Alternative Rate Structure Paul Smith Vice President, Rates Duke Energy Ohio June 20, 2006

2 ACCELERATED MAIN REPLACEMENT PROGRAM

3  Description: –To replace all cast iron and bare steel pipe on Duke Energy’s gas distribution systems in Ohio and Kentucky on an accelerated basis.  Purpose: –Cast iron removed from Office of Pipeline Safety’s list of approved pipeline materials in 1971 –Prior program would take 80 years to replace pipes –High inventory of gas leaks on system –Potential O&M savings (approximately $5 million per year) –Enable the Company to increase system pressure and support distributed generation

4 ACCELERATED MAIN REPLACEMENT PROGRAM  Study and Evaluation –Retained Stone & Webster to review our plan and make recommendations Findings – –Ohio – 1,169 miles of cast iron and bare steel mains dating to 1873, representing 25% of the system. Also, 272 miles of bare steel services. –Kentucky – 150 miles of cast iron and bare steel mains dating to 1887, representing 16% of the system. Also, 64 miles of bare steel services.  Original Cost estimate: Ohio = $716 million; Kentucky = $135 million  Proposed 10 year program in both jurisdictions –Aggressive –Necessary and achievable  Proposed “Rider AMRP” in both Ohio and Kentucky

5 ACCELERATED MAIN REPLACEMENT PROGRAM Construction Process  Physical work performed by contractors  Company solicits bids in September for following calendar year  Work broken down into “modules” – 3 to 5 miles of main (and associated services)  10 or 11 contracting firms submit bids – Company tracks quality and productivity for each contractor

6 ACCELERATED MAIN REPLACEMENT PROGRAM Revenue Requirement Calculation  Return on Net Program Investment –Plant additions since beginning of program (not in base rates) –Less retirement of plant replaced –Less accumulated depreciation on above Accumulated depreciation on additions Cost of removal Original cost retired –Less deferred taxes on accelerated depreciation  Return based on pre-tax rate of return approved in last base rate case

7 ACCELERATED MAIN REPLACEMENT PROGRAM Revenue Requirement Calculation (Continued)  Return of Net Program Investment –Annualized depreciation expense on additions –Less annualized depreciation expense on retirements  Change in Operation & Maintenance Expense –Less reduction in main maintenance expense since beginning of program

8 ACCELERATED MAIN REPLACEMENT PROGRAM Annual Filing - Ohio  Preliminary Filing (November) - 9 months actual & 3 months estimate  Updated Filing (February) - 12 months actual data  PUCO Staff Audit - intervenors also request information  PUCO Staff Report issued mid-March  Hearing scheduled in early April – generally stipulated  Revised Rider AMRP effective May 1

9 ACCELERATED MAIN REPLACEMENT PROGRAM Rate Structure - Ohio Note: Annual increases in Rider AMRP rates were subjected to stipulated rate caps

10 ACCELERATED MAIN REPLACEMENT PROGRAM Annual Filing - Kentucky  Actual data filed in March  Commission Staff and AG review filing  Hearing usually held in July  Revised Rider AMRP effective for service rendered in September

11 ACCELERATED MAIN REPLACEMENT PROGRAM Rate Structure - Kentucky

12 Alternative Rate Structure Reasons Rider AMRP was approved  Focus was on improved SAFETY of gas distribution system  Significant reduction in gas leak inventory  Significant reduction in main maintenance expense and pass through of savings to customers  Amount of capital investment required  Study and testimony of Stone & Webster  Other gas utilities had similar riders approved, most notably Atlanta Gas Light Company

13 Alternative Rate Structure Questions and Further Discussion