In the Matter of the Appeal in Case No. 01-NE-BD-2003 (TransCanada Power Marketing Ltd.) June 13, 2003

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1 Jon G. Lotis, Chair Robert C. Arnold, Vice Chair Robert I. Hanfling Joseph H. Petrowski Jay S. Siegel N E P O O L B O A R D OF R E V I E W In the Matter of the Appeal in Case No. 01-NE-BD-2003 (TransCanada Power Marketing Ltd.) June 13, 2003 DECISION ON APPEAL Before: Lotis, Chairman, Arnold, Hanfling, Petrowski, and Siegel, Members Procedural Background By letter dated February 24, 2003 TransCanada Power Marketing Ltd. ( TransCanada ) appealed the NEPOOL Participants Commitee ( PC ) failure to approve at its February 14 meeting the following motion proposed by TransCanada: That at the time of the New England RTO filing or by September 30, 2003, whichever is earlier, NEPOOL shall make a filing with FERC that rolls the costs of the HQ Interconnection into a single tarif, in compliance with FERC s January 31, 2003 Order in Docket No. EL The following parties intervened in this case: PG&E Energy Trading-Power, L.P. and USGen New England, Inc. (jointly) ( PG&E NEG ), H.Q. Energy Services (U.S.), Inc., ( HQ ), National Grid USA Companies 1 ( National Grid ), the IRH Management Commitee ( IRH ), the NSTAR Companies 2, PSEG Energy Resources & Trade, LLC, Hydro-Quebec TransEnergie, and Select Energy, Inc. TransCanada, PG&E NEG, HQ, National Grid, IRH and the PC submitted Statements of Position. Position of the Parties TransCanada contends that FERC has mandated the rol in of the costs associated with the Hydro-Quebec transmision tie ( HQInterconnection ). 1 New England Power Company, Massachusetts Electric Company, The Narragansett Electric Company, and Granite State Electric Company. 2 Boston Edison Company, Cambridge Electric Light Company, Canal Electric Company, and Commonwealth Electric Company.

2 TransCanada cites FERC s January 31, 2003 order in Docket No. EL in which it stated that the withdrawal of the joint petition of the ISO-New England and NYISO to form a Northeastern RTO should cause acceleration of efforts ultimately to roll in the costs of the HQ Interconnection into a single tarif. TransCanada maintains that the Board must decide whether NEPOOL has complied with the January 31 order, in part, by weighing FERC s earlier rulings that provided guidance and led to the January Order. According to TransCanada, the PC s vote rejecting its motion represents a failure by NEPOOL to properly meet its obligation to comply with FERC directives. TransCanada maintains that the continued treatment of the HQ Interconnection as a separately tariffed charge is detrimental to the development of an efficient and competitive market in New England. TransCanada states that while the RTO mechanism is a reasonable vehicle for submitting an HQ Interconnection roll-in proposal, delays in the RTO filing need not delay action on the HQ Interconnection and that the proposed September 30 deadline in its motion is reasonable under the circumstances. TransCanada requests that the Board find that at the time of the New England RTO filing or by September 30, 2003, which ever is earlier, NEPOOL should make a filing with FERC that rolls the costs of the HQ Interconnection into a single tariff. National Grid does not oppose the Board issuing a decision setting a deadline for NEPOOL to support a roll-in filing with FERC for the costs of the HQ Interconnection that coincides with the date of a RTO filing. National Grid, however, is opposed to any proposed roll-in methodology that disproportionately increases costs to its customers, that harms New England customers generally, or that harms HQ Interconnection shareholders. National Grid believes that there are win-win solutions for the various parties that are obtainable through settlement negotiations. National Grid urges that the Board not create unnecessary barriers to settlement discussions by going beyond establishing the requested deadline for conclusion of roll-in negotiations. National Grid requests that the Board not comment on or analyze any aspect of an appropriate roll-in methodology, as this could reduce the parties flexibility and restrict the potential outcome of the negotiations. HQ requests that the Board grant TransCanada s appeal and establish September 30, 2003 as the deadline for the PC to file for the roll in of the HQ Interconnection. HQ says that the deadline should not be connected to the promise of an RTO whose formation, despite best intentions, is uncertain. HQ cites FERC orders and Board decisions calling for the roll in of the HQ Interconnection and the urgency for decision. PG&E NEG supports the appeal but believes the Board should recommend that the roll in of the HQ Interconnection be included as part of the New England RTO proposal and that the necessary filings be completed at the earliest feasible date. PG&E NEG asserts that the Board should assist the interested parties by developing a proposed resolution of the issues raised. PG&E NEG says that by adopting an expedited schedule, the Board s proposed resolution could be presented to those developing the New England RTO proposal. 2

3 IRH recommends that the Board reiterate its support for the roll in of the HQ Interconnection but not grant the specific relief that TransCanada has requested. IRH makes these arguments: FERC s orders do not mandate roling in the HQ Interconnection by a date certain; FERC s orders contemplate that the interested parties would take action to address the HQ Interconnection as part of a proposal to form a single northeast RTO; TransCanada has not proposed a specific mechanism or process by which a roll-in could be accomplished; the continuation of the HQ Interconnection on an interim basis has not been found to have an adverse effect on the competitiveness of the New England markets; and the Board may not have all the parties before it to resolve this matter in that a roll-in of the HQ Interconnection implicates the rights of the Asset Owners 3 as well as all of the Interconnection Rights Holders 4 under the Support Agreements. Given the complexities of the issues involved, IRH asserts that it may not be practicable to file a RTO tariff with the HQ Interconnection roll-in by the expected date of the RTO filing, July 1, 2003, or even by September 30, In its statement of position, the PC makes these points: FERC alone can definitively rule on NEPOOL s compliance with a FERC order; NEPOOL s Report of Compliance in Docket No. EL was filed on March 3, 2003, and supplemented on March 17, 2003; FERC noticednepool s filing and supplement and requested comments on those submissions no later than April 17, 2003; no FERC order has required NEPOOL to cause a rol-in 6 ; FERC orders have stated that all discussions concerning roll-in should take place during the formation of an RTO; and FERC s January 31 Order did not set a specific date for roll-in. The PC emphasizes that NEPOOL does not have direct authority over the HQ Interconnection because the HQ Interconnection is not owned by NEPOOL but rather by the Asset Owners who are not signatories to the NEPOOL Agreement. The Asset Owners would have to give their consent for the facilities to be rolled in. The PC further observes that the rights over the HQ Interconnection are not held by NEPOOL but rather the Interconnection Rights Holders and their consent would also be a prerequisite to roll-in. The PC asserts that ISO-NE and the New England transmission owners have embarked on an aggressive schedule for completion of a New England RTO proposal and have expressed a commitment to address the roll-in issue. The PC states that the Interconnection Rights Holders and the Asset Owners have formed a working group to 3 New England Electric Transmission Corporation, Vermont Electric Transmission Company, Inc., New England Hydro-Transmission Corporation, and New England Hydro-Transmission Electric Company. 4 The Interconnection Rights Holders consist of various public utilities and non-jurisdictional utilities. 5 The Board notes that at the PC s April 4, 2003 meeting, the schedule was adjusted to support a filing target date of mid-october. See, PC s Answer To Pleadings Regarding Compliance Filing in FERC Docket No. EL , April 11, 2003, p.6. 6 The PC states that Rol-In as used in its Statement of Position means an inclusion of the HQ Interconnection into the NEPOOL Open Access Transmission Tariff or the successor regional transmission organization ( RTO ) tarif, for the purposes of recovery of revenue requirements through rates and transmission service. 3

4 explore the various issues that would need to be addressed for a roll-in to take place. In light of these measures, the PC recommends the Board deny the appeal and thus avoid the creation of dual, simultaneous efforts to achieve roll-in. Discussion As stated above, TransCanada asserts that the Board must decide whether NEPOOL has complied with FERC s January31 Order. However, FERC received a voluntary compliance report from the PC (cited above) concerning FERC s January 31 Order. In response to that compliance filing, TransCanada filed a protest and motion for clarification in which it set out the same issues and presented essentially the same arguments that are contained in its Statement of Position in this proceeding. 7 FERC accepted the PC s compliance report without commenting on TransCanada s arguments 8. The efect of FERC s silence on this mater is toleave in place its January 31, 2003 statement that the withdrawal of the joint petition of the ISO-New England and NYISO to form a Northeastern RTO should cause acceleration of efforts to ultimately roll in the costs of the HQ Interconnection into a single tarif. FERC s expectation that accelerated eforts would be made to rol in the costs of the HQ Interconnection into a single tarif signals no preference on FERC s part that the roll in be accomplished in the context of an RTO or as a separate matter outside the RTO negotiations. Further, while FERC placed no deadline or timetable for the parties to accomplish the roll in, at the same time, it placed no bar or impediment to the parties themselves adopting a schedule for the completion of their work that would reflect the accelerated effort that FERC expected the parties to make. The agency s various statements concerning rol-in mirror similar views expressed earlier by the Board. With respect to the roll-in issue, the Board has held that it is appropriate for the costs of the HQ Interconnection (the roll-in issue) to be included in the NEPOOL Open Acces Transmision Tarif ( OATT ). In doing so, the Board also recommended to the PC that such roling in of costs should be accomplished at the earliest feasible date. 9 Thus, while FERC and the Board have left it up to the parties to determine the manner of implementation of roll-in, both urged the parties to accelerate their efforts to accomplish this end. The Board continues to adhere to the view that it would be best for the details of implementation to be negotiated by the parties and, further, that resolving this issue should be a priority for the PC. With the exception of PG&E NEG, none of the parties filing statements of position requests that the Board render an advisory opinion on the merits. 7 See TransCanada s March 31, 2003 Protest and Motion for Clarification in NSTAR Electric & Gas Corporation et. al. v. New England Power Pool, Docket No.EL Order Granting Rehearing, In Part, and Denying Rehearing In Part, April 30, FERC 61, See Cases No. 08-NE-BD-2001, 09-NE-BD-2001 and 10-NE-BD-2001, Decision on Appeal dated November 27,

5 It is evident to the Board from theparties statementsthat a great deal of work has gone into addressing issues involved in this dispute. The substantial effort made to understand the financial implications of a roll-in demonstrates there is a sincere desire to resolve the impasse. But, challenges still remain. For example: 1. There is a strong disposition on the part of some of the parties for a comprehensive settlement. 2. Integration of the HQ Interconnection into the OATT will affect market participants in widely divergent ways. The analyses included with the Appelant s filing indicate the magnitude of the immediate shifts in cost responsibilities. 3. Other costs and benefits of roll-in, e.g., energy clearing prices and the impact in the ICAP market, have not been analyzed in detail. The statements do not indicate what other considerations the parties may want addressed in conjunction with the settlement of the HQ Interconnection issue. While the Board recognizes the parties divergent interests and concerns in this mater, reconciliation of the parties diferences through setlement is atainable. NEPOOL s stated objective to create and maintain competitive markets (RNA, Section 5.1(b)) and the resulting long-term benefits created should be sufficient incentive to reach an accommodation satisfactory to all concerned. A comprehensive solution always seems enticing. Clearly,the formation of an RTO and the resolution of the many and varied issues around its creation can provide the opportunity to resolve the issues associated with integration of the HQ Interconnection costs into the OATT. While resolution of the HQ Interconnection issue in conjunction with the RTO negotiations would be salutary, the two matters are severable. Indeed, unless the RTO filing incorporating the HQ Interconnection resolution is ready for filing on the schedule currently proposed, i.e., mid-october, delay in needed market improvements would be unnecessarily postponed. Such an unwarranted delay would run counter to the RNA which sets forth commitment of the signatories to efficient competitive markets. Consistent with that commitment, the HQ Interconnection issue needs to be addressed directly, definitively, and in a timely manner. In setting up new market structures and revisions to them, the PC has typically agreed upon procedures for phasing in the associated financial benefits and burdens. Such financial rebalancing has usualy been done apart from the asociated market design changes so that the more efficient market designs could proceed unencumbered by the terms for settlement of the financial issues. Market participants that will experience additional costs from a market design change that benefits the entire market place may be entitled to some financial relief. Any such relief must be reasonable, of a limited duration (not more than five years), and not interfere with the operation of a more efficient market. 5

6 Almost all market changes will each have their list of imponderables. This one certainly does. Market participants must find ways to prevent such uncertainties from paralyzing the decision process. The Board is confident such approaches can be identified. In particular, the Board is encouraged that there seems to be little disagreement over the need for full integration of the HQ Interconnection into the OATT, thereby eliminating a market seam. The Board also is encouraged by the substantive and concerted efforts undertaken to achieve that end. In these circumstances, the Board believes that it can be of assistance to those involved with this issue by making recommendations concerning the timing and process for resolving the roll-in issue. Recommendations: The Board believes that the resolution of the roll-in dispute would be substantially enhanced by the establishment now of a reasonable target date for a filing with FERC. Further, providing for the process to be followed in efforts for achieving such resolution would also assist the parties in their negotiations. It would be in furtherance of the earlier ruling of this Board and FERC s declaration urging acceleration of the eforts to resolve the isue at the earliest posible time. What is critical in the Board s view is that the isue should be resolved by some definitive time period. Accordingly, it is the Board s recommendation that a filing should be submitted to FERC that rolls the costs of the HQ Interconnection into the OATT no later than January 31, Whether the resolution is achieved as part of the ongoing discussions for the creation of the RTO or as a separate matter is not critical. Therefore, if the roll-in of the HQ Interconnection costs is not resolved as part of the overall RTO discussions by October 15, 2003, negotiations for doing so separately should immediately commence as of that date and be completed by the January 31, 2004 deadline. Further, these separate negotiations should proceed as of October 15 with the services of a mediator who will already have been selected and empowered to begin the mediation process. Such individual would be helpful in assisting the parties to agree on the estimated, if not exact, financial impacts, and the appropriate time period and method for phasing in financial benefits and burdens generated by the market design change(s). 10 The Board therefore urges the PC to consider four specific recommendations at its next meeting following the issuance of this decision: 1. Adoption of a deadline for a filing on or before January 31, 2004 with FERC which rolls in the HQ Interconnection costs into the OATT. 2. Severing the roll-in issue from the RTO discussions if it is not resolved by October 15, Separate negotiations to resolve the roll-in dispute shall involve the use of a mediator. 10 Even for related issues to the HQ Interconnection treatment, that are not as easily measurable in their forward financial impact, a mediator would be of significant assistance in identifying formulae or processes for measurements that might need to be taken into consideration apart from market design improvements. 6

7 4. Designating a smaller representative group the responsibility for selecting the mediator and negotiating a separately proposed settlement of the roll-in dispute for consideration of all the affected parties. 11 Under these recommendations the above framework for resolution of the roll-in dispute should be initiated at this first meeting and finalized at the following meeting. This would include providing for the mediator to be selected and empowered to act as of October 15, 2003 with the mediation proceeding promptly after that date if the roll-in issue has not been resolved as part of the RTO discussions. Decision The appeal, as modified above, is granted in part and denied in part. NEPOOL BOARD OF REVIEW Jon G. Lotis, Chairman Robert C. Arnold Robert I. Hanfling Joseph H. Petrowski Jay S. Siegel 11 Not all parties of interest seem to have major impacts from a roll-in. If the parties impacted most significantly can agree upon the terms of a proposed settlement, then those whose interest are not so seriously impacted are more likely to accept it. 7