1. Moving Forward – Maximizing Your Energy Management 2009 and 2010 Rate Issues WPSC Executive Team Barb Nick – SR Vice President Energy Delivery & Customer Service Dennis Derricks – Director – Electric Regulatory Policy WIEG May 8, 2008

2. 2 2009 and 2010 Rate Issues  Review of 2007/2008 Rate Case  Discuss 2009/2010 Rate Case

3. 3 2007 Rate Case January 2007 Rate Order Electric $56.7M (6.6%) Gas $18.9M (14.4%)

4. 4 2007 Rate Case - Electric  Reliability  ATC Infrastructure  Fuel and Purchased Power  Coal and Rail Costs  Purchased Power  Fox Energy Center  Recovery of Reduced Coal Delivery Deferral

5. 5 2007 Rate Case - Electric  Reliability (cont’d)  Weston 4  Construction and Staffing  Plant Maintenance  Weston 3  De Pere Energy Center

6. 6 2007 Rate Case - Gas  Infrastructure improvements  Manufactured Gas Plant Remediation Costs  Exhausted Insurance Proceeds

7. 7 2008 Rate Case  No Rate Case Filing for 2008  Annual General Rate Cases since 2000  Fuel Increase:  2.5% increase January 2008  $23M  Included certain ATC and deferred MISO costs  Interim Fuels Increase

8. 8 2009 Rate Case - Electric Rate Request for 2009 Electric $77.1M  7.75% from March 2008 Fuels Increase rates $106.8M  11.16% from January 2008 rates

9. 9 2009 Rate Case - Gas Rate Request for 2009 Gas $11.7M  7.89% from January 2007 rates

10. 10 2009 Rate Case - Electric  KNPP Refund (51%)  2006 and 2007 rates were subsidized using the refund  Proceeds are now exhausted  Weston 4 Costs (17%)  Non-Fuel O&M  Depreciation  Return

11. 11 2009 Rate Case - Electric  Emission Compliance Costs (13%)  Emission Allowances  Hardware installations  Transmission Costs (7%)  MISO  ATC  Other (12%)  Primarily Weston 3 lightning strike costs

12. 12 2009 Rate Case - Gas  Manufactured Gas Plant Remediation Costs (-1.9M)  Additional insurance proceeds recovered  WPS Gas laterals for Guardian Pipeline (100%)  Second interstate pipeline for service territory  Competition

13. 13 2010 Rate Case - Electric  Electric $3.5M  0.33% from January 2009 rates  Plus Fuel Re-Opener  No Gas Increase

14. 14 2010 Rate Case - Electric  Generator Maintenance  $5.4M  Combustion Turbines  Transmission Costs  $2.2M  ATC and MISO  Environmental Compliance  -$4.0M  Less reliance on Allowances

15. 15 2010 Rate Case - Electric  Neither 2009 or 2010 rates reflect impact of Crane Creek Wind Project  99 MW Wind Farm in Iowa  Required by WI Renewable Portfolio Standard  WPS’ application currently under review at PSCW  $10.4M in 2009  Additional $19.9M in 2010  Costs will be partially offset by fuel cost savings  Production Tax Credits

16. 16 Cost of Capital  Rate of return on equity  Rate increase reflects 10.9% after tax return on equity  WPS has requested 11.5% after tax return on equity

17. 17 2009 Rate Case – Tentative Time Table April 1 2008 April-June 2008 September- October 2008 December 2008 January 2009 Rate Case filed at Public Service Commission Public Service Commission Review Rate Design filed at the Public Service Commission Public Service Commission rate hearings Public Service Commission rules on rate changes 2009 rate changes go into effect April 1, 2008 April-June Sept-Oct Dec. 2008 Jan. 2009 May 15, 2008

18. 18 Historical Return on Equity Year Authorized Return Actual Return 200212.3%11.50% 200312.0%10.40% 200412.0%12.61% 200511.5%8.63% 200611.0%9.48% 200710.9%≈9.9% 200810.9%TBD 200911.5% RequestedTBD

19. Moving Forward – Maximizing Your Energy Management Fuel Window

20. 20 What is the Fuel Window?  Process that adjusts rates for fuel variability  Electric Utilities are not allowed to recover fuel one for one by statute in Wisconsin  Cost of gas for distribution is one for one  Volatility of fuel cost has increased  “Large” swings in fuel costs are addressed by fuel window which reduces some of the fuel volatility risk

21. 21 How does it work?  If cost of fuel YTD exceeds or falls below the rate case level by a given percentage on a $/MWH basis, we are allowed (if exceeds), or required (if less than) to file to update our fuel costs.  Percentages are 8% for Jan, 5% for Feb, and 2% for rest of year  Projection for remainder of year also taken into consideration

22. 22 Some of concerns of the Fuel Window  Time frame  Rate decreases processed quickly  Rate increases delayed by notification and hearing process  Adjusted rates calculated for annual period, applied for remainder of year so prior period is not recovered  Some parameters for forecasting remainder of the year not allowed to be updated

23. 23 What is the Process?  Fuel Forecast completed  Submitted as part of rate case filing  PSCW staff & intervenors  Audit information  Take position  Testimony submitted by all parties  Rate Case hearing  Commission determines position & fuel window

24. 24 What’s in the Window?  What’s In?  Forecasted fuel costs  Coal, including transportation  Natural gas  Hydro generation  Wind generation  Purchased power  MISO RSG & Congestion & Losses  Reduced for estimated opportunity sales  What’s Out?  Purchased power capacity costs  Power plant non-fuel costs (fly ash and fuel handling expense)  Third party wheeling costs (ATC)

25. 25 What causes volatility?  Natural gas prices  Purchase power prices  Spot purchases  Fox Energy Center  Combined Locks  Combustion Turbine prices  Unplanned Power Plant outages  Planned outage schedule changes  Generation mix changes

26. 26 UR-118 2007 Cumulative Fuel Window $22.00 $22.50 $23.00 $23.50 $24.00 $24.50 $25.00 $25.50 $26.00 $26.50 $27.00 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOVDEC Dollars per MWH Upper limitLower limitFuel WindowUR118 Rate Case FB200610EU200703EU200706FB200705 EU200709EU200712Actuals 25.15 24.24 23.19

27. 27 UR-118 ReEstimated 2008 Cumulative Fuel Window

28. 28 What are we doing about it?  Natural Gas hedging plan implemented  Coal contract portfolio mix  Fuel Forecast improvement process  Looking at individual processes that make-up fuel forecast  Currently Production Cost Study & Load Shape  Participating in process to review Fuel Window at PSCW

29. 29 Fuel Window Questions?

30. 30 WPS Cost Drivers  Cost Drivers  Infrastructure (Weston 4, Guardian, Transmission)  Coal  Gas  Environmental  Renewables

31. 31 WPS Cost Drivers – Cost Composition

32. 32 WPS Cost Driver - Weston 4  Nearly complete  500 MWs, highly efficient  Environmentally sound  On budget  Built safe  Online this summer  Fuel savings for customers

33. 33 WPS Cost Driver - Guardian Pipeline  Will bring new gas pipeline capacity to region  Will bring competition to region  In service later this year

34. 34 WPS Cost Driver - Renewables  Assorted hydro, wind, biomass, landfill gas  Wind Farms  58 MW from Forward Energy wind farm in WI  99 MW development in northeastern Iowa  150 MW development in southeastern Minnesota  Investigating others

35. 35 2007 WPS Cost Driver - Projected Generation Mix Coal 68% Coal 54% 2008

36. 36 WPS Cost Control  Where WPS Has Reduced Costs  Infrastructure almost done  Weston 4 fuel savings  Weston 4 financing  Rail Contracts  ATC Planning  O&M

37. 37 WPS Cost Control  Construction of Weston 4  Significant Fuel Savings (≈$40M)  2009 compared to 2007  Employee Benefit Cost Reductions ($14.8M)  Manufactured Gas Plant Insurance Recoveries ($1.9M)

38. 38 Commitment To The Customer  To be committed to the customer means listening to the customer…  “my costs are increasing, but I have to deliver lower costs to my customers”  “I wish I were regulated so I could pass on my costs”  “I am an expert in my business – I don’t want to be an expert in the electricity business – WPS should help”  “What are you doing to reduce costs”  “Help me reduce my per unit costs”

39. Moving Forward – Maximizing Your Energy Management Questions?