Transmission Policies in Texas

Legislative Staff Briefing!January 27, 2011!

Legislative advertising paid for by: John W. Fainter, Jr. • President and CEO Association of Electric Companies of Texas, Inc. 1005 Congress, Suite 600 • Austin, TX 78701 • phone 512-474-6725 • fax 512-474-9670 • www.aect.net

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AECT Principles!

• AECT is an advocacy group composed of member companies committed to:

- Ensuring a modern, reliable infrastructure for the supply & delivery of electricity.

- Supporting efficient competitive markets that are fair to customers and market participants.

- Supporting consistent and predictable oversight and regulation that will promote investment and ensure the stability of Texas’ electric industry.

- Promoting an economically strong and environmentally healthy future for Texas, including conservation and efficient use of available resources.

• AECT member companies remain dedicated to providing Texas customers with reliable service and are committed to the highest standards of integrity.

The Association of Electric Companies of Texas, Inc. (AECT) is a trade organization of investor-owned electric companies in Texas. Organized in 1978, AECT provides a forum for member company representatives to exchange information about public policy, and to communicate with government officials and the public. For more information, visit www.aect.net.

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Overview of the Electric Market in Texas!

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ERCOT: Separate companies provide retail, transmission & distribution and generation services!

•  In competitive markets, consumers have multiple retail electric providers (REPs) and service plans to choose from.

•  Wholesale and retail prices are set by competitive market forces, while the PUC sets transmission and distribution rates.

Power Flow Financial Flow

Regulated

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ERCOT: Separate companies provide retail, transmission & distribution and generation services!

•  Because wholesale electric prices are set by the competitive market, the risks associated with the cost of construction, operations and maintenance of a generation plant are borne entirely by the generator and its investors, not by end-use customers.

Power Flow Financial Flow

Regulated

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Outside ERCOT: A single company provides retail, transmission & distribution and generation services in each area!

•  In fully regulated markets, the PUC sets retail rates charged to end-use customers.

•  Each of these service areas is part of multi-state electric grids, with differing regulations. In many cases, vertically integrated utilities purchase wholesale power from certain competitive entities.

Power Flow Financial Flow

Regulated

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•  New power plants in these regions can be built by both regulated entities and certain competitive entities or qualifying facilities.

•  Regulated utility power plants, however, must be approved by the PUC after a rigorous review of need and siting.

Outside ERCOT: A single company provides retail, transmission & distribution and generation services in each area!

Power Flow Financial Flow

Regulated

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ERCOT Generation Mix Compared to U.S. Average!

Note: Oil-fired generation is negligible in ERCOT, accounting for less than 0.1% of ERCOT capacity and load; numbers may not add up to 100% due to rounding.

Sources: ERCOT (2010 data)

Cap

acity

(MW

) En

ergy

(MW

h) ERCOT U.S. Average

Natural Gas

Coal

Nuclear

Renewable (Mostly Hydro)

Oil

39%

31%

10%

14%

6%

Nuclear

Natural Gas

Coal

Renewable (Mostly Hydro)

Petroleum

21%

48%

20%

9% 1%

Coal

Nuclear

Natural Gas

Other

38%

40%

13%

1%

Coal

Natural Gas

Nuclear

Wind

59%

22%

6%

11% 2%

Other

Wind 8%

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Lower inflation-adjusted prices available today than before competition began

Sources: PUC Historical Data, Bureau of Labor and Statistics, www.powertochoose.org offers as of January 19, 2011

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Overview of Texasʼ Transmission Policies!

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The “grid” can be broken down in to four main components: Generation, Transmission, Distribution, and Customers.

Source: www.nerc.com

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•  Serves as the “interstate highway system” for electricity

•  Used to move power long distances from generators to load

•  Strategically interconnected to enhance grid reliability

•  Key infrastructure in supporting electric markets

•  Critical component for Texas’ economic and energy leadership

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Generator Transmission & Distribution Retailer

Before…

After (2002)…

Investor Owned Utility (IOU)

Gen. T&D* Customer Interface

Competitive Regulated Competitive

Option to Opt-in

Municipals & Cooperatives

* Transmission and Distribution

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•  Provide reliable delivery of electricity on a 24-7 basis

•  Invest in and build infrastructure to support the needs of Texas’ growing economy

•  Manage operation and planning of their networks under the direction of ERCOT

•  Quickly respond to outages (e.g., storms, natural disasters) and restore service

•  Support operations of Texas’ competitive market

Transmission’s Role in the Competitive ERCOT Market

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•  Open-access - affords all generators the right to access and deliver energy across the transmission network

•  Postage stamp tariff – levelizes costs, since we all benefit from the investment

•  Transmission Cost of Service (TCOS) - implemented to support much needed investment in the grid and provide timely recovery of investment

•  ERCOT Regional Planning Process - evaluates need for and coordinates planning of new transmission by numerous market participants

4 Key Transmission Policies in Texas

The marketplace is strengthened by providing legal and regulatory stability which serves to increase investment.

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  Stimulated generation investment   50,689 MW since 1995 – over 70% natural gas

  Stimulated transmission investment   More than 8,000 miles since 19991

  Benefits afforded to all Texans including: •  economic benefits of increased reliability •  lower energy costs from reduced congestion •  lower prices associated with diverse fuel mix

Benefits of Texas’ Transmission Policies

1ERCOT, "ERCOT Releases Annual Transmission Planning Reports," December 30, 2010

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CREZ – Consistent with Policies and Benefits

•  Open-access

•  Postage stamp tariff

•  Transmission Cost of Service

•  ERCOT Planning

•  Benefits

•  Legislature increased RPS; ordered CREZ designation and transmission

•  PUC reports estimated savings of $38/MWh for wind power and lower congestion costs of $2.9B*

•  ERCOT stated it is capable of integrating wind-generated electricity without sacrificing system stability and reliability*

* PUC Project 33672

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•  Open access transmission rights subject to Federal Energy Regulatory Commission (FERC) jurisdiction.

•  FERC transmission pricing reflects location of generation.

•  FERC requires generators to bear higher cost relative to the ERCOT system of connecting with the transmission grid.

•  Certification in Texas is with the PUC.

Transmission in Texas - outside of ERCOT

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•  The competitive electricity market in Texas is strengthened by stable legal and regulatory policies

•  Stable legal and regulatory policies promote transmission investment in Texas’ grid

•  The electric grid is the indispensable engine of Texas’ growing economy, which will increasingly rely upon an advanced network.

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Web: AECT.net

Blog: AECTnet.wordpress.com

Twitter: twitter.com/AECTnet

Facebook: Association of Electric Companies of Texas, Inc.

Email: info@aect.net