POSITIVE ENERGY TOGETHER ® Industry Trends Discussion MEC Conference San Antonio Texas, October 19 th, 2009 Jesse B. Langston

POSITIVE ENERGY TOGETHER ® The way I see it, here’s what’s happening to our industry… Trend # 1: Continued increase in Federal involvement –More active enforcement, in addition to traditional tariff and policy making –Increasingly stringent environmental and energy efficiency policies Carbon emission legislation delayed for now, but will lead to increase in overall cost to customers Supporting Information –FERC new market enforcement power from 2005 policy act and now reliability oversight; increase in staffing –EPA expanding enforcement decisions; new source review notices of violations issued; proposing to regulate Co2 2

POSITIVE ENERGY TOGETHER ® The way I see it, here’s what’s happening to our industry… Trend #2: Continued movement toward competitive markets and retail disintermediation –Federal program incentives and local Commission IRP/RFP requirements facilitate announcements of new entrants to fulfill traditional Utility investments… Supporting Information –New entrants are appearing downstream of generation (i.e. Google, Microsoft via Smart Grid) –FERC regulatory agenda via RTO’s; independent boards; day ahead market requirements –i.e. Independent transmission Company (ITC) to construct Green transmission lines across the US 3

POSITIVE ENERGY TOGETHER ® The way I see it, here’s what’s happening to our industry… Trend #3: Continued decline in per capita electric consumption growth –Volume growth remain under additional pressure due to higher prices and efficiency mandates –Sleeper: Industry DSM coupled with higher than expected rates will cause greater energy reduction than expected –Issue: In an industry of 1.5% annual growth… higher earning growth rates are driven by either higher return on equity granted, O&M reductions or increasing prices Supporting Information –Real price electricity decreased over the last 50 years; Expect price increases of 30% over the next 10 – 15 years with flat to declining industrial sales 4

POSITIVE ENERGY TOGETHER ® What would my Grandparents say about these trends… Continued increase in Federal involvement Continued decline in per capita electric consumption growth 5 We got to find another way out of here other that that door… Grandpa Langston Continued movement toward competitive markets and retail disintermediation The grass always looks greener on the other side… but that water bill is… Grandpa Langston Enough is enough and TOO much stinks… and this is beginning to smell… Grandma Langston

POSITIVE ENERGY TOGETHER ® If we want to prosper from these trends, we must… Lead the shaping of energy and regulatory policy –Implement State legislation to protect against the cost impact of federal mandates –Advocate non traditional approaches to tariff designs, recovery and ratemaking Leverage business relationships to extend opportunity reach –Broader / non traditional partners Create a “privileged” customer position –Enhance customer interfaces and target high value products and services –Develop behind the meter strategies Expand the footprint by expansion into new markets –Earning growth from displacement of other energy sources or expansion of customer base 6 Continued increase in Federal involvement Continued movement toward competitive markets Continued decline in per capita electric consumption growth TrendsStrategic Considerations

POSITIVE ENERGY TOGETHER ® In Summary… Current industry trends fundamentally challenges sustainable earning growth… thus Utilities must proactively find ways to fix the plane in the air Positioning for long term success requires “head room today” –Identify near term economic investments that must either lower variable cost, or usage, while maintaining customer satisfaction 7

POSITIVE ENERGY TOGETHER ® Questions 8