ASSOCIATION OF ENERGY ENGINEERS – SW OHIO PJM AND OHIO REGULATORY CHANGES HOWARD PETRICOFF VORYS, SATER, SEYMOUR & PEASE LLP 1

REGULATORY COMPACT Electric Utilities granted a monopoly franchise from the state Electric Utilities build, own, operate and maintain electric service network sufficient to supply service to all customers in their service territory Generation Transmission Distribution Rates and terms of service set by Public Service Commission Reasonable return on investment so long as it is Reasonable Level of Service Used and Useful HOWARD PETRICOFF VORYS, SATER, SEYMOUR & PEASE LLP 2

RATES SET UNDER COST OF SERVICE Test Year Inventory of investment – Rate Base Test Year accounting of costs Operation and maintenance Administrative and Executive Return of and on the Rate Base Investment. Allocation of Costs based on “cost causation” Public Service Commission sets rates and terms of service by type HOWARD PETRICOFF VORYS, SATER, SEYMOUR & PEASE LLP 3

REGIONAL TRANSMISSION ASSOCIATIONS Energy Policy Act creates Regional Transmission Association Co ordinate dispatch among utilities Assure regional service stability Planning on a regional basis Markets Real Time Next Day & Beyond Capacity States Decide whether participation in mandatory / Rate impact HOWARD PETRICOFF VORYS, SATER, SEYMOUR & PEASE LLP 4

PJM INTERCONNECTION All four of Ohio’s major investor owned utility groups belong Operates the grid – though ownership remains with the utilities All additions of both sources and sinks and approved Entrant pays cost to modify the system Planning functions generation transmission conservation Markets marginal pricing models clearing house for all load serving entities HOWARD PETRICOFF VORYS, SATER, SEYMOUR & PEASE LLP 5

DEVELOPMENTS AT PJM Base Residual Auction – Conducted three years in advance All generators must bid or be pledged to FPP Conservation (Demand Response) is a bid Constrained areas – priced separately Base Residual Auction for service year was $59 down from $136 per Megawatt Day Cost to Load Serving Entities & End Users Down Revenue to Generators Down HOWARD PETRICOFF VORYS, SATER, SEYMOUR & PEASE LLP 6

OHIO REGULATION CHANGES – PJM CAPACITY AEP Ohio Cases No EL-UNC and EL-SSO State Compensation Plan for Capacity Applies only to FRR utilities AEP Ohio Ohio Power Columbus Southern Power Duke Energy Ohio AEP Ohio now receiving the difference between RPM Capacity cost and $ per MW/d - $1 MWh straight charge and deferral of the rest. Duke Energy Ohio – Petition for like program – case pending HOWARD PETRICOFF VORYS, SATER, SEYMOUR & PEASE LLP 7