October 1, 2004 Report on Existing and Potential Electric System Constraints and Need within the ERCOT Region

See Report Highlights and Executive Summary below.

The complete 63-page Transmission Report 2004 is available under Reports and Presentations 2004.

To set up an interview with ERCOT staff:

Dottie Roark, Communications Coordinator, 512-225-7024, Cell 512-413-3379.

Report Highlights

The ERCOT electric system is reliable and adequate.

• Ample generation reserves – 26,000 MW of new generation added since 1995 (46% of total generation)
• Reserve margins at least 20.5% until 2009 – well over the 12.5% requirement
• Almost $2 billion in transmission additions in last six years (27% of total transmission plant)
• Transmission system has allowed a viable competitive market

Significant transmission additions are planned.

• Driven by reliability and economics
• Several 345-kV and 138-kV additions are well under way
• $2.8 billion in transmission projects in the next few years
• Estimated $100 million annual savings in projects analyzed
• Additional savings in projects under study

Transmission congestion costs to consumers incurred to maintain the reliability of the ERCOT system were $390 million over one year – approximately 1.5% of the total market. Areas found to be most constrained include:

• South Texas to both North Texas and Houston
• Northeast Texas to the Dallas/Fort Worth metroplex
• Localized congestion pockets in DFW, the Lower Rio Grande Valley, North Texas, West Texas, and Corpus Christi

ERCOT managed Reliability Must-Run (RMR) contracts with 14 units no longer competitive in the market

• Exit strategies for all RMR units have been approved to reduce congestion costs
• Estimated annual savings to consumers over $50 million (included in above savings) without RMR units

ERCOT Transmission Services

• Leads three regional groups: north, south, west
• Studies all significant projects independently and in nondiscriminatory manner
• Facilitates consideration and review of proposed projects to address system needs
• Employs new tools and processes to project and mitigate congestion costs
• Recommends transmission infrastructure additions that have been analyzed in an open process

Executive Summary

High-voltage transmission lines serve as an integral link between power generating plants and consumers of electrical energy. Working together, these transmission lines form a transportation highway for electrical power and are often referred to collectively as the transmission grid. The synergism achieved by all components that make up the transmission grid enables the delivery of power to the consumer with minimum disruptions. Major transmission-related components include conductors, support (tower) structures, rights of way, transformers, relays, breakers, switches, reactive devices and remedial action equipment. Some components are essential to the physical act of transmitting power (e.g. conductors); others ensure that the delivered power is of acceptable quality (e.g. reactive devices), while others are required to protect equipment or affect operations and maintenance (e.g. control systems, SCADA, relays, and breakers). This system must be planned, designed, constructed, and maintained to operate reliably within thermal, voltage, and stability limits while achieving its major purposes. The transmission system must be flexible enough, every second of every day, to accommodate the growing demand for reliable and affordable electricity.

The Electric Reliability Council of Texas (ERCOT), Transmission and Distribution Service Providers (TDSPs), generators, and loads are meeting the challenge to keep the ERCOT system reliable and adequate. Over 26,000 MW of new generation capacity including over 900 MW of wind power has been added to the grid. This represents an increase of over 46% of installed generation capacity since 1995. Reserve margins are projected to remain above the 12.5% minimum requirement through 2009, and transmission construction is proceeding well to meet customer load requirements. About 700 circuit miles of 345-kV lines and hundreds of circuit miles of 138-kV lines along with significant autotransformer additions have been installed since 1996. Additional new generation is being developed within the region. Measures have already been taken that will reduce the chances of wide-scale events like the Northeast blackout of 2003.

A summary of all the transmission projects currently in progress within ERCOT indicates that significant 138-kV construction will be completed over the next three years. Multiple 345-kV/138-kV autotransformers will be installed through 2007 in order to increase the transfer capability from the 345-kV system to the 138-kV load-serving system. 345-kV additions are also continuing to be made at about the same rate as in previous years.

The consumer’s electric bill contains rate elements covering the three main components of electrical infrastructure costs – generation, transmission and distribution. Generation costs come from the capital costs of power plant equipment, operation and maintenance expenses and, most significantly, the cost of the fuel used by the plants to produce electricity. Transmission and distribution costs come from the capital costs for transmission and distribution equipment, plus operation and maintenance expenses.

Almost $2 billion in transmission additions have been made over the past six years with a total transmission plant investment in ERCOT of almost $6.8 billion. In other words, over 27% of the total transmission plant investment in ERCOT has been added to rate base over the past six years. While these investments require significant capital, transmission costs currently make up less than 10% percent of a retail consumer’s electric bill.

Based on the current assessment of existing needs, and in support of ongoing generation and demand growth, ERCOT is tracking a series of projects over several years with an estimated cost of approximately $2.8 billion. The average level of future transmission estimates in ERCOT is consistent with the past six years. Several large 138-kV, 345-kV, and other transmission projects are expected to be completed in 2006.

Through its planning authority role, all significant projects are independently studied by ERCOT in an open and non-discriminatory manner. ERCOT leads three regional planning groups (RPGs): North, South, and West. ERCOT staff facilitates the consideration and review of proposed projects to address transmission constraints and other system needs. ERCOT has recently adopted computer simulation tools and developed processes to project congestion costs based on wholesale market fundamentals. These new tools and processes are being applied to determining the cost effectiveness of major transmission additions in the RPG process. Where there is a need, ERCOT recommends and the TDSPs build transmission infrastructure that has been fully analyzed vis-à-vis the open RPG process. We emphasize fairness and openness with stakeholders that may be impacted by these facilities – balancing their concerns with the need to keep the lights on for millions of people. Participation in these regional planning groups is required of all TDSPs and is open to all market participants/stakeholders, consumers, and Public Utility Commission of Texas (PUCT) staff.

Retail competition is strong in Texas. In the ERCOT Region where customer choice is in effect (refer to ERCOT's Retail Transaction Reports), consumers representing about 37% of the peak load have exercised their right to switch to different retail service providers. Over the past 10 years, wholesale competition has been encouraged in electricity markets to lower costs to consumers by spurring needed investments in generation and increasing the efficiency of operations. Today, the transmission system acts as an interstate highway system for wholesale electricity commerce and is the backbone for wholesale and retail competition.

Daily transmission constraints increase electricity costs to consumers and can reduce system reliability and increase the risk of equipment damage if not properly managed. Two types of constraints are defined in the ERCOT market: (a) Commercially significant constraints (CSCs) limit the flow of energy from one of the major zones in the ERCOT Region into another, and (b) local constraints (LCs) limit the flow of energy in areas within a zone in ERCOT.

Reducing transmission constraints when practical and economical is essential to ensuring reliable and affordable electricity now and in the future. Between June 1, 2003, and May 31, 2004, transmission congestion cost ERCOT consumers about $390 million. Costs may have been even greater due to factors not included in this report, such as self-commitment of higher cost units by Qualified Scheduling Entities. While this figure is significant, it represents only 1.5% of the electric retail market in ERCOT. Figure 1 lists the total cost of congestion by cause and by the type of service procured pursuant to the ERCOT Protocols.

The cost of Reliability Must-Run (RMR) services and local congestion mitigation in the ERCOT region has been the focus of significant new analysis by ERCOT Transmission Services over the last year. Since the 2003 report, eight RMR exit strategies have been developed in response to the uneconomic cost of these generation resources. Annual savings to end-use consumers in excess of $50 million are estimated once the recommended transmission improvements are completed.

In addition, a protocol revision approved this year requires ERCOT and the associated TDSP to identify and implement feasible alternatives to local congestion once certain dollar thresholds are met. ERCOT Transmission Services staff is actively identifying areas of chronic transmission congestion and, with the assistance of the regional planning groups, developing plans to alleviate these transmission bottlenecks.

Electricity use is continuing to grow. This reflects the transformation of the economy to a high-technology information base that relies on electricity. Electricity, though, is not a commodity that can be easily stored, and the transmission infrastructure is at the heart of economic well-being. An open, aggressive, and coordinated transmission planning process that incorporates transmission upgrades to relieve constraints, reliability must-run requirements, and the interconnection of new supply (including environmentally friendly units) will be of paramount importance to the future of Texas.