1. State of the Electricity Utility Industry State of the Electricity Utility Industry David K. Owens Executive Vice President Edison Electric Institute Annual Fuel Oil/Energy Buyers Conference October 27, 2009

2. America’s Challenges Resolve financial crisis Stimulate economy and get America back to work Address Climate Change Transform our society to be greener and more efficient

3. A Significant Transformation is Underway Stimulated by ………. Restructured Financial Market Major Initiatives to Address Climate Change Emerging Technologies Gaps / Lack of Clarity in Federal / State Decisions on Infrastructure and Market Issues

4. Financial Crisis Impacts … Access to Capital Short-term lines of credit for small business Long-term investments Ultimately Impacting Small Business, Consumers, and Reliability

5. Overview Recession has dampened demand, but forecasted to rebound and grow Commodity, equipment, and labor costs are down, making it an ideal time to build and prepare for future demand increases Wall Street Restructuring affects access to capital markets and increasing cost of capital As one of the most capital-intensive industries, reduced access to capital markets at higher costs, means that enhanced liquidity and financial flexibility is important Utility industry at the beginning of a major investment cycle Driven by new technology, demand growth, efficiency and environmental CAPEX Addressing climate change and new priorities will be costly

6. Industry Capital Expenditures are Growing Industry committed to reliability - making needed investments in generation, transmission, smart grid/ distribution & the environment Financial crisis initially brought sharp revisions for 2009 Multi-year trend of soaring construction /materials costs reversed in Q3 2008 Increased spending expected to continue into the future Total CAPEX for 2010-2030 ~ $1.5 trillion* Excludes impact from climate legislation U.S. Shareholder-Owned Electric Utilities * The Brattle Group, preliminary findings from The Edison Foundation presentation titled Transforming America’s Power Industry. Represents the entire Power sector. Request Mark Agnew to Update this Slide 10/13/09

7. Industry Faces Difficult Decisions Defer or cancel infrastructure projects to enhance current liquidity position Electric reliability could be impacted when economy and demand rebound To Invest or Not to Invest? Opportunities with sharply declining commodity and input costs Higher financing costs Uncertainty ?

8. View Forward

9. President Obama’s Energy / Environmental Views Climate Change EnergyEfficiency Energy Efficiency Smart Grid Renewable Portfolio Standards 25% by 2025 Overhaul of Federal Efficiency Codes Increased Government Support 80% reduction by 2050 H.R. 2454 83% reduction by 2050 H.R. 2454 20% by 2020 In H.R. 2454 In H.R. 2454 and stimulus package

10. Climate Change Questions We Must Answer! How do you minimize the impact of compliance costs on low-income consumers? What must U.S. climate change legislation and carbon management strategy include to Ensure economic growth? Ensure energy security? Avoid unfairness?

11. Key Climate Provisions Economy Wide? Cap-and-Trade or Tax? Mitigating Customer Impacts? Allowances Offsets Strategic allowance reserve Other approaches Targets and Timetables ?

12. Targets and Timetables Questions / Concerns To meet short-term targets Power sector will rely on energy efficiency, renewables and natural gas In the medium term ( i.e., 2020-2025) Targets should be harmonized with the development and commercial deployment of advanced climate technologies and measure s ( e.g., nuclear energy, advanced coal technologies with carbon capture and storage, PHEVs, smart grid)

13. The American Clean Energy and Security Act of 2009 (H.R. 2454) Economic Impact Projections

14. Allocation of Allowances Primary Goals Help mitigate the impact of increased energy prices on consumers Assist in transition to clean energy economy Advance development and deployment of clean energy technologies, including energy efficiency

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16. Allowances Under Kerry-Boxer Bill (S.1733) Clean Energy Jobs and American Power Act S.1733: Does not specify how many allowances each covered industry would receive Contains the same allocation distribution as H.R. 2454 Total number of allowances for 2012-2016 are the same under H.R. 2454 Auctions 25% of the allowances (15% in H.R. 2454). Source of these additional allowances is unclear Establishes a minimum auction price of $10 in 2012, escalating at 5% per year plus inflation Contains a so-called “soft” price collar

17. What Will It Take to Address Climate Change? Renewables Energy efficiency Clean coal technologies Carbon capture and storage Nuclear Plug-in hybrid electric vehicles (Smart grid) We need it all … but it will be costly! There is no silver bullet!

18. The Enhanced Role for Renewabl es

19. Renewable / Energy Efficiency Questions We Must Answer! Renewable Techno logy How much can increased renewable capacity contribute going forward? How do we get transmission constructed for renewables? Energy Efficiency How significant of a role can energy efficiency play in the future? How can customers benefit and actively participate in energy efficiency programs from the residential and commercial perspectives?

20. State Renewable Energy Portfolio Standards 31 states with quota obligations – RPS Each state has different natural resource endowment, different industrial and socio-economic characteristics… …So each state RPS has: Different targets Different timelines Different eligible resources Different compliance entities Different compliance mechanisms Different enforcement and penalties

21. Federal Policies A Federal ERES? H.R. 2454 The American Clean Energy and Security Act of 2009 S.1462 The American Clean Energy and Leadership Act of 2009 Contingent on climate (HR 2454 / S.1733)

22. Planned Capacity Additions Reflect State RPS Requirements Non-hydro renewables make up 4% of US capacity today but 34% of planned capacity additions through 2020. US Generation Capacity in 2008 (1,061 GW in Service) Planned Capacity Additions to 2020 (352 GW) Source; Ventyx Global Energy and Bernstein Analysis Hydro 9% Gas 41% Coal 30% Nuclear 10% Oil 6% Non-Hydro Renewable 4% Hydro 16% Gas 23% Coal 14% Nuclear 13% Oil 0% Non-Hydro Renewable 34% Source: Bernstein Research

23. Biggest Challenge for Renewables … Transmission Planning Siting Cost Allocation Renewables are Variable Resources!

24. Integrating Renewables Operational Challenges Higher RPS levels can create significant surplus energy Has created excess energy at night Requires more system backup to maintain reliability Quick start and fast ramping technologies (peaking / storage) to manage generation variability and maintain reliability when wind falls off or clouds appear Smart grid can help mitigate some of these problems Energy storage / off-peak electric vehicle charging can mitigate problem Smart grid will help enable these new technologies

25. The New Role for Energy Efficiency

26. Demand Projected To Increase 40% 21% by 2030 Sources: U.S. Department of Energy, Energy Information Administration Billon kiloWatthours Recession Impact?

27. The Energy Efficiency Challenge Average US household owns 24 consumer electronic products 2 DVRs use as much energy in 1 year as a refrigerator Play Station and X-Box use more electricity than a PC PCs and TVs now account for 10% of a home’s electricity usage 99% of these products must be plugged in or recharged 42” Plasma TV uses more than twice as much as a standard 27” TV More efficient use of energy could significantly reduce energy bills Need to educate all consumers about how to save energy and use it more efficiently

28. Aggressive campaign for technologies Smart buildings Smart appliances Smart electric meters and grid Smart rates Use of “smart technologies” and new rate designs can: Allow consumers to control their energy usage to save money Avoid wasting energy Control how and when appliances do their jobs Help utilities efficiently operate their systems and maintain reliability Help keep supply and demand in balance Support more efficient use of generating resources Commercializing plug-in hybrid electric vehicles Intensified National Commitment To Energy Efficiency Is Needed Intensified National Commitment To Energy Efficiency Is Needed

29. Energy Efficiency - Our 1 st fuel Ave. Cost ~$0.035 / kWh Saved Source: The Edison Foundation – Institute of Electric Efficiency; EIA Form 861 $ 0.000 $0.005 $0.010 $0.015 $0.020 $0.025 $0.030 $0.035 $0.040 $0.045 $0.050 20002001200220032004200520062007 $/kWh Total Utility EE Costs per kWh Saved

30. Energy Efficiency Business Model Components Program Cost Recovery Lost Margin Recovery Performance Incentives

31. Coal Must Remain in the Mix…

32. Carbon Capture and Storage Challenges Capture Develop cost-effective means of capturing CO 2 from combustion Transport Ability to access current gas and CO 2 pipeline structure Regulatory framework Liability concerns Storage Permitting and siting Liability concerns Full-scale demonstration projects Public education and acceptance

33. New Coal Generation Carbon Capture and Storage (CCS) in (H.R. 2454) “National strategy” for a CCS regulatory framework Federal agencies to develop a (sec. 111) Geologic storage and propose regulations EPA to finalize regulations for under the Clean Air Act (sec. 112) Study of legal framework for geologic storage sites Establish task force (sec. 113) New Carbon Storage Research Corporation Funded by charge on deliveries of fossil fuel electricity Fund commercial-scale (>250MW), integrated demo projects (sec. 114) $10 billion over 10 years; 50% of funds reserved for utility projects Corporation is an affiliate of EPRI and not an agent of the U.S. government

34. …And So Should Nuclear

35. U.S. Electricity Sources Which Do Not Emit Greenhouse Gases During Operation 2008 Source: Energy Information Administration Updated: 4/09

36. Expectations for the Future 2010 2012 2014 2016 20202018 Suppliers ramp up component manufacturing capability Second wave begins construction when it is clear that first wave can be licensed and built on time and within budget Initial wave has 4 - 8 plants on line by 2015-2016 Second wave begins COL preparation Source: NEI

37. U.S. Shale – A Game Changer? Gas Production Potential BCFD Source: Tristone Capital, Devon Energy Historical Forecast

38. SMART GRID A Game Changing Technology

39. What is the Smart Grid? An advanced, telecommunication / electric grid with sensors and smart devices linking all aspects of the grid, from generator to consumer, and delivering enhanced operational capabilities that : 1. Provide CONSUMERS with the information and tools necessary to be responsive to electricity grid conditions (including price and reliability) through the use of electric devices and new services (from smart thermostats to PHEV) 2. Ensure EFFICENT use of the electric grid (optimizing current assets while integrating emerging technologies such as renewables and storage devices) 3. Enhance RELIABILITY (protecting the grid from cyber and natural attacks, increasing power quality and promoting early detection and self correcting grid “self-healing”)

40. Smart meter platform and home area network technologies will take EE and DR to new levels HAN communication SmartMeter communication … Giving customers the tools and the know-how to be smarter energy consumers

41. The Changing Regulatory Environment

42. Emerging New FERC Focus “Going Green” - Environment / Climate Platform Regulation of Carbon Markets Clarify jurisdiction boundaries – FERC, CFTC, SEC Expand regulatory goals Regulation of Combined Efficiency and Renewable Electricity Standard (CERES ) Oversee Energy Efficiency Credit System Prescribe standards and protocols for defining and measuring electricity savings Specify types of Energy Efficiency measures Receive and evaluate all state applications for eligible electricity savings Smart Grid Investment and Cost Recovery Distributed Energy Resources How do these areas fit together? How do they impact FERC / State relationships?

43. Evolving Areas of Federal / State Collaboration

44. The View Forward The View Forward Respond to comprehensive energy and climate legislation Preserve all options Accelerate development of technologies Mitigate the impact of rising costs on consumers Ensure regulatory environment supports environmental initiatives Develop a new regulatory model which … Stimulates new investment Provides timely cost recovery Equitably transforms our society to a greener and more energy efficient economy