utilities Board (EUB)

The EUB is an independent, quasi-judicial agency of the Alberta government

Regulatory oversight of:

• transmission system development

• transmission system access

• AESO transmission tariff

- AESO “own costs” and cost of ancillary services and system losses

- TFO facility and operating costs

• generation projects

- environmental and siting approvals

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Transmission Policy:Drivers for change…

Alberta relies on the competitive market to provide investment for new generation

Only one significant transmission line built in the last 20 years

A once robust transmission system becoming inadequate

Increasing transmission congestion:

• System losses and the associated costs

• System reliability – voltage stability

• Reliance on Transmission Must Run (TMR) generation – excessive costs and distortion of the price signal

• Compromising the competitive energy market

Impediment to the investment in new supply Potential impact on the economy of Alberta

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Why was this happening?

Expectation – “the market” would drive the development of the transmission system

The market signals weren’t adequate:

• Postage stamp transmission tariff

• “Energy only” real time pool market – single price

• No significant locational signals -- i.e. no LMP

• Ineffective system planning

- Absence of decision making criteria

- Chicken and egg conundrum

Resulted in an over reliance on location critical gas-fired generation and no new transmission

A clear government policy for transmission system development was required

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The Policy – an overview

Transmission planning must be proactive leading load growth and generation development -- market signals and/or congestion pricing schemes will not result in timely construction of transmission facilities

• it is appropriate and necessary to align timelines, milestones and commitment of generation and transmission to ensure transmission is developed in a timely manner

• preconstruction activities (planning, engineering and ROW) to be proactive and aggressive -- costs deemed to be necessary and prudent

• actual construction to be timed with generation commitment and milestones to assure coincident completion

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The Policy cont’d…

Transmission must facilitate a competitive wholesale market – system must be reinforced such that about 95% of expected wholesale transactions can be realized without congestion

• all in-merit generation can be dispatched and virtually all economic wholesale transactions may be realized without congestion under normal operating conditions

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The Policy cont’d…

Transmission development should eliminate the need for most Transmission Must-Run (TMR) Generation

• TMR is not to be considered as a substitute for transmission development

• ISO to be given flexibility to consider TMR where economic or an acceptable alternative to transmission

• TMR costs to be based on “cost of service” model

Internal transmission should be reinforced to restore the existing inter-ties to their full import/export ratings

• transmission internal to Alberta should be reinforced so that under normal conditions the existing interconnections can import and export on a continuous basis in accordance with design capability

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Since Policy Implementation… AESO has about $1 billion in transmission

investment approved and underway

Major Projects Approved:

• 500 kV Edmonton to Calgary

• SW System Reinforcement

• City of Edmonton Reinforcement

• NW System Reinforcement

Upwards of $3 billion in new transmission could be required in the next 10 to 15 years

Merchant Transmission – planning stage

• Montana Alberta Tie Line

• Northern Lights (major DC Transmission from Northern Alberta to the Pacific NW in USA)

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Summary

Industry/market structure established in 1996 and enhanced in 2003 has served Alberta well

Merging of the market and transmission functions within the ISO provided efficiencies

Independence of the transmission function is essential to develop competition for generation

System operation has remained reliable The Transmission Policy has proven effective

in advancing the “needs” approvals The “energy only” market structure has

provided sufficient incentives for investment in new supply