GETTING THE BEST DEAL FOR ELECTRICITY CONSUMERS: THE COMPELLLING CASE FOR COMPETITIVE PROCUREMENT John E. Shelk President and CEO Electric Power Supply Association November 14, 2006

Nearly 40% of installed generating capacity Competitive sector built almost all new generation since early 1990s – primarily natural gas Improved operating results at plants acquired through restructuring – coal and nuclear Competitive Power’s Fuel Diversity: Coal – 36%; Natural Gas – 27%; Nuclear – 27%; Renewables – 5%; Other – 5% Role of Competitive Power Sector

Demand up three times supply ( ): 19 percent (141 GW) v. 6 percent (57 GW) (NERC 2006 LTRA) “Uncommitted” resources to double to over 100 GW (NERC) Record peak demand (Merrill Lynch 7/06) (summer heat wave) Crunch starts , not at end of the forecast period GE Financial Energy Services: $250 billion/150,000 MW by 2025 How to meet demand is up for grabs – multiple fuels Who will meet demand is also up for grabs – choices The Need for New Generation is Clear

Fuels – global market, infrastructure needs Environment – Carbon, CAIR, CAMR, NSR Labor – benefits, wages, shortages Construction materials – ordering at once Technology risks are high, but manageable What system better handles costs and risks: “cost- plus” or “cost discipline”? Costs and Risks Are Rising

Some say no need for competitive procurement – what are they afraid of? Only rate-base can do new coal and nuclear – disagree Competitive suppliers are national in scope Case for competitive suppliers is compelling – risk transfer Nature of competitive procurement will vary by state Buy vs. Build Debate is Joined

Connecticut – sealed bid for anything over $50,000 Illinois – anything over $30,000 Louisiana – most purchases over $25,000 Massachusetts – most purchases over $5,000 North Carolina – anything over $25,000 Ohio – services over $50,000, supplies over $25,000 Rhode Island – nearly all construction over $10,000 Virginia – anything over $50,000, if practical Taxpayers Protected by Competitive Procurement, Why Not Ratepayers?

Collaborative Process –Local utility submits recommended approach –Multi-day, commission-facilitated collaborative meetings –State PUC resolves outstanding issues Independent, Third Party Evaluator –Performs independent evaluation –Monitors communication between the utility and affiliates –Benefit: Extra pair of “eyes” –Recent solicitations – IL CC, MD PSC, NJ BPU, GA PSC Credible Procurement Solicitations

Fair Process Must: –Be free from actual, apparent conflicts –Provide all bidders similar access to information –Require full public view of the utility decision-making process If the utility or affiliated entity participates, additional protections are required –Use of an independent evaluator – reports to commission –Separation of utility personnel – utility proposal vs. evaluating bids –Utility winner must honor its bids as submitted Credible Procurement Solicitations

Don’t be dazzled by “debt equivalency” Don’t change rules/terms in mid-stream Don’t restrict solicitations to new builds Don’t carve out or exempt specific projects Don’t forget role of marketers and generators Don’t over-compensate rate-base plants not subject to competitive procurement Competitive Procurement Pitfalls

QUESTIONS? John E. Shelk President and CEO Electric Power Supply Association 1401 New York Ave., NW 11th Floor Washington, DC Telephone: (202) Fax: (202) Website: