Business Plan (March 3, 2006)

Grid West Business Plan Draft for Discussion – March 7, 2006 The Structure Group 2000 W. Sam Houston Pkwy. South Suite 1600 Houston, TX 77042 Page 1 Agenda Today’s presentation will cover the following topics… ● Summary ● Functions ● Requirements ● Work Plan ● Costs ● Timing of funding sources DRAFT Page 2 02/28/2005 Summary DRAFT Page 3 02/28/2005 Summary Background & Objectives The TRG was tasked with developing a business plan that supports a logical evolution of functionality… ● Move to Basic Features by implementing functions incrementally; ● Implement the features that deliver the greatest benefit to the region; ● Minimize cost to implement each set of functions; and ● Allow for future functional expansion and increased participation. DRAFT Page 4 02/28/2005 Summary Functional Evolution This incremental approach moves Grid West towards the original TSLG Basic Features through a defined functional evolution… Function 1 – Tariff Assistance and Planning Covered in this report GW tariff assistance & planning Independent tariff administration Grid West Tariff Function 2 – Ancillary Services Covered in this report ADI (Not included in estimate) Ancillary services and market monitoring Full TSLG Market Design DRAFT Page 5 02/28/2005 Summary Business Plan Components The functional evolution is described within the Business Plan, which is comprised of the following sections… ● Part 1 - Functions ● Part 2 - Requirements ● Part 3 – Work Plan ● Part 4 – Costs ● Part 5 – Timing of funding sources DRAFT Page 6 02/28/2005 Summary Approach To develop the business plan we used the following approach… Requirements Work Plan Costs Funding People Activities Development Loans Systems Duration Implementation Debt Issuance Facilities Dependencies Operations Revenue DRAFT Page 7 02/28/2005 Summary Definitions The work plan and costs were broken down into development, implementation, and operating phases… ● Development – This includes all activities up to and including the sourcing process (e.g. protocols, market mechanics, etc. with sourcing used here to mean all implementation options, whether that be through service contracts, issuance of RFP and hiring, or combinations of both). ● Implementation – This includes all activities associated with the implementation start-up of the Grid West functions (e.g. requirements, design, build, test, cutover). ● Operating – This includes all activities associated with the ongoing operation of the Grid West functions 1 & 2. DRAFT Page 8 02/28/2005 Summary Scope The scope of the business plan and associated costs described here includes… Development Implementation Operations Included: • Resources providing technical support in preparation for implementation Not Included: • Board of Directors •Recruiting, cost • Non-technical support for administrative, funding and policy functions •FERC, Legal etc. • Funding to date and associated interest DRAFT Included: • Technical Resources • Systems • Facilities • Insurance & Other Not Included: • Board of Directors • Non-technical support for administrative, funding and policy functions • Funding to date and associated interest Included: • Resources • Systems • Facilities • Insurance & Other • Board of Directors Not Included: • Amortization of funding to date or non-technical development costs • Costs to move toward full Basic Features design Page 9 02/28/2005 Summary Tariff Assistance and Planning Requirements Tasks Costs Funding Systems: • Planning tools Facilities: • Interim facility • < 2000 sq ft. Labor: • 9 FTEs • Staggered hiring Development: • Define services, requirements, resources • Determine facility • Q2 2006 Implementation: • Develop infrastructure, hire, prepare base cases etc. • Q2-3 2006 Go-Live: Q4 2006 Development: • $150k Implementation: • $1.6m Operating*: • $2.4m before amortization • $2.6 after amortization Funding Sources: • Interim Funding Agreement will cover the development and implementation costs • Annual operating costs will be recovered through case study and fixed payments Note: *10-year amortization for only the technical cost of development and implementation costs of this function. Funding to date and non-technical development have not been included. Page 10 DRAFT 02/28/2005 Summary Ancillary Services Requirements Tasks Costs Funding Systems: • RT monitoring • Market • Corporate Facilities: • 30,000 sq ft*** Labor: • 93 FTEs Development: • Design verification, protocols, market mechanics, sourcing • Q2 06 – Q1 2007 Implementation: • Business, systems, organization, integration etc. • Q2 07 – Q3 2008 Go-Live: Q4 2008 Development**: • $2.1m Implementation: • $63.4m Operating*: • $28.5m before amortization • $35m after amortization Funding Sources: • Interim funding agreement will cover development • implementation will be bond financed • A market operations charge will cover operating expenses Notes: *10-year amortization for only technical cost of development and implementation costs of this function. Funding to date and non-technical costs have not been included. ** Development cost is for technical support only, not board, filing activities, etc. *** Square footage will accommodate incorporating planning group into permanent facility. Page 11 DRAFT 02/28/2005 Summary Implementation Timing The following summarizes the timing for the functions… Activity Function 1 - Development - Implementation Tariff Assistance & Planning Live Q2 ’06 Q3 ’06 Q4 ’06 Q1 ‘07 Q2 ’07 Q3 ’07 Q4 ’07 Q1 ’08 Q2 ’08 Q3 ’08 Q4 ’08 Function 2 - Development A/S Live - Implementation ADI Go Live S (Separate activity by TOs) ADI Live DRAFT Page 12 02/28/2005 Summary Value Proposition By taking an incremental approach, Grid West can more quickly capture a large portion of the benefits at a reduced cost… Benefits Snapshot $383-646 original estimate of benefits $190-393 revised estimate for A/S only Capture ~50% Costs Snapshot $85m/year original operating expense* $<40m/year revised operating expense Reduced ~55+% Timing Snapshot 24 mo Development 24 mo Implementation 12 mo Development 18 mo Implementation Faster * Note: Not including amortization of funding to date DRAFT Page 13 02/28/2005 Summary ● Incremental approach captures approximately 50% of identified benefits sooner with less than half the costs. ● $3.8 million of interim funding is estimated for technical support only: • $1.7m to bring Tariff Assistance & Planning to operational state; and • $2.1m to bring Market functions to state of readiness for an implementation sourcing decision. ● Momentum is created to provide coordinated approach to addressing identified “problems and opportunities” in the Pacific Northwest. DRAFT Page 14 02/28/2005 Part 1 - Functions DRAFT Page 15 02/28/2005 Part 1 - Functions Overview The proposed business plan includes the following functions… ● Tariff Assistance and Planning ● Tariff Administration Assistance for TOs ● Regional Planning ● Ancillary Service Markets ● ● ● ● ● ACE Diversity Interchange (ADI) Regulating Reserve Contingency Reserve Real-Time Balancing Service Market Monitoring Page 16 DRAFT 02/28/2005 Part 1 - Functions Rationale The following rationale was used to select the functions to be included in the initial roll-out… ● ● Implementing the planning function allows Grid West to develop a new revenue stream as early as Q4 2006. ACE Diversity Interchange will allow for netting the ACE of participating control areas to reduce regulation control burden. • • Implementation is intended to be Q4 2006, before implementation of the regulating reserve markets. Cost is not included in the estimates presented here. ● Implementing the ancillary service markets, especially the real-time balancing service, allows Grid West to capture approximately 50% of the identified benefits at a lower total cost. Standard software is available to support these functions. This reduced subset of functionality lowers implementation risk. ● ● DRAFT Page 17 02/28/2005 Part 1 - Functions Capability Map Lon Long -term Planning Pre -Day Ahead - Day-Ahead Market Monitoring Adjustment Operating Hour Market Monitoring Settlement Regional Planning & Capacity Expansion Transmission Modeling Monthly Reconfiguration HAN D O FF TO CO NT ROL AREAS Tariff Assistance Scheduling Scheduling Adjustments Reconfiguration Settlement REGIONAL SERVICES Rights Data Management Administration Settlement Annual Reconfiguration Intra -Month Reconfiguration Day-Ahead Reconfiguration Invoicing Dispute Management CCA SERVICES GW Real -Time Balancing Service CCA Reserve* Market GW Reserve Market Meter Data Management GW Reserve Settlement GW Reserve Sharing GW Balancing Settlement * Reserves auction conducted close to real time DRAFT Page 18 02/28/2005 Part 1 - Functions What’s Different? There are important functional differences from the original TSLG Basic Features, including… ● Reconfiguration: Grid West will not implement the transmission markets in this stage. ● Reliability: Grid West will not assume the Reliability Authority responsibilities in this stage. ● Control Area Operations: Grid West will not assume Balancing Authority and Interchange Authority responsibilities in this stage. DRAFT Page 19 Impacts ● Significant headcount reduction ● Reduced infrastructure ● Reduced systems ● Reduced implementation effort 02/28/2005 Part 1 - Functions Tariff Assistance and Planning : Overview The following is an overview of the proposed tariff assistance and planning function… ● Objectives: • Perform fee-based studies at the request of TOs that – • Build planning knowledge base and capability within Grid West • Assist TOs with long range planning development by –  Focusing on the Grid West service area;  Providing transmission evaluations for resource planners; and  Addressing the commercial value of potential expansions.  Aid TOs in administering their OATTs; and  Identify alternatives and develop information for merit based decision making regarding new facilities. ● Service Fees & Tariffs: • Study service costs – paid for by requesting TO. • Data maintenance costs – paid for by a general recovery mechanism (e.g. an assessment, a users fee, a component of the grid management charge, etc.). DRAFT Page 20 02/28/2005 Part 1 - Functions Tariff Assistance and Planning: Overview The following is an overview of the proposed planning sub-functions… ● Case-by-case studies that: • May be particularly valuable for addressing requests that involve multiple systems by providing a Grid West perspective; • May include system impact, interconnections, etc.; • Will be done as requested TOs to supplement their internal process for administering OATTs; and • Starts with small staffing and grows as needed. • Evaluate the ability of the combined Grid West high voltage backbone system to – • Support A/S market operations by –  Reliably serve load; and  Integrate new resources, particularly addressing the real-time effects of alternative resources. ● Transfer capability determinations that:  Evaluating simultaneous transfers between control areas; and  Evaluating other transfer capabilities under various operating conditions. DRAFT Page 21 02/28/2005 Part 1 - Functions Tariff Assistance and Planning: Overview The following is an overview of the proposed planning sub-functions (continued)… ● Long-range planning studies that: • Are coordinated with the work of WECC, NTAC and ColumbiaGrid to avoid unnecessary duplication of effort; • Support merit-based investment decisions;  Evaluate commercial value of network expansion alternatives; and  Examine both local delivery and regional trade implications; • Consider specific projects, going beyond the “broad conceptual level” of existing regional studies, e.g., evaluating a direct connection between the BCTC network and the Grid West network. ● Collection and validation of physical system modeling data: • Validates data gathered from TOs and other sources including –  Load and resource data; and  Transmission network data. • As an independent entity, Grid West may be able to gather commercially sensitive data not otherwise available for planning studies. DRAFT Page 22 02/28/2005 Part 1 - Functions A/S Markets: Overview The following is an overview of the proposed ancillary service function… ● Objectives: • Allow for efficient operating reserves and imbalance energy provision:  Pooling ACE and operating reserve requirements;  Enhancing reserve sharing through use of most efficient resources; and  Providing balancing energy market using economic dispatch. ● Service Fees & Tariffs: • A layer fee structure to collect a contribution from all part based on level of participate in markets – possibilities include:  Grid management type charge for participating TOs; and  Transaction based fees for suppliers outside Grid West, etc. DRAFT Page 23 02/28/2005 Part 1 - Functions A/S Market: Ace Diversity Interchange (ADI) ADI can be implemented within the current utility infrastructure prior to the implementation of the regulating reserve market… ● Not a part of the TSLG model but had been contemplated as a near-term activity – current plans are for implementation in Q4 2006. ● ADI is an established method for netting the ACE of participating control areas to reduce the control burden on regulating units. ● Can be implemented earlier by leveraging the existing infrastructure and systems of TOs. ● Will contribute to inadvertent interchange but experience in other places has shown that the impact tends to be more canceling than cumulative in nature. ● It is assumed that the personnel/vendor for each participating control area will implement the required changes to its systems and bear the associated costs. ● Operational aspects of the ADI function need to be defined and agreed upon by participating control areas. DRAFT Page 24 02/28/2005 Part 1 - Functions A/S Markets: Overview While the ADI function can be implemented early, the regulating reserve, contingency reserve and real-time balancing markets are tightly integrated and best implemented simultaneously… Contingency Reserve Regulating Reserve Real-time Balancing DRAFT Page 25 02/28/2005 Part 1 - Functions A/S Markets: Regulating Reserve Regulating reserve includes the following features… ● Will extend the ADI function with an auction process for selecting the unit(s) that will provide the required regulation services. ● Auction will be run each hour to select unit(s) that will provide services for the following hour. ● The pooled ACE calculated by the ADI function will be allocated to control areas where the unit(s) selected to provide regulation services are physically located. ● Settlement for associated energy transfers will be at imbalance energy prices –several operational aspects need to be resolved during the protocol development phase, e.g., must-offer requirements, ability to self-provide, settlement rules, etc. DRAFT Page 26 02/28/2005 Part 1 - Functions A/S Markets: Contingency Reserves Contingency reserve includes the following features… ● Total Grid West reserve requirement will be calculated by aggregating the requirements of individual TOs. ● An auction process will be facilitated for selection of the units providing the reserve – auction will be run every hour to select providers for the next hour. ● Selection process will be same as in the original design and will take into consideration bid prices, contingencies and ATC. ● Grid West will identify the required transmission associated with use of the selected reserves - TOs not providing required transmission will be required to self-provide reserve. ● Several operational aspects need to be resolved during the protocol development phase, e.g., must-offer requirements, ability to self-provide, etc. DRAFT Page 27 02/28/2005 Part 1 - Functions A/S Markets: Real-Time Balancing Real-time Balancing Service (RBS) includes the following features… ● Design is functionally the same as in the TSLG model and will be based on a Security Constrained Economic Dispatch (SCED). ● Grid West will have to implement the capability to develop a full State Estimator solution or will have to coordinate operations with PNSC/others to obtain one. ● TOs will be required to provide hourly balanced schedules. ● All qualified resources will be allowed to submit incs and decs. ● RBS will balance Grid West requirements every five minutes and will generate interchange schedule adjustments to balance the requirements of each control area for each interval. ● Settlements will be nodal for all generation but on a metered boundary level for loads. DRAFT Page 28 02/28/2005 Part 1 - Functions A/S Markets: Market Monitoring Market monitoring includes the following features… ● Activity will be only in support of the organized ancillary service markets implemented by Grid West. ● This effort will be supplemental to broader market monitoring of bilateral markets considered in SSG-WI discussions. DRAFT Page 29 02/28/2005 Requirements Part 2 – Requirements DRAFT Page 30 02/28/2005 Requirements Part 2 - Requirements Approach In evaluating the requirements for each function, we looked at the impact to our original people, systems, and facilities estimates… Requirements • How many people are required? People • When do they need to be hired? Systems • What systems are required? • How much will it cost to implement them? • How large of a facility is required? Facilities • What upgrades are required? DRAFT Page 31 02/28/2005 Requirements Part 2 - Requirements Tariff Assistance and Planning: People To implement and operate the Tariff Assistance and Planning function, the following organization is likely required… Overview Grid West System Planning Group: 7 ● Divisions: 1 ● 24x7 positions: 0 desks Corporate Group: 1 ● FTEs: 9 • • • • 1 Managing Engineer 6 Planning Engineers 1 IT Support 1 Business Manager IT Operations Group: 1 ● Hiring waves • 3 Q3 2006 • 3 Q4 2006 • 3 Q1 2007 DRAFT Page 32 02/28/2005 Requirements Part 2 - Requirements Tariff Assistance and Planning: Systems To administer the Tariff Assistance and Planning function, the following systems are likely required… Planning Tools Overview ● Power Flow Analysis - $ 175k • • • GE PSLF PTI PSS/E PowerWorld Power Flow Analysis: GE PSLF PTI PSS/E PowerWorld ● Transient/Voltage Stability Analysis – $ 65k • PSAT, TSAT, VSAT MathLab, other Transient/Voltage Stability Analysis: PSAT, TSAT, VSAT ● Math Packages - $ 10k • ● Hardware - $25k Math Packages: Math Lab, other DRAFT Page 33 02/28/2005 Requirements Part 2 - Requirements Tariff Assistance and Planning: Facilities We have assumed a temporary facility to house the Tariff Assistance and Planning function until the permanent facility is ready to house both Functions 1 and 2… Interim Facility Interim Tariff Assistance and Planning Site Lease Rate Start-up Leasehold Improvements Unit Cost $25/sq ft build-out and site readiness $0 UPS & back-up generation $0 data/network $25/sq ft per year 1,800 sq ft $5/sq ft furniture Building services Utilities Telecom Annual Lease Annual Operational Expenses DRAFT Page 34 02/28/2005 Requirements Part 2 - Requirements Tariff Assistance and Planning: Assumptions To implement and operate the Tariff Assistance and Planning function, the following assumptions have been made… Assumptions ● ~6 month implementation to start quickly and then get rolled into larger organization Unknowns ● Can hiring happen quickly and will resources move to new, untried organization? ● Can planning services be defined appropriately for the region and will the demand for services cover costs? DRAFT Page 35 02/28/2005 Requirements Part 2 - Requirements A/S Markets: People To implement and operate the A/S market function, the following organization is likely required… Overview Grid West Corporate Administration Group: 23 ● Divisions: 4 ● 24x7 positions: 2 desks ● Staff per 24x7 position: 6 ● FTEs: 93 ● Hiring waves • Q1 2007 • Q1 2008 Market Development Group: 14 Market Operations Group: 30 IT Operations Group: 26 DRAFT Page 36 02/28/2005 Revised Employee Estimate Total: 102 for Functions 1 & 2 Executive Management Group: 4 CEO, VP of Market Ops, 2 Admin System Planning Group: 7 Grid Operations Group: 0 • Operational Planning (0) o Operations engineering Market Operations Group: 29 Market Development Group: 14 IT Operations Group: 27 Corporate Administration Group: 21** • Dir of Planning (1) • Interconnection Planning (2) • Expansion Planning (2) • Transmission Studies (2) • AFC Mgmt (0) • Dir of Markets (1) • Scheduling o Managers (0) o Pre-Schedulers (0) o Real-Time Schedulers (0*) o Outage Coordination (0) o OASIS (0) • Dir of Development (1) • Market Design (4) o Market engineering o Business solutions • Dir of IT (1) • Corporate Infrastructure & Systems (12) o IT planning o Asset management o Network o Desktop o Security o Enterprise o Architecture • Finance (7) o o o o o Director Controller Treasurer Accounting Budget & Reporting • Real-Time Operations o Managers (0) o Shift supervision (0*) o Dispatcher Training/ Operating Procedures (0) o RAS Coordination (0*) o Generation Dispatchers (AGC) (0*) o Balancing Energy Dispatcher (0) o Transmission Dispatchers (0*) o Floating (0) • Project Mgmt (2) o Business process o Change management o Vendor oversight • Regulatory/Legal (8) o General Counsel o Regulatory o Compliance • Market Administration (20) o o o o o o o Manager (2) A/S (6*) RBS (6*) RCS (0) Net. Model (2) Procedures (2) Support (2) • Market Services  Stakeholder Support (6) o o o o Training Customer service Dispute resolution Registration • Application Support (14) o EMS (3) o Market (6) o Financial & Other (5) • Mkt Monitoring (2) o Data review o Outsource liaison Tariff Assistance & Planning includes 7 in System Planning, 1 from IT and 1 Business Admin (9 total) • HR (2) o Staffing & training o Employee relations • Mkt Analysis (1) • Market Settlements (7) o Manager o Analysis o Dispute resolution  Contract Administration (1) o New and existing agreements • Corporate Communications (1) o Web content o Internal & External • Facilities & Security (1) *Shift work **Corporate Administration is a total of 25 including 4 in Executive Management DRAFT Page 37 02/28/2005 Requirements Part 2 - Requirements A/S Markets : Systems To administer the A/S market function, the following systems are likely required… Real-Time Monitoring Systems DAC ICCP ADI SE/CA Overview ● Real-Time Monitoring Systems - $4m ● Market Systems – $11m Market Systems Market Information System Regulating and Contingency Reserve Auctions Load Forecast and Real-Time Balancing Service Meter Data and Settlements ● Corporate Systems - $5m Corporate Systems Office Automation, Infrastructure, Accounting and HR, CRM, Legal DRAFT Page 38 02/28/2005 Requirements Part 2 - Requirements A/S Markets : Facilities Based on the defined organization, the following permanent facility is likely required… Facility Greenfield Administration Site Lease Rate Leasehold Improvements Unit Cost $50/sq ft build-out and site readiness $1.5 million UPS & back-up generation $60,000 consoles $3.5 million data/network Annual Operational Lease $25/sq ft per year 30,000 sq ft $5/sq ft furniture Building services Utilities Annual Operational Expenses DRAFT Page 39 02/28/2005 Tasks Part 3 – Work Plan DRAFT Page 40 02/28/2005 Tasks Part 3 - Work Plan Approach To develop an implementation plan we defined the activities, including effort and duration, for each function… Work Plan Activities • What are the major activities associated with each function? Effort • How much effort is involved with each activity? • How many people are required? • What dependencies exist? Dependencies • What is the critical path? DRAFT Page 41 02/28/2005 Tasks Part 3 - Work Plan Central Question The central question we are trying to answer is… ● Can we implement Stages 1 & 2 more quickly given their reduced scope? Yes…but how much faster? To answer this question we must review the following…. ● What are we implementing? (scope) ● What key dates must be accommodated? (milestones) ● What activities must be completed? (tasks) ● How long will each activity take? (effort) ● What tasks are dependent on one another? (dependencies) ● When will the features become operational? (functional evolution) DRAFT Page 42 02/28/2005 Tasks Part 3 - Work Plan Parallel Paths As a part of our analysis we are looking at Functions 1 & 2 of the business plan… ● Functions 1 & 2 are independent of one another. ● ADI will be implemented as a separate effort. ● They can be implemented in parallel. ● Since Function 1 is not system intensive, it will follow a different implementation path. ● Since Function 2 is system intensive it will go through a standard system development lifecycle. DRAFT Page 43 02/28/2005 Tasks Part 3 - Work Plan Phases Any project will have two phases… ● Development Phase – This phase includes all activities up to and including the sourcing process (e.g. protocols, market mechanics, etc.). ● Implementation Phase – This phase includes all of the steps within the system development lifecycle (e.g. requirements, design, build, test, cutover). NOTE: Subsequent functional releases will be considered major system implementation and go through similar steps DRAFT Page 44 02/28/2005 Tasks Part 3 - Workplan Tariff Assistance and Planning: Critical Path Function 1 does not need to follow the typical system development lifecycle… Activity Developmental - Define Services - Define Requirements Q2’06 Q3’06 Q4’06 Q1’07 Implementation Effort - Hire Staff - Develop Protocol Development ~1-2 months GoLive Implementation ~5-6 months - Acquire systems and data Operations - Offer study services DRAFT Page 45 02/28/2005 Tasks Part 3 - Workplan Ancillary Services: Critical Path The following activities have been identified as critical path for the A/S market function… Activity Developmental Effort - Finish Design - Protocols Development - Market Mechanics - Sourcing Implementation Effort - Requirements Q2 ’06 Q3 ’06 Q4 ’06 Q1 ‘07 Q2 ’07 Q3 ’07 Q4 ’07 Q1 ’08 Q2 ’08 Q3 ’08 - Design, Build Test - integration Test - Market Trials - Cutover Development ~12 months S Grid West Go Live - Daily Operations ADI Go Live (Separate activity by TOs) ADI Live Page 46 Implementation ~18 month GoLive DRAFT 02/28/2005 Costs Part 4 – Costs DRAFT Page 47 02/28/2005 Costs Part 4 - Costs Approach To estimate costs, we performed a change case using our existing cost model. Costs • What are the cost associated with development activities? Development • When will those outlays occur? Implementation • What are the costs associated with start-up activities? • When will those outlays occur? • How much will Grid West cost to operate? Operating • When will those outlays occur? DRAFT Page 48 02/28/2005 Costs Scope Change Case Cost Drivers The reduction in estimated costs can be explained by the following changes in cost drivers… ● Employees: reduced to 102 from 305 ● Facilities: 1 facility instead of 3 ● Development: 12 months instead of 24 months ● Implementation: 18 months instead of 24 months ● Outside Services: reduced effort by 50% ● Systems: reduced number and complexity of systems DRAFT Page 49 02/28/2005 Costs Part 4 - Costs Cost Summary The following is a summary of the costs associated with the Tariff Assistance and Planning and A/S Markets functions… Planning Summary Cost Total Pre-Operation Costs Total $1,702,000 A/S Market Summary Cost Total Pre-Operation Costs Total $65,538,000 - Development Costs* $144,000 - Development Costs* $2,112,000 - Implementation Costs Total Operating Costs* $1,558,000 $2,373,000 - Implementation Costs Total Operating Costs** $63,426,000 $28,526,000 *Note: Development costs only include technical support. Other costs were considered out of scope. **Note: Operating costs do not include amortization of development and implementation costs * Note: Development costs only include technical support. Other costs were considered out of scope. ** Note: Operating costs do not include amortization of development and implementation costs. Cost of Board included in operating costs only. DRAFT Page 50 02/28/2005 Costs Part 4 - Costs Tariff Assistance and Planning: Development Cost Detail The following is a summary of the development costs associated with the Tariff Assistance and Planning function… Cost Category Technical Support Estimate Comments - Define Service Requirements - Define Resource Requirements - Define Technical Requirements - Secure Facility Total Preoperational Expenses - Non-technical support - Facilities - Hardware/Software Expenses - Insurance Total Total Development TBD TBD TBD TBD TBD TBD Not estimated $144,000 Note: Development costs only include technical support. Other costs were considered out of scope. DRAFT Page 51 02/28/2005 Costs Part 4 - Costs Tariff Assistance & Planning: Implementation Cost Detail The following is a summary of implementation costs associated with the Tariff Assistance and Planning function… Cost Category - Grid West Labor & Employee Expenses - Outside Services* - Systems - Facilities - Insurance - Other Total Estimate 487,000 591,000 362,000 111,000 0 7,000 1,558,000 Meetings & communication 6 months pre-operational Tech support & legal Comments * Note: Outside services assumes 6 months implementation, 30 days external legal and 30 days financial & security consulting DRAFT Page 52 02/28/2005 Costs Part 4 - Costs Tariff Assistance and Planning: Operational Cost Detail The following is a summary of operational costs associated with the Tariff Assistance and Planning function… Cost Category Annual Operating Expenses - Grid West Labor & Employee Expenses - System Expenses - Outside Services* - Facilities - Insurance - Other Operating Expenses Amortization (10-year) Revenue Requirement 1,320,000 54,000 342,000 132,000 500,000 25,000 2,373,000 170,000 2,543,000 Does not include allocation of funding to date & associated interest Depends on services Meetings & Communications Estimate Comments * Note: Outside services assumes 90 days technical support consulting; 60 days external legal; and 30 days financial & security consulting DRAFT Page 53 02/28/2005 Costs Part 4 - Costs Ancillary Services: Development Cost Detail The following is a summary of the development costs associated with ancillary services market… Cost Category Technical Support - Design - Protocols - Market Mechanics - Sourcing What are the categories for development TBD Estimate $2,112,000 Comments 5-6 FTE Q2 2006-Q1 2007 Preoperational Expenses - Board of Directors - Non-technical support - Facilities - Hardware/Software Expenses - Insurance Total Development DRAFT Page 54 TBD 02/28/2005 Costs Part 4 - Costs Ancillary Services: Implementation Cost Detail The following is a summary of the implementation costs associated with the ancillary services market… Cost Category Capital Expenditures - Systems 20,364,000 Estimate Comments - Outside Services - Data, Voice, Network - Facilities (Leasehold Improvements) Total Preoperational Expenses - Grid West Labor & Benefits - Board of Directors - Facilities - Employee Expenses - Systems - Insurance - Other Total Interest During Construction DRAFT Page 55 Total Implementation 7,524,000 3,472,000 3,040,000 34,400,000 Site build-out, UPS 15,569,000 0 4,032,000 754,000 237,000 1,500,000 534,000 22,626,000 6,400,000 63,426,000 02/28/2005 Interest & bond flotation Meetings, tax HW maintenance Costs Part 4 - Costs Ancillary Services: Operational Cost Detail The following is a summary of operational costs associated with the ancillary services market… Cost Category Annual Operating Expenses - Grid West Labor & Benefits - Board of Directors - System Expenses - Data ,Voice, & Network - Outside Services - Capital Enhancements - Facilities - Employee Expenses - Insurance - Other - Interest Expense 11,694,000 700,000 2,493,000 689,000 2,291,000 2,036,000 2,688,000 651,000 1,500,000 457,000 3,327,000 Meetings, tax Includes market monitoring functions Estimate Comments Operating Expenses** Amortization (10-year) Revenue Requirement Page 56 $28,526,000 6,550,000 $35,076,000 Does not include allocation of funding to date * Note: Operating expenses are based on one complete year of operation (i.e. 2009). Amortization of development and implementation costs includes technical costs only. Non-technical costs and funding to date are not included. DRAFT 02/28/2005 Costs Part 4 - Costs Reducing costs Can costs be reduced and the implementation time reduced? Tariff Assistance and Planning function ● ● ● ● Can we use existing TO planning software? Do we need all the planning software? Can we “borrow” TO planning staff? Can we get cheaper office space by renting from a TO? A/S Markets ● ● Can we use existing software: PNSC, Utilities? Can outsourcing lower costs and speed up delivery? DRAFT Page 57 02/28/2005 Funding Part 5 – Timing of funding sources DRAFT Page 58 02/28/2005 Funding Part 5 - Funding Approach Finally, we evaluated the timing of outlays and revenues to determine if the proposed funding agreement is sufficient… Funding • What money has been spent to date? Loans • Is the proposed interim funding sufficient? Debt Issuance • How much debt will be issued for Grid West start-up? • How will that debt be amortized and recovered? • What are the different Grid West revenue sources? Revenue • When will Grid West begin to collect revenue? DRAFT Page 59 02/28/2005 Funding Part 5 - Funding Tariff Assistance and Planning The Tariff Assistance and Planning function will be supported by the following funding sources… Funding Source Interim Funding Agreement Function Development Implementation 2006 0.1 1.6 2007 2008 Total 0.1 1.6 1.7 Operating Case Study Services 2.4 2.4 Loan/Debt Revenue DRAFT Page 60 02/28/2005 Funding Part 5 - Funding Ancillary Services The ancillary services function will be supported by the following funding sources… Funding Source Function 2006 2007 2009 Total Function 1 does not need to follow the typical 2008 system development Development 1.6 0.5 lifecycle… Interim Funding Agreement Implementation Bond Issuance 63.4 Market Operations Charge Operating 7.1 28.5 40.4 23.0 2.1 2.1 63.4 Loan/Debt Notes: •Market Operations Charge does not include recovery of amortized development and implementation costs. •Board costs are included for operations only. •Market Operations begin October 1, 2008. •Development includes technical support only. DRAFT Page 61 02/28/2005 Revenue Funding Part 5 - Funding Consolidated Activities: Function 1 & 2 Function Function 1 Development 2006 0.1 1.6 1.6 0.5 Subtotal Function 2 Implementation 40.4 23.0 Subtotal 2007 2008 2009 Total 0.1 1.6 2.1 3.8 63.4 63.4 67.2 Funding Source Interim Funding Agreement Function 1 Implementation Function 2 Development Bond Total Case Study Services Market Operations Charge Function 1 Operations 2.4 2.4 Total 2.4 Function 2 Operations 7.1 28.5 Note: Total costs do not include admin costs during development (tech support only), Board, or interest expense on interim funding. Page 62 DRAFT Loan/Debt 02/28/2005 Revenue Funding Part 5 - Funding Interim Funding Requirements Function Function 1 Development Function 1 Implementation 2006 0.1 1.6 1.6 0.5 Technical Subtotal Policy Administration Board of Directors* TBD TBD TBD TBD TBD TBD Non-Technical Subtotal 2007 2008 2009 Total 0.1 1.6 2.1 3.8 TBD TBD TBD TBD TBD Funding Source Interim Funding Function 2 Development Interim Funding Non-Technical Support Total Interim Funding** * Note: Board of Directors is only included in operations costs after go live date in Q4 2008. Total ** Note: Funding to date is not included in this summary. The funding to date is $14,066,000 principal with $2,187,000 interest accrued to date. DRAFT Page 63 02/28/2005 Summary ● Incremental approach captures approximately 50% of identified benefits sooner with less than half the costs. ● $3.8 million of interim funding is estimated for technical support only: • $1.7m to bring Tariff Assistance & Planning operational; and • $2.1m to bring Market functions to sourcing for implementation. ● Momentum is created to provide coordinated approach to addressing identified problems and opportunities in the Pacific Northwest. DRAFT Page 64 02/28/2005 Appendix DRAFT Page 65 02/28/2005 Grid West Scope Functional Scope: A/S Markets The easiest way to implement ADI pre-market is to leverage the existing infrastructure of the TOs. These are the major steps involved: ● ADI (pre-market) • Agree on a host control area; • Configure the ICCP of all participating control areas to transmit their ACE to the host control area and to receive their ACE Adjustment from the host control area; and • Implement the ADI function at the host control area (could be implemented as part of AGC, a separate function or perhaps as part of an existing calculation function):  This function will basically net the ACEs of the participating control areas and calculate ACE Adjustments for each of them; and  The resulting adjustments are then transmitted to the participating control areas. • • Participating control areas will modify AGC function as desired to accommodate use of the ACE Adjustments – this capability may already exist for some of the TOs. It is assumed that the personnel/vendor for each participating control area will implement the required changes to its systems. DRAFT Page 66 02/28/2005 Comparison of implementation Costs implementation Cost Category Capital Expenditures - Systems $40,111,000 20,726,000 July 2005 Estimate Basic Features March 2006 Estimate Functions 1 & 2 - Development & Consulting - Data, Voice, Network - Facilities (Leasehold Improvements) Total Preoperational Expenses - Grid West Labor - Board of Directors - Facilities - Hardware/Software Expenses - Employee Expenses - Insurance - Other Total Interest During Construction Total implementation $18,648,000 $8,514,000 $5,436,000 $72,709,000 8,115,000 3,472,000 3,040,000 35,353,000 $30,992,000 $1,400,000 $6,074,000 $1,384,000 $1,442,000 $1,500,000 $1,345,000 $44,137,000 $15,836,000 $132,682,000 16,056,000 0 4,143,000 754,000 237,000 1,500,000 541,000 23,231,000 6,400,000 64,984,000 * Note: March 2006 estimate does not include Board costs during implementation. Neither include development costs. Page 67 DRAFT 02/28/2005 Comparison of Operating Expenses Cost Category Annual Operating Expenses - Grid West Labor & Benefits - Board of Directors - System Expenses - Data ,Voice, & Network - Outside Services - Capital Enhancements - Facilities - Employee Expenses - Insurance - Other Operating Expense Interest Expense Operating Expense after Interest Expense Amortization (10 Year)* Total Revenue Requirement $37,926,000 $700,000 $5,232,000 $2,967,000 $4,186,000 $4,011,000 $3,569,000 $2,135,000 $2,000,000 $2,838,000 $65,564,000 $6,574,000 $72,138,000 13,268,000 $85,406,000 13,014,000 700,000 2,547,000 689,000 2,633,000 2,036,000 2,820,000 651,000 2,000,000 482,000 $27,572,000 $3,327,000 $30,899,000 6,720,000 $37,619,000 July 2005 Estimate Basic Features March 2006 Estimate Functions 1 & 2 * Note: Funding to date not included in amortization. DRAFT Page 68 02/28/2005 Glossary Acronym ACE ADI ATC CRM DAC GE PSLF ICCP NTAC OATT PNSC PSAT PTI PSS/E SE/CA TSAT VSAT WECC DRAFT Area Control Area ACE Diversity Interchange Available Transmission Capacity Customer Relationship Management Data Acquisition and Control GE Positive Sequence Load Flow Inter-Control Center Communications Protocol Northwest Transmission Assessment Committee Open Access Transmission Tariff Pacific Northwest Security Coordinator Powerflow & Short-Circuit Assessment Tool Power Technologies International Power System Simulator for Engineering State Estimator/Contingency Analysis Transient Security Assessment Tool Voltage Security Assessment Tool Western Electricity Coordinating Council Page 69 02/28/2005 Definition