1 Utility Ownership of Wind Power: Why it makes sense now American Wind Energy Association May 17, 2005 Eric Markell Senior Vice President Energy Resources

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3 10 Reasons Why IOUs Should Own Wind Lowers portfolio volatility Lowers portfolio volatility Moderate integration costs Moderate integration costs Excellent energy value Excellent energy value Modest environmental impact Modest environmental impact Tax efficient Tax efficient Excellent cash flow Excellent cash flow Earning asset Earning asset Less costly than a PPA Less costly than a PPA Potential revenue from GHG credits and RECs Potential revenue from GHG credits and RECs Reliable, warranted technology Reliable, warranted technology FERC preferred interconnection FERC preferred interconnection

4 Wind lowers Portfolio Volatility No fuel component No fuel component  Especially important given current gas market Production variability can be modeled and managed Production variability can be modeled and managed Wind adds fuel diversity Wind adds fuel diversity Portfolio beta reduced Portfolio beta reduced

5 Moderate Integration Costs

6 Wind is an excellent energy value ( ) ( ) ( ) ( ) ( ) Notes: 1. Acquisition Screening Model (ASM8) 20-yr Levelized Costs 2. Transmission solutions are not mature for coal generation resources 3. All costs are exclusive of credit impacts 4. All delivered to PSE System

7 Little Environmental Impact Zero SO2 Zero SO2 Zero NOx Zero NOx Zero Hg Zero Hg Zero CO2 Zero CO2

8 Avoided Environmental Costs Zero SO2 ($290-$800/ton) Zero SO2 ($290-$800/ton) Zero NOx ($2,200/ton) Zero NOx ($2,200/ton) Zero Hg (Costs TBD) Zero Hg (Costs TBD) Zero CO2 (Costs TBD) Zero CO2 (Costs TBD) Source: Natsource

9 Tax Efficient Tax Benefit

10 Excellent Cash Flow / Short Construction Cycles 6 years to recover initial investment 6 years to recover initial investment Lag between ground breaking and Commercial Operation Date is typically less than one year Lag between ground breaking and Commercial Operation Date is typically less than one year

11 Earning Asset Earnings New Wind Existing Assets

12 Ownership is less costly than a PPA Results from PSE RFP process PPAs include imputed debt costs

13 Potential GHG Credits and RECs Source: Natsource RE Trends Weekly 4/25/05

14 V80 – 1.8MW Optimized for medium and high wind sites Optimized for medium and high wind sites Proven technology Proven technology 1,021 turbines installed 1,021 turbines installed Hub height:67m (220 ft) Hub height:67m (220 ft) Rotor diameter:80m (262 ft) Rotor diameter:80m (262 ft) Average availability (world-wide): Average availability (world-wide): 95% to 98% range Reliable and Warranted Technology Vestas V80 Turbine Generator

15 Reliable Technology: Availability: Availability:  As good or better than anything in a utility portfolio.  Availabilities >97% increasingly common  Availability warranty Mechanical Warranty: Mechanical Warranty:  Stronger warranty protection than comparable sized power plants  Warranties from material balance sheet companies  Five year “bumper-to-bumper” warranty  Serial defect warranty Energy Production: Energy Production:  More reliable energy production than most utilities believe  Wind volatility on annual basis may be less than  hydro volatility or  fuel price volatility  Increasingly accurate wind resource assessments  Terrain, array, and long-term prediction models  Turbine performance curves now well documented

16 FERC Interconnection Policies Favorable policy statements from FERC Favorable policy statements from FERC Proposals under consideration to remove interconnection barriers for intermittent resources Proposals under consideration to remove interconnection barriers for intermittent resources Goal to create standard agreements and technical requirements Goal to create standard agreements and technical requirements

17 Hopkins Ridge Wind Project Key Dates: Letter of Intent: Oct 29, 2004 Letter of Intent: Oct 29, 2004 PSE Board Approval: Jan 11, 2005 PSE Board Approval: Jan 11, 2005 Closing / Notice to Proceed: Mar 11, 2005 Closing / Notice to Proceed: Mar 11, 2005 Commercial Operations Date: Dec 10, 2005 Commercial Operations Date: Dec 10, 2005 Seattle Project Site Developed by Renewable Energy Systems Developed by Renewable Energy Systems $200 million $200 million 150 MW 150 MW 35% capacity factor 35% capacity factor

18 Wild Horse 13 miles east of Ellensburg, near Whisky Dick Mountain 13 miles east of Ellensburg, near Whisky Dick Mountain 230 MW 230 MW Zilkha Renewable Energy - Developer Zilkha Renewable Energy - Developer 8,600 acres – primarily grazing land 8,600 acres – primarily grazing land 165-acre project footprint 165-acre project footprint

19 Utility Ownership Makes Sense Wind is least-cost resource Wind is least-cost resource Utility Ownership Results in lower cost of energy for customers Utility Ownership Results in lower cost of energy for customers  Lower WACC for utility than developer  Avoids complex ownership/financing structures that add to interest rates and financing fees Avoids imputed debt associated with power purchase agreements Avoids imputed debt associated with power purchase agreements Avoids adverse accounting treatments related to variable interest entities Avoids adverse accounting treatments related to variable interest entities Avoids long-term collateral issues and associated credit-related costs Avoids long-term collateral issues and associated credit-related costs Stronger Community support as compared to unknown owners Stronger Community support as compared to unknown owners