Railbelt Grid Restructuring David A Gillespie Chairman Alaska

Railbelt Grid Restructuring David A. Gillespie Chairman, Alaska Railbelt Cooperative Transmission & Electric Company Legislative Roundtable September 5, 2014 1

Agenda • Introduction • Case for action: Why does the railbelt need to restructure the way it plans, builds and operates the electric grid? • Guiding Principles for Restructuring • Independence, ISOs and Transcos • Legislation? • Path Forward 2

Who am I? • Elected to Chugach Board in 2013 • Elected ARCTEC Chairman in 2014 • 25+ years of electric industry experience at Duke Energy and UIL Holdings • Developed IPP projects throughout US and Canada • Participated in establishing ISO-New England CAISO – Represented traditional IOUs – Represented non-traditional IPPs • Founded renewable biofuel and pumped storage companies 3

Who is ARCTEC? • MEA, Seward, Chugach, Golden Valley • Address generation, transmission and ancillary services needs • Procure / facilitate development of fuel, alternative energy and hydroelectric facilities • Advocacy group for state funding transmission projects • Committed to being a force for change • Committed to pursuit of a new business model 4

Transmission System Today 5

The Case for Action Why do we need to do anything? 6

Case For Action • Alaska Energy Authority has estimated ANNUAL costs to Alaska customers of $60 M-$140 M due to uneconomic dispatch 7

What is “Economic Dispatch”? • Generating unit with the lowest Incremental Cost is dispatched first • Incremental cost means: – Fuel – Variable O&M – Emissions • Incremental cost DOES NOT mean: – Fixed O&M, property taxes etc – Cost of debt or equity 8

What is “Economic Dispatch”? System 1 System 2 2 MW, $80/MWh 2 MW, $100/MWh Incremental cost Incremental Cost $10 M/yr fixed cost $1 M/yr fixed cost Total Cost: $180 1 MW Cost: $100 9

What is “Economic Dispatch”? System 1 System 2 $ 2 MW, $80/MWh Incremental Cost 2 MW, $100/MWh Incremental Cost MW h Total Cost: $160 $10 M/yr fixed cost 1 MW Cost: $80 $1 M/yr fixed cost 1 MW Cost: $80 10

How Did it Get Like This? • Railbelt utilities often plan facilities for their own customers’ needs without regard for the interconnected system – Can Ignore what other utilities may be doing – Can forgoe potential scale economies • This situation is getting worse. 11

Case For Action • Alaska Energy Authority has estimated ANNUAL costs to Alaska customers of $60 M-$140 M due to uneconomic dispatch. • It is difficult to build transmission projects that have regional benefit • Despite PURPA and RCA regulations, non-utility and renewable generation developers have no clear road map to get their projects built. • Reliability standards are not uniformly adopted • Although individual utilities have long-term resource plans, there is no integrated long-term plan to ensure the most economic upgrades to the system. 12

If This Opportunity Is So Great, Why Aren’t We Already Doing It? • We are, to a very limited extent. • The transmission system has not been planned or constructed to take advantage of this opportunity. • Multiple tariffs and cost recovery mechanisms distort true economics. • There are short-term winners and losers. – The total cost of the existing interconnected transmission system will not change. – Who pays for it and how will change. • Railbelt utilities have long history of sometimes contentious relationships. • When it’s everyone’s problem, …it’s no one’s! 13

If This Opportunity Is So Great, Why Aren’t We Already Doing It? There approximately zero examples where utilities implemented comprehensive restructuring voluntarily. 14

Guiding Principles Features of a Restructured Railbelt 15

Guiding Principles 1. 2. 3. 4. 5. 6. 7. Stakeholder governance RCA jurisdiction “NERC-like” reliability standards Interconnection standards Enforcement Plans system upgrades Provides non-discriminatory access and service 8. Economic dispatch 9. Single control area 10. Respects existing agreements and investments 16

Stakeholder Governance • • Transmission owning utilities Independent power producers End-use customers State agencies (AEA, RCA, etc) Consumer advocates Wholesale / retail marketers Others? 17

RCA Jurisdiction • Use of ratemaking authority to enforce participation and compliance • Regulatory compact ensures cost recovery • Direct RCA engagement in governance. 18

“NERC-like” Reliability Standards • We are all interconnected, so everyone plays by the same rules • No need to reinvent the wheel; NERC is the gold-standard • Can tweak for unique Alaska circumstances • See: “Railbelt Operating and Reliability Standards” 19

Interconnection Standards • Creates a standard for studying and mitigating system impacts created by new projects – Gives new generation projects clarity and certainty of how its project will be evaluated – Protects existing customers – Creates transparency • Defines and standardizes roles and responsibilities • Fosters economic efficiency 20

Enforcement • We are all interconnected, so there need be consequences for noncompliance • In coordination with RCA, ability to sanction • As a last resort, the ability to step in and perform 21

Plans System Upgrades • Develops a comprehensive, long-term transmission plan – Based on reliability – Based on economic efficiency • By looking at the grid as a whole, the projects with the most overall benefits can be prioritized • Bottlenecks can be targeted to enhance economic dispatch • Deploys capital more efficiently 22

Provides Non-Discriminatory Access and Service • Transmission service provided to all users on same terms and price, regardless of facility ownership • Removes rate “pancaking”, which distorts economic efficiencies by inhibiting economic dispatch • Does not provide transmission owners with preferential access 23

Economic Dispatch • The ability to deliver the most efficient generation to customers anywhere on the grid • Reduces costs by “pooling” reserves 24

Single Control Area • Simplifies oversight and reliability • Lowers operating costs • Reduces accounting 25

Respect for Existing Agreements and Investments • Recognizes that there are many existing agreements among stakeholders. • Recognizes that changing the terms of these agreements have real and meaningful implications – To customer rates – To utility balance sheets and credit ratings • Provides appropriate phase-in tools to reduce shocks. • Does not strand existing investments 26

Summary: Our System Should Provide: • Economically efficient dispatch – Lower cost for customers – The most “efficient” generation runs first • Enhanced reliability – A set of tried and true standards applied in a way that does not discriminate against any stakeholder • Lower emissions, increased access to renewables, sustainability • Enhanced access for independent power producers – Transparent, non-discriminatory interconnection standards • Capital efficiency – Investing in the right projects in the right places – Maximizing the usefulness of existing resources 27

Independence, ISOs and TRANSCOs 28

Independence • Important for trust, transparency • Must be guided by: – Long term interests of customers – Lowest lifecycle costs – Preference for free markets, when appropriate – Prudently incurred costs are recoverable – Respect for past committments 29

ISOs (or RTOs) are a Proven Solution Mid 1990 s FERC Order 888 mandated non-discriminatory open access 1999 FERC Order 2000 recognized and encouraged the formation of Regional Transmission Organizations (RTOs) (ISOs) They are common in areas without significant federal investment in transmission and generation i. e. Bonneville and Tennessee Valley Authority Ten exist today covering most of the US and parts of Canada with proven improvements in efficiency and reliability Alaska is not FERC regulated…. However: Adapted for the Railbelt's smaller size and unique circumstances they provide a proven road map - a workable rational Railbelt business structure 30 30

ISOs are common in the Lower-48 & Canada 31 31

Independent System Operator ISO- An independent system operator • An ISO owns no assets • It is neutral party responsible for planning, management and control of the electric transmission grid in a state or region • Characteristics • Ensures non-discriminatory access; • Possession of operational authority for all transmission facilities under the ISO’s control; and • Exclusive authority to maintain short-term reliability. 32 • Regulatory Compact

ISO and the Unified Grid Functions: • Administers its own tariff and employs a transmission pricing system that will promote efficient use and expansion of transmission and generation facilities • Creates market mechanisms to manage transmission congestion • Develops and implements procedures to address un intended flow issues • Serve as a supplier of last resort for all ancillary services • Operate a single website for all transmission facility commercial and technical information under its control • Responsibility for independently determining transmission line limitations • Monitors markets to identify design flaws and market power • Plans, conditions , and coordinate necessary transmission additions and upgrades • Performs security constrained economic dispatch and market clearing functions 33

TRANSCO Transco- A transmission owning entity • A regulated entity which owns, constructs, and maintains transmission lines used to transmit wholesale power • It may or may not handle power dispatch and coordination • Secures financing • Executes project 34

ARCTEC as Transco • Use of existing assets of transmission providers are pooled for joint use under a single tariff • Participation is voluntary • Its owners are its customers; a “cooperative” model • Transmission owners retain ownership of existing facilities • RCA provides cost recovery of approved projects • Raises capital and constructs new transmission facilities pursuant to Regional Transmission Plan (by ISO) • Maintains transmission system assets • May provide system operating services to ISO 35

Typical ISO / TRANSCO Relationship ISO Transco Performs economic dispatch Yes No Plans projects Yes No Conditions projects Yes No Drafts reliability standards, assures compliance Yes No Independent board represents stakeholders Yes No Responsible for ensuring non-discriminatory open access Yes No Responsible for short term reliability Yes No Regulatory Compact Yes Through ISO Owns assets No Yes Builds transmission No Yes Finances transmission No Yes Maintains transmission No Yes 36 36

Regulatory Compact RCA assigns authority to the ISO to: • • • Ensure reliability compliance Implement non-discriminatory open access Develop a universal tariff Develop reliability standards Oversee system -wide economic dispatch RCA Recognizes ISO’s stakeholder developed planning protocols Responsible for long-term transmission planning Assures project cost recovery for ISO-approved transmission projects 37 Ensures stakeholder representation on ISO board 37

ISO Structure With Transco RCA Jurisdiction Transco Governance (Nonindependent) ISO Governance (Independent) • Utilities • IPPs • Consumers • Economic Development Councils • Renewables • Industrials • Other Stakeholders ISO • Transmission Owning Utilities Transco Coop’s Municipals AEA Investor Owned IPPs Other 38 38

Legislation? 39

Legislation • Regulatory Commission of Alaska (RCA) to recommend plan to legislature by the end of this session: – Establish an independent entity to implement guiding principles 1 -10. – Provide suggested legislation and/or regulatory changes necessary to implement plan if needed – Mandate participation 40 40

Path Forward 41

We Have to Change the Way We Think of “The Grid” • The electric transmission system is a single integrated whole • Its sole purpose is to deliver reliable, economic energy to end users • All customers derive benefit from interconnection • New generators should be able to interconnect wherever they want, as long as they pay the costs they impose on the system and can find a customer to buy their product. 42

Implementation (do all at once) • Enabling Legislation (maybe) – – Establish Independent Entity RCA jurisdiction Mandatory participation Voluntary FERC compliance? • Begin stakeholder deliberations – Define Structure – Adopt a “go by” from lower 48 • ARCTEC can host / coordinate the deliberations, but cannot BE the Independent Entity 43

Conclusions • Economic dispatch is the prize. • Regional transmission projects are an enabler • An Independent Entity is required to make and enforce the rules. • The Independent Entity must be governed by all stakeholders. • Participation must be mandatory • A Transco can be helpful, more so if the rules are rationalized • Legislature should be prepared to enable RCA to implement 44

Thank You! 45