2008 YEAR IN REVIEW (plus a couple months in 2009!) AAI 9 th Annual Energy Roundtable David L. Mohre Executive Director Energy & Power Division NRECA

Current, Expected Industry Drivers The U.S. and world economy The credit, liquidity crisis Expected legislative initiatives Regulatory initiatives, outcomes Conditions on the ground

Current Economy U.S. stocks off 50%, continuing to fall U.S. 3 rd. Qtr GDP down 6.2% Most all countries down, most at faster pace, as exports to U.S. fall Japan exports down 46%! Many commodities continue to fall What came first, economic meltdown chicken or credit, liquidity crisis egg?

Credit, Liquidity Crisis Complex financial transactions, ties and guarantees led to falling credit ratings Falling credit ratings led to margin calls, to liquidity problems, to depressed stocks Led to “emergency mergers” of those considered “too big to fail” Led to big questions of appropriate competition policy in those markets

For Electric Sector, Credit and Liquidity Crisis Led To: Initial interest by private equity, M&A Much higher capital costs Significant movement from commercial paper and stocks, towards bonds Large Cap-Ex reductions in short-run, while long-run Cap-Ex plans exploding Long-term contracts become a must for investment grade financing per Street

A Recent Wall Street Quote In this new financial environment, “utilities will need to have access to longer-term, more permanent financing and be able to sell power from new projects pursuant to long-term contracts and not market-based rates” Charles Wortman, Managing Director, JP Morgan Chase Inc

Another Recent Wall Street Quote “ I think the challenge that we have is that we are trying to build long-term assets with short-term pricing, and that just doesn’t add up, particularly if you want to get something that’s investment grade” Anthony Ianno, Morgan Stanley to FERC

A Big Question Can we raise sufficient long- term capital cost-effectively in this new financial environment given the short-term focus of current centralized market designs?

Current Legislative Initiatives Climate Change--- big $$$ Renewable Portfolio Standards--- big $$$ Transmission for Renewables--- big $$$ Energy Market Transparency Transmission Siting--- big $$$

Regulatory Drivers Transparency of markets—FERC, CFTC? Siting after 4 th Circuit opinion Are capacity markets working? Response to GAO, consumers Renewable transmission Smart Grid, Demand Response Will Street finance w/o market change? Edison Mission Summary Disposition

Conditions On The Ground Physical sales in whsle. market down for twelfth straight quarter, fell 7.8% in 3 rd Q. Load: -.8% overall, -5% industrial, 2007 to 2008, February 09 week down 9.7% Energy, other commodities prices down Downturn buying us time to fix mess Consumers lack trust in markets given big rate increases already, want changes; CO2 hidden tax will make matters worse Md., N.Y., efforts to repeal/change markets