The New England Restructuring Roundtable Gas Pricing Dynamics Affecting Power Markets and Resource Adequacy in New England Richard L. Levitan, rll@levitan.com June 15, 2012

Primary Issues & Concerns (next 3-5 Years) Supply push in PJM / NYISO  demand pull in New England Slack deliverability during non-heating season insufficient to support new entry New flow patterns raise questions about economic obsolescence Anticipated retirement of many RFO / dual fuel steam units, coal Basis benefits will be indirect and may not materialize in the peak heating season Destination-flexible LNG cargoes jeopardize fuel adequacy around Boston Financial / regulatory support for new gas infrastructure Who pays?

Commodity prices remain weak and stable Spot gas prices at Henry Hub down dramatically from peaks seen in 2008. 2

Gas Price and New England Energy Price New England energy prices follow the City Gates price in general. Summer energy price spikes in 2010, 2011 are not gas price driven, but winter spikes are gas-driven. ANIMATE to show gas price, then on-peak energy price

Blow out in historical parity relationship The price of crude oil spiked in 2008, plummeted, then recovered steadily over 2009 through early 2012. It is shown here in $/MMBtu for compatibility with the HH gas price. The WTI to HH ratio ranges from less than 1.0 to about 2.5 through early 2009, then climbs steadily as gas holds steady or declines while oil skyrockets. The ratio hit a peak of about 9.76 in late April 2012 and has dropped since. (ANIMATE: Start with HH price, then roll in WTI price. Fade out prices and fade in ratio.)

Marcellus Production Forecast July 2011 projection by Penn State University Note: forecast is nearly a year old, may be outdated, consider deleting. EIA has reduced its shale gas forecasts. Source: Penn State University

Wet and dry shale gas production Major Dry Gas Production Area Wet Gas Dry Gas Major Wet Gas Production Area Sources: EIA, Pennsylvania State University Marcellus Center, Dominion Resources, Pennsylvania Department of Conservation and Natural Resources

Gas Basis to New England Reflects Congestion Algonquin City Gates price is generally higher and much more seasonal and volatile than Henry Hub, due to deliverability constraints. WE COULD ADD TZ6NY to this chart.

Marcellus-related planned projects None of these projects address constraints into New England Pipelines unwilling to foot the bill for new infrastructure without FT contracts Source: NGA

Seasonal Basis to New York and New England

Estimated P/L slack deliverability, except during winter 0.5 1 1.5 2 2.5 9/1/07 11/1/07 1/1/08 3/1/08 5/1/08 7/1/08 9/1/08 11/1/08 1/1/09 3/1/09 5/1/09 7/1/09 9/1/09 11/1/09 1/1/10 3/1/10 5/1/10 7/1/10 9/1/10 11/1/10 1/1/11 3/1/11 5/1/11 7/1/11 9/1/11 11/1/11 1/1/12 3/1/12 Daily Deliveries in NE (Millions of Dth/d) Algonquin Tennessee Includes deliveries to interconnections Dashed lines represent current contract levels The original copy of this slide was placed at the end.

Gas Price Dynamics on DA / RT Prices E&P outlook likely to sustain downward pressure on prices Generators bid value  AGT Citygates, TN-Z6 Existing paradigm does not capture M-T-M benefits FCA prices do not support new gas infrastructure Attrition effects by FCA #8 Deliverability constraints likely to materialize Prices will reflect seasonal basis, ULSD Who bears the transportation freight? 11

Gas Price Dynamics on Reliability Decline in LNG Imports to Canaport and Distrigas Concerns over adequate fuel to serve Mystic 8/9 Gas flow displacement effects from western and Atlantic Cdn Coal and RFO steam unit retirements Posturing RFO steam units in the winter appear key to reliability ULSD oil tankage constraints and refill logistics No step-up to firm transportation How does the stakeholder process evolve? Less wordy