Gloria Godson VP, Federal Regulatory Policy Reliability Pricing Model Part 2

2 Combined Service Territory Transmission & Distribution Competitive Energy / Other Who is Pepco Holdings, Inc. PHI Investments 2 Regulated transmission and distribution is PHI’s core business.

3 PJM’s Proposal: DR Operational Deployment  Enhancements to DR obligations Changes to administrative procedures during emergency Revise emergency DR to an economic dispatch approach  Changes to notification time requirements for DR Diversify the lead time for notification of DR during emergency Current Emergency DR: 2 hour (~9,000 MWs) and 1 hour (~500 MWs) lead time  Allow for DR resources to operate with a dispatchable range Must offer requirement for DR in the Day-Ahead market  Address the impact of Limited DR clearing in RPM auctions Cap/Curtail Extended Summer/ Limited DR Revise DR assumptions and modeling in PJM planning studies  Whether capacity DR meets the RPM physical reliability requirement

4 PHI’s Demand Response Programs  PHI’s participation is PJM’s DR market is to implement the public policy objectives of our states and the needs of our customers  PHI offers mass-market mostly residential DR programs including Direct Load Control and Peak Energy Savings to our customers  We offer the summer extended and limited DR products  PHI programs provide RT market offers once an emergency has been declared  Peak Energy Savings program pays customers $1.25KWh ($1250) Must have capability to reflect true cost in bids DR customer fatigue from frequent calls Impact Advanced Metering (AMI) value proposition  PHI’s program was designed around existing RPM rules and interruption expectations. Every interruption costs PHI $$$  Changing the DR operational characteristics and compliance rules will affect PHI’s ability to deliver on our state commitments and product offerings to customers

5 Demand Response Resource Notification Time Offered

6 PHI Issues & Concerns  Market Issues Must offer requirement for the Day-Ahead energy market “Parameter Limited Schedules” for DR  Compliance issues & concerns How will compliance change? Clear criteria for calling customers Compliance timeline –Prospective only –Appropriate transition mechanisms DR fatigue - “cycling” period Eliminating emergency declaration  Regulatory Regulatory recovery Reduced revenues for customers Impact on utility’s ability to support state public policy objectives Regulatory risk due to penalties if no adjustments are allowed Limitations on participation in incremental auctions

7 DR Operational Deployment : PHI’s Position  PHI supports changes to notification times for DR: DR buckets with 60 and 120 minutes lead time  Trigger: PHI supports having both emergency and economic DR  DR programs like PHI’s play a key public policy role and should be carved out: Achieving conservation, changing customer behavior, changing the load profile/curve, shaving the peak and implementing public policy mandates Direct impact on a million customers No flexibility - state mandated  Dispatch granularity/Geographic Diversity: dispatch of local regions: PHI supports dispatch granularity but not by zip code or pNode For program purposes, mass market calls must occur by zone e.g. All of PEP, not certain zip codes  Penalty structure revision: PHI opposes any rule changes that will impair our ability to transact in the incremental auctions to meet our capacity obligations and manage risk  Keep in mind that it was DR that saved the day during hot weather operations in July and September

8 DR Comparability to Generation – PHI’s Position  Comparability: Should all capacity resources be paid the same price? PHI supports all capacity resources being paid the market clearing price. Discrimination by resource type is undue discrimination  PHI supports the greater participation of cost effective DR products that are functionally comparable to generation Comparability is not equivalency DR is that it can be both load as well as supply  PHI can support a must offer requirement provided parties can bid their legitimate costs  PHI supports market prices that reflect real system conditions and sends the right price signals  PHI opposes using DR as a purely financial product for arbitrage. We believe that the capacity product under the Reliability Pricing Model (RPM) was intended to be a physical product  PHI opposes a DR day-ahead “must offer” obligation as it could expose PHI to significant downside market risk with no upside PHI’s mass market DR programs do not pose market power concerns

9 PHI Recommendations  Rule changes should be prospective only - Starting from 2015/16 Include appropriate transition mechanisms and timelines Support state regulatory processes to reconfigure existing programs  Mass-market mostly residential programs like PHI's should be carved out of some rules changes <100 kW or similar standard  Rules must minimize barriers to entry for residential customers to reduce end use administrative complexity and risk  Protect or hold members harmless from the negative impact of market positions taken under existing rules - honor existing commitments  Rule revisions must recognize the differences between mass market (residential) and contractual resources  Emergency Declaration - the programs have been designed around an emergency implementation. Implementation ahead of an emergency declaration is problematic and may require state tariff changes  PJM should not cap the extended summer product or eliminate the limited DR product. PJM must resist the temptation to make major long term changes to solve a short term problem