Eugene T. Meehan Senior Vice President Presented at: Empowering Consumers Through Competitive Markets: The Choice Is Yours Sponsored by: COMPETE and the Electric Power Supply Association Capitol Hilton, Washington, DC November 5, 2007 Restructuring at a Crossroads

1 The Issue Our Study Addresses  Customers are finally seeing market prices for electricity  Market prices for electricity have risen sharply  Increases are driven by increases in input prices – gas, oil, specialty metals – but coincide with the end of transition periods  Legislators and regulators are confusing coincidence with causality and are seriously considering intervening in markets with regulated activity

2 The Problem  Regulatory intrusions into markets undermine the workings of the market and will inexorably lead back to regulation and away from competitive solutions  Competitive solutions provide a more dynamic and efficient means to meet infrastructuring investment needs at lowest cost and to achieve environmental objectives

3 The Facts  Deregulation of generation was done for good reason – regulation was not working  Deregulation has already provided many successes  Price increases have not been caused by restructuring and prices have also increased in restructured states  Competitive generation markets have been and will be more effective at promoting key elements of the efficient solution, in particular, demand response and renewables

4 Factors That Led to Deregulation  Proximate utilities had very different price levels  Customers (particularly large industrial customers) wanted more control over the costs to which they were exposed  Operations were not perceived to be the most efficient – e.g., operating costs and availability of nuclear units  Investment decisions were not perceived to have the discipline that comes from competition  Legislative and regulatory imposed costs – e.g., NUGs and DSM – were measurably driving rates up  Concerns that the regulatory compact was broken and utilities were unable or unwilling to invest in new generation

5 Deregulation Counts Many Notable and Significant Successes...  Increased availability and lower operating costs of generating plant – particularly nuclear plant  Cost savings from expanded scope and independence of ISO/RTO coordination of operations  Emergence of competitive traders and risk management providers  Reduced or eliminated customer burden from imposed contracts and uneconomic DSM programs  Significant expansion of generation base – much of it by merchant generators

6 Price Increase Comparison Restructured vs. Unrestructured States % Change Nominal Real (2005 Prices) Nominal Real Restructured States$0.1048$0.1343$ %-12.9% Unrestructured States$0.0786$0.1008$ %-5.4% Rate Freeze States Versus Non-Rate Freeze States % Change Nominal Real (2005 Prices) Nominal Real Restructured States (No Rate Freeze)$0.1086$0.1392$ %-7.0% Restructured States (With Rate Freeze)$0.1000$0.1282$ %-21.0% Unrestructured States$0.0786$0.1008$ %-5.4%

7 Renewable Energy Development Total Renewable Net Generation in Restructured and Unrestructured Markets Market Structure Restructured67,933,57265,774,15265,071,71662,240,85456,317,01261,060,122 Traditional Regulation 297,320,060293,051,620298,145,083289,010,072238,629,097295,418,446 Source: EIA

8 The Message  Coincidence is not causality  Deregulation was a reaction to failures with regulation  Deregulation has already produced successes  Competitive markets are the best way to achieve a reliable, affordable and clean energy future  Regulatory intrusions into markets will undermine competitive markets

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