2. Natural Gas 101 & Current Industry Issues Bruce McDowell American Gas Association May 2008 Copyright © 2008 American Gas Association. All rights reserved

3. Natural Gas Advantages  Domestic resource  Sufficient supply  Competitively priced  Relatively safe and clean burning

4. Natural Gas Accounts for Roughly One- Fourth of U.S. Primary Energy Consumption Source: Dept. of Energy, Energy Information Administration

5. Natural Gas Transportation System

6. Participants Miles of PipeRegulatory Regime Producers 5,000 Independents 0 Phased price deregulation 21 Majors begun in 1979, completed in 1989 Pipelines 160300,000 Federal Energy Regulatory Commission (FERC) Natural Gas Marketers 2500 Unregulated Local Gas Utilities 360894,000State Utility Commissions End Users Residential 64 million 0 Unregulated Commercial 5 million Industrial 200,000 Electricity Generators 500 0 Interstate - FERC Intrastate - State Commissions The US Natural Gas Industry At A Glance Source: Dept. of Energy, Energy Information Administration, AGA Investor-Owned Municipal 860320,000Local Governments

7. Supply, Exploration & Development Photo courtesy of OSHA

8. How Oil & Natural Gas Are Created Reprint permitted by the American Association of Petroleum Geologists

9. Well Success Rates Wildcat well: 10%-20% Exploratory well: 25%-50% Developmental well: 70%+

10. Drilling Rig Reprint permitted by the American Association of Petroleum Geologists

11. Completed Well Reprint permitted by the American Association of Petroleum Geologists

12. Non-Traditional Drilling Techniques Reduce Environmental Impacts Gas Oil Water American Petroleum Institute, 1986

13. Natural Gas Production Is Responsive to Market Price SOURCE: U.S. Dept. of Energy, Energy Information Administration

14. Tightening Demand And Supply Curves = Price Volatility Lower-48 Dry Gas Production vs. Dry Gas Productive Capacity Productive Capability Gas Production

15. Recoverable Gas Resources in the US, 1968-2006 Potential Resources Proved Reserves Cumulative Production Coalbed Methane Trillion Cubic Feet Source: Potential Gas Committee

16. Pipeline Transmission System Photo courtesy of FERC

17. Pipeline Activities  Construction FERC or state approval Obtain right-of-way Construction  Operation Compression Maintenance Underground Storage

18. U.S. Natural Gas Pipeline Network

19. Pipeline Rates  Rate of return regulated by FERC Traditional contracts with set rates Capacity release market  Types of contracts/services Firm Interruptible Released capacity No-notice  Factors impacting returns Demand - weather Competition from other pipelines Types of contracts

20. Distribution System Photo courtesy of Michigan Public Service Commission

21. Distribution Operations  Natural gas supply management  Gate station Pressure reduction Odorant  System construction & operation  Metering & customer service

22. Natural Gas Supply Management  Natural gas supplier options Producer Marketer Intrastate pipeline Company-owned production  Natural gas contract options Contract length Contract pricing  Indexed (monthly, weekly)  Fixed  Spot  Hedged (NYMEX)

23. Distribution Rates  Rates regulated by PSC’s Costs spread over fixed and commodity Purchased gas costs recovery  Rate schedules based on demand Firm Interruptible/special contracts Transportation  Factors impacting returns Weather Competition New construction/marketing Conservation

24. Customers

25. Residential  90% of total customers  22% of total consumption  Weather sensitive  Conservation impact

26. Commercial  9% of total customers  15% of total consumption  Somewhat weather sensitive  Conservation impact  Market opportunities

27. Industrial  Less than 1% of total customers  33% of total consumption  Can help manage sendout  Primarily transportation customer

28. Electric Generation  Less than 1% of total customers  31% of total consumption  Demand growing  Difficult delivery requirements  Primarily transportation customer

29. Current Natural Gas Industry Issues

30.  North American supply/demand balance is and will remain tight.  Gas consumption grows.  Gas prices remain relatively high and volatile. North American Natural Gas Supply Market  Access to some gas supplies are restricted.  “New frontier” gas supplies are necessary and take time.  LNG imports will become an important player in natural gas pricing.

31. Lower-48 Supplies Will Not Be Enough  Canadian imports will be limited  Liquefied Natural Gas (LNG) imports will increase  Alaskan natural gas could flow to the continental US by 2020

32. LNG Imports Could Triple by 2011 Source: Energy Information Administration, Annual Energy Outlook 2008-2030.

33. Alaska Natural Gas Pipeline  Proposed 4.5 Bcf/d pipeline  Application process ongoing  Adds 35-40 Tcf of reserves immediately  New supply will meet 7% of annual needs  Estimated cost of $30 billion

34. Consumer Response to Gas Prices  Consumer bills have been increasing  Conservation efforts  Bill payment concerns

35. Typical Home Heating Costs Have Increased for Natural Gas Customers Winters Source: Energy Information Administration Estimate

36. Energy Efficiency Efforts Have Made Impacts  Use/customer dropped about 1%/yr pre 2000 Appliance efficiency & better home construction Rate structures adapting to conservation  Recent conservation has been more intense Use/customer dropped 2.2%/yr post 2000 Consumers do react to gas price increases Past conservation not easily reversed

37. Policies to Address Price & Supply Concerns  Low-Income Household Energy Assistance Program (LIHEAP)  Increase access to gas supply  State price regulation – innovative rates

38. LIHEAP Funding Has Been Unsteady

39. Need For LIHEAP Has Grown

40. What are Utilities Doing to Help  45% offer rate discounts  35% forgive part or all of past arrearages  38% participate in fuel funds  50% have shareholder assistance programs  10% offer discounts on the reconnection fee  35% have other programs Source: AGA Survey

41. Increase Access to Supply Areas  Tract 181 in eastern Gulf of Mexico  Outer Continental Shelf  Rocky Mountain area

42. Innovative Rate Designs  For the customer Budget billing Fixed bills/fixed cost  For the company Cost trackers Non-volumetric rate design

43. Natural Gas Costs Commodity Costs  70% of Utility Revenue Distribution Costs  30% of Utility Revenue Includes: Customer Service Operations Maintenance Depreciation Taxes Return on assets used to provide service

44. Types of Non-Volumetric Rates Revenue Decoupling Automatic Adjustments (partial decoupling) Weather Normalization Clause Rate Stabilization Tariffs Monthly Fee Fixed Monthly Distribution Charge Two-Tier Customer Charge Straight Fixed Variable (Demand Rate) Modified Rate Blocks 43 million customers in 31 states are being served under non-volumetric rates

45. Climate Change Laws Are on the Horizon  GHG reduction goals will require major lifestyle changes  Several competing bills in Congress Most call for about 70% reduction by 2050 Gradual reductions over time  Expectations that legislation will pass in next administration

46. U.S. G REENHOUSE G AS E MISSIONS BY S ECTOR – 1990-2005 (T G CO 2 E QUIVALENT ) Source: U.S. Environmental Protection Agency

47. Summary  Tight energy market will continue  Consumers & gas utilities have responded  Technology, prices, consumer attitude & legislation will further promote energy efficiency  Need for cleanliness and high efficiency will serve natural gas well

48. Questions?

49. Thank You!