Slide 1 - Introduction

Glenn Ross
Virginia Power
July 9, 1998

Good morning Mr. Chairman and members of the subcommittee, I am Glenn Ross, Manager of Transmission Planning at Virginia Power and I will briefly outline the status of the Alliance ISO. Before I do that however, I want to point out that although Virginia Power has been actively engaged in negotiations with the Alliance group, we have been closely monitoring the progress of the other ISOs that are being reported on today, namely PJM and the Midwest ISO.

I am the Virginia Power representative on the PJM ISO Members Committee and one of the two elected members of the PJM ISO Finance Committee reporting to the ISO Board. Virginia Power has intervened in the Midwest ISO filing at The FERC and is monitoring this filing.

Virginia Power has not made a final commitment to any ISO and we are reserving this decision until we can identify which of the models will best fulfill the essential goal of ensuring reliability and providing for non-discriminatory access to transmission services for all suppliers and customers.

The action by the General Assembly in passing House Bill 1172 was very timely in calling for the formation of one or more ISOs to serve Virginia and setting a timetable for the transition to competition. In fact negotiations were already underway toward formation of the Alliance ISO. Virginia Power had begun to participate in these deliberations in December of 1997. Such early participation was necessary if we were to have an effective voice in its formation. This demonstrates the pace at which the industry is changing and further confirms the need to move forward with more detailed legislation in 1999 to insure the Commonwealth reaps the benefits of competition. Such legislation should allow sufficient flexibility regarding ISO structure and governance to accommodate the possible outcomes of the evolving process that is now underway.

Slide 2 - Participants

• AEP
• Carolina Power and Light
• Consumers Energy
• Detroit Edison
• Duke Power
• FirstEnergy
• Santee Cooper
• South Carolina Electric and Gas
• Virginia Electric & Power
• Stakeholder Involvement

The participants in The Alliance discussions have grown in the past few months. They are:

AEP, Carolina Power and Light, Consumers Energy, Detroit Edison, Duke Power,

FirstEnergy, Santee Cooper, South Carolina Electric and Gas, Virginia Electric & Power,

and Stakeholder Involvement - including Coops, Municipals, Industrial and Commercial

Customers, State Regulators, and Consumer Advocates).

Slide 3 - Phase 1 participant map

Slide 4 - Current Participant Map

Slide 5 - Main Market Components and Interfaces

This simple model will help clarify the relationship between the principle components and will facilitate discussion. This generalized model shows alternate paths between generators and load serving entities and illustrates the role to be played by the ISO. It is my intent to show functions that may fit the final model, but are offered for discussion only at this time.

• Generators and/or Load Serving Entities, or simply LSEs, submit information to the ISO.
• Generators may sell energy through the RPX or other markets associated with the ISO rather than, or in addition to, bilateral contracts.
• THe ISO forecasts the Alliance Regional load for each hour. It schedules generation to meet this load forecast.
• The ISO produces an economically optimized generation constrained schedule.
• The ISO implements this schedule.
• Deviations from the schedule are based on redispatch decisions by the ISO to enhance network performance.

• The Key Principles that follow, in combination, make the Alliance unique
• They will lead to:
  • generation competition over a wide area, not constrained by ISO boundaries
  • the provision of an efficient and secure transmission service in an open and non-discriminatory manner
  • the evolution of a transmission service that meets the market's requirements

It is anticipated that they will lead to:

1. Generation competition over a wide area, not constrained by ISO or existing service territory boundaries--this broader market mitigates any market dominance by any one generation owner.
2. The provision of an efficient and secure transmission service in an open and non-discriminatory manner.
3. The evolution of a transmission service that meets the market's requirements.

• Reliability, Independence, open access, non-discrimination
• Flexibility
• Facilitate competition in Generation
• Ensure economic, efficient Transmission

Other important Alliance Principles are:

Flexibility - A structure that is flexible not only to the needs of market participants, but also to the needs of transmission owners that are participating in the entity.

Facilitate competition in generation - experts agree that this provides the greatest potential for consumer benefits.

Ensure economic, efficient, transmission - while only a small part of the consumers total electricity bill, transmission costs still represents billions of dollars. It is important that it is provided as economically as possible against a background of secure and reliable service. This can be ensured by providing incentives for efficiency in the delivery of this service.

Slide 8 - Fulfillment of Key Principles

• Positive development towards alternate end-state
• Reciprocity
• Markets for settling energy imbalance/
  Voluntary central trading mechanism for bulk energy
• The use of a method to efficiently price congestion

Alternate end-state options - flexibility means that the alliance will consider alternatives such as a Transco. - A Transco is a for profit transmission company that both owns and operates transmission assets, but does not own generation assets. Unlike ISOs in place today, the Transco links the economic performance of transmission operations to that of transmission ownership. With this transmission market structure, the owners of transmission assets can then be held directly accountable to regulators and to the public for safe, reliable, and economically efficient operations and planning.

Reciprocity - eliminates paying multiple transmission fees, called rate pancaking, between ISOs in an effort to ensure generation competition over a much wider area than the ISO.

Markets for settling energy imbalance/voluntary trading of bulk energy - this is the key to generation competition. If customers have the option, to sign a bilateral contract, or buy all electrical energy at a market price via a central mechanism, effective generation competition will be the consequence--this will drive innovation and lower production costs.

Price mechanisms to address congestion - The congestion pricing methodology should provide transmission customers with economic incentives to efficiently utilize the transmission system. It should also promote efficient expansion of the transmission system and location of new generating resources.

Slide 9 -

Ultimately this ISO like others must gain FERC approval in order to operate--since there is a FERC representative speaking today I will not go into detail regarding this process. However in fulfillment of the key principles outlined above, the Alliance should be able to satisfy much of the FERC criteria.

I am confident that a working ISO can be in place to accommodate the 2002-2004 time frame for the transition to competition envisioned in HB 1172. The ISOs will certainly evolve in ways that we can only guess at today as the collective experience of increasing competition is brought to bear and as FERC and other policymakers further define the path. It is important that Virginia Power and the other stakeholders participate in the deliberations that will lead to the design of this component of the future structure of the electric business.

I appreciate this opportunity to brief you on the Alliance ISO and I will be glad to answer any questions that you may have regarding it.