1. Enron Energy Services Emissions Strategies Meeting May 18, 2001 Heather Mitchell and Elizabeth Howley Creation NOx CO 2 Trading Negawatts

2. 2 Overview EES has the opportunity to develop a new business resulting from the benefits of energy efficiency with three products - negawatts, NOx emission credits, and CO2 reductions. The market for the three products includes 1) green energy marketers and consumers, and 2) emission sellers and purchasers. The benefit for EES and our customers includes financial savings, risk reduction, and additional profit opportunities. Given its expertise in outsourcing, capital, commodities, and facilities management, EES is uniquely positioned to offer emission risk management services to the market.

3. 3 Emission Risk Management Consistent with Outsourcing Approach Traditional ApproachEnron Approach Conditioned Air Light Managed Facilities Ability to focus on core business Reduced operating costs Redeployment of capital Reduced pollution Financial savings and risk reduction Additional profit opportunities Improved Environmental Performance Environmental recognition Customer Receives Commodity Management Energy Info Mgt. Energy Asset Mgt. Facilities Mgt. Capital Mgt. Emissions Management Utilities C Software/ Consultants Architects/ Engineers Environ. Consultants In-house Equipment, Controls Manufacturers HVAC Companies Brokers/Marketers Accounting Firms

4. 4 Energy Efficiency = Negawatt Production and Emission Reductions Benefits from Energy Efficiency Projects Reduce greenhouse gas emissions (e.g. CO2, CH4) Diversify energy sources Reduce air pollutants (NOx, SOx, PM) from conventional power generation Encourage technology development Increase system reliability Decrease reliance on imported fuel Create tradable Negawatts Negawatts Provides alternative for states to achieve renewable energy requirements whereby suppliers can include negawatts in energy products and comply with renewable energy mandates and disclosure. Encourages development of energy efficiency projects through market-based programs. NOx and CO2 Emission Reductions Encourages development of additional energy efficiency projects through existing and new market-based trading programs. Benefit to Enron: Enables EES to capture incremental value from the environmental benefit of energy efficiency. EES participates in the development of and benefits from the commoditization of energy efficiency. EES is recognized as an active supplier/trader of Green-e certified energy products and emission credits.

5. 5 Negawatts from Energy Savings What is a “Negawatt”? A negawatt is the term used to describe energy savings resulting from energy efficiency measures. EES is working to have negawatts recognized as a tradable commodity and component of green power products. Traditional green power products contain renewable energy resources only. However, several states and power pools, including PA, OH, NEPOOL and PJM have recently initiated feasibility studies on including a negawatts component in green power products. Negawatts would not be state regulated, but rather a voluntary commercial program. Green-e, a division of the non-profit Center for Resource Solutions, provides certification services of green power products and negawatts. Value is estimated to be similar to, or slightly less than, the green premium for renewable energy ($0.004-$0.04/kWh). Why start with Pennsylvania? EES is currently spearheading a pilot program in PA with the support of Green-e, and will do the same in OH. Pennsylvania has a shortage of renewable energy options. The state mandates that 2.0% of supply for default suppliers must come from renewable power, growing by 0.5% annually. Consumers have demonstrated a willingness to pay a premium for cleaner power.

6. 6 NOx Emission Credit Markets Emission Credits/Allowances –Local Air Quality - Non-Attainment Areas (credits) –Regional Air Quality - Ozone Transport Region (allowances) What is required to capture value? –EES’s ability to trade the credits - requires ownership of the credits –Recognition of credits from energy efficiency by trading authority How are credits generated from EES projects? –Energy Efficiency gains, total –Trade allowances in market Total Energy Savings Allowance X Emission Factor = Tons of Pollutant Reduced

7. 7 States with Set-asides for Energy Efficiency (Creating NOx Emission Allowances) Massachusetts 5% set-aside available in 2003+, possibly 7% depending on allocation to new sources Maryland 3% set aside for new “Clean Air” projects in 2003+ New York Energy Efficiency and Renewable Energy Set-Aside Allocation available currently with full program running as of 2003+ Indiana Currently under development New Jersey Incentive allowances = 1.5 lbs. NOx/MWh saved Approximately 6.5 tons annually from EES energy efficiency projects Available to those companies demonstrating a reduction in electricity consumption due to energy efficiency Currently operational, but after 2003, reserve will be 5% of available allowances 1.3 MM kWh Saved = 1 ton NOx

8. 8 Greenhouse Gas Regulation Global Warming Background - CO2 UN Framework Convention on Climate Change (UNFCCC) established the need to limit greenhouse gases. The Kyoto Protocol set targets for industrialized countries to reduce their greenhouse gas emissions by 2008-2012. US target is 7% below 1990 levels, EU is 8% below 1990. Only 20 countries have ratified the Kyoto Protocol, the US is not likely to ratify anytime soon because of the current administration’s position on the issue. Current Status of Program Some pre-rule market trading is occurring in anticipation of CO2 regulations. Several states have either limited or proposed limiting greenhouse gas emissions, including NJ, OR, NH, and MA. Many EU countries have established CO2 reduction programs. Several companies are making voluntary commitments to reduce greenhouse gases through in-house activities and trading, especially multi-national companies with existing obligations in other countries. CO2 reduction obligations may be included as part of future multi-pollutant legislation, if not the Kyoto Protocol.

9. 9 Multiple Benefits for EES Additional value lever in outsourcing contracts Ability to create emissions books Ability to attract new customers Public relations Environmental designations and awards Differentiate from the competition – “partnership” in goodwill effort may increase loyalty EES Value

10. 10 Sample Transaction: Chase Emissions Creation Potential NOx Emission Reductions 17 tons per ozone compliance season at New York facilities Gross estimated value of $34,000- $86,000 per year starting in 2004 Potential to create tradable reductions prior to 2004 CO 2 Emission Reductions 50,000 metric tons per year total for US facilities Gross estimated value of $100,000- $250,000 per year Current market fairly illiquid for pre-2008 (pre-Kyoto) reductions Assumptions: Expected annualized DSM savings: $9 million Total annual electricity consumption: 581 million kWh NY annual electricity consumption: 393 million kWh (based on NY’s square footage as a percent of total square footage) Average electricity rate for NY: 11.04 cents/kWh NY DSM in kWh: 82 million kWh Average electricity rate for all states: 10.50 cents/kWh All states DSM in kWh: 86 million kWh Chase states with greatest square footage Other states with Chase operations

11. 11 Issues: Creating and Valuing Negawatts and Emission Reductions Creating reductions: Regulatory uncertainty –Creating tradable credits from kWh reductions –Permitting –Applicable emission factors –Ratification of the Kyoto Protocol or multi-pollutant regulation Market price uncertainty = Illiquidity Valuing reductions: Emission sharing between EES and Customer Incremental costs –Monitoring & Verification –Reporting Technical issues –Declining baseline –Discounting (<1:1 ratio) –Eligibility threshold for negawatts –Retirement of credits Forward sales

12. 12 Most Promising Clean Air Markets NOx Credits/Allowances New Jersey and New York: Already established NOx credit set-aside for energy efficiency. NOx SIP Call States: Broad support, some states have included energy efficiency set- asides (NY, MA, MD), others may also adopt EPA guidance (IN). California: Already in existence, widely accepted, immediate need for new means to create NOx reductions and green power. Negawatts Pennsylvania: Opportunity for Enron to establish program in PA that could serve as template for other states, such as OH, and power pools, such as NEPOOL and PJM. CO 2 Reductions All States: CO 2 trading as a means to cost-effectively comply is widely accepted, and several countries and companies have established trading programs. The market is being created now.