1. Page 1 Gas Markets Ron Mosnik Director, Gas Supply Wisconsin Public Service Corporation Energy Utilities Basics October 5, 2012

2. Page 2 Gas Markets Agenda  Brief history of natural gas regulation  Gas transportation market  Shale (Natural gas market game changer)  Natural gas pricing  Price and volatility

3. Page 3 Wisconsin Public Service Corporation Profile  1,363 Employees  319,000 Gas Customers  12.8 Bcf Gas Storage  38 Bcf System Sales  $178 Mil (Annual Gas Cost)  441,000 Electric Customers  2,175 Mw Gen Capacity Data as of December 31, 2011

4. Page 4 Regulation of WPSC Gas Utility  Federal Regulation (FERC) – Federal Energy Regulatory Commission  Transportation, Storage & Sales of natural gas in interstate commerce  State Regulation (PSCW) – Public Service Commission of Wisconsin  Tariff (Distribution Rates, Extension Rules, Service Rules, etc.)  Gas Cost Rates (Transportation & Storage, Gas Purchases, Hedging, etc.)  Pipeline Safety (Federal & State rules)

5. Page 5 Natural Gas Industry (Current State) Natural Gas Commodity is De-regulated Transportation of Natural Gas is highly Regulated  Interstate transport  Gas Storage in interstate commerce  Why? Provide the market “open access” to gas transportation assets Mitigate abuse of limited gas transportation assets

6. Page 6 Natural Gas Industry (Prior to 1938) Local gas production (Coal Gasification) Expanding exploration for crude oil and natural gas Steel welding perfected  High pressure steel pipelines Federal Trade Commission (FTC)  Looked after the growing industry  Made recommendations to regulate the natural gas industry

7. Page 7 Natural Gas Act of 1938 (NGA)  Federal Power Commission (FPC) was given authority to regulate…  Transportation of natural gas in interstate commerce  Sales of natural gas in interstate commerce for resale  Exempted: Local distribution of natural gas Production and gathering of natural gas

8. Page 8 Natural Gas Act Required… Certificates of public convenience and necessity [NGA §7(C)] Abandonment authority [NGA §7(b)] Just and reasonable rates [NGA §4 and § 5] Nondiscrimination [NGA §4(b)] Reporting [NGA §10]

9. Page 9 Local Distribution Company Interstate Pipeline Bundled Sales and Gas Transportation Service Producer Gas and Transportation Service (Bundled)

10. Page 10 Natural Gas Policy Act of 1978 (NGPA) Natural gas supply shortage in mid-1970s  Legislation that established…  Federal Energy Regulatory Commission (FERC) - Abolished FPC  Extensive price regulation at wellhead  Curtailment priorities  First timeline for natural gas deregulation

11. Page 11 Federal Energy Regulatory Commission (FERC) Five commissioners  Appointed by the President (With advice and consent of Senate)  Serve staggered five year terms  Equal vote on regulatory matters No more than three may belong to same political party Chair is designated by President to serve as FERC’s administrative head

12. Present FERC Commissioners  Chairman Jon Wellinghoff (D)  Commissioner Philip Moeller (R)  Commissioner John Norris (D)  Commissioner Cheryl LaFleur (D)  Commissioner Tony Clark (R) Page 12

13. Page 13 NGPA of 1978 (Objectives) Reform of wellhead price controls (increase supply on interstate pipelines) Foster a more competitive environment (in market areas & along the interstate pipeline systems) Restructure distribution and sales (to provide “open access” on pipes to serve market areas) First step toward present regulatory system

14. Page 14 NGPA of 1978 (Outcomes) Production boom of late 1970s, early 1980s FERC successfully stimulated supply to meet demand Exploration and production segments flourished However - Unforeseen jurisdictional and bureaucratic problems arose  Had to purchase a bundled package  “Open access” to marketplace did not materialize

15. Page 15 FERC Order 436 (1985) Pipelines must transport gas on an open-access, nondiscriminatory basis Pipeline capacity to be allocated (first-come, first-served basis) LDC’s have ability to:  Convert bundled service to transportation-only contracts  Reduce demand volume for gas purchase contracts “Shipper Must Have Title” Rule

16. Page 16 Orders 500 & 528 (Take-or-Pay) Painful consequences when FERC permitted LDC’s to acquire gas directly from suppliers under Order 436  Orders 500 & 528 resolved problems  Allow pipelines to buy out or buy down supply contracts  Apportion costs between themselves and their customers (Take-or-pay provisions)

17. Page 17 Local Distribution Company Interstate Pipeline Open Access Transportation and Bundled City Gate Service Gas Commodity Sales Transportation Producer P/L Gas and Transportation Service (Bundled)

18. Page 18 Natural Gas Wellhead Decontrol Act of 1989 (NGWDA) Congress decided price regulation was unnecessary and anticompetitive NGWDA amended the NGPA of 1978 to phase out all price regulation of natural gas (commodity) Natural gas (commodity) market completely deregulated as of January 1, 1993

19. Page 19 FERC Order 636 (1993) – “Final” Restructuring (Pipeline Services)  Interstate Natural Gas Pipelines must…  Unbundle transportation from sales of gas Pipelines can only transport gas for others (Shippers)  Provide all shippers access to certain information on electronic bulletin boards  Allow shippers to release capacity on permanent or temporary basis

20. Page 20 FERC Order 636 (cont.)  Interstate Natural Gas Pipelines must… (cont.)  Allow shippers to have flexible receipt and delivery points  Provide “no notice” service to protect certain shippers in the event of a sudden need for gas (balancing) FERC adopted Straight Fixed Variable rate design Demand charge (fixed costs) Commodity charge (variable costs)

21. Page 21 Interstate Pipeline Open Access Gas Transportation Gas Commodity Sales Transportation Producer Delivery Point or Broker

22. Page 22 U.S. Gas Transportation System

23. Page 23 Upper Midwest Gas Transportation Market

24. Page 24 Natural Gas Market Game Changer

25. Page 25 Shale Production Outlook History Forecast WesternCanada Appalachia Gulf Coast/Midcontinent Courtesy TransCanada Bcf/d History of NYMEX Gas Prices $/Dth

26. Page 26 North American Gas Supply Courtesy TransCanada Mexico Gulf of Mexico Onshore Gulf Big Four Shales Permian/Anadarko Rockies/San Juan Eastern U.S. WCSB Conventional Shale LNG/Other History Forecast Bcf/d

27. Page 27 North American Gas Demand History Forecast Pipe/Plant Fuel Residential Commercial Industrial Electric Generation LNG Exports Courtesy TransCanada Bcf/d

28. Page 28 Natural Gas Pricing Natural gas is a traded commodity (New York Mercantile Exchange - NYMEX) Law of supply and demand What Drives Natural Gas Prices?

29. Page 29 Natural Gas Pricing (Supply and Demand)  Drivers for lower prices:  Increased shale production (Supply)  Adequate storage inventories (Supply)  Greater energy efficiency (Demand)  Economic down-turn (Demand)  Weather (Demand) Warm winter Cool summer

30. Page 30 Natural Gas Pricing (Supply and Demand)  Drivers for higher prices:  Production losses from hurricane damage (Supply) ???  Low winter storage inventories (Supply)  Increased gas usage for fuel switching/emissions control (Demand)  Economic recovery (Demand)  Weather (Demand) Cold winter Hot summer

31. Page 31 Natural Gas Pricing  Other factors influencing price  Value of the dollar (global commodity) (currently - U.S. price insulated)  Speculators trading in market (i.e., Natural Gas Fund, derivatives, etc.) (Oversupplied market – non issue)

32. Page 32 Historical NYMEX Gas Futures Prices Delivery Months: January 2001 through August 2012

33. Page 33 Historical NYMEX Gas Futures Prices Delivery Months: January 2001 through August 2012 Supply/Demand in Balance Market Oversupplied

34. Page 34 Natural Gas Pricing Natural gas is a traded commodity (New York Mercantile Exchange - NYMEX) Law of supply and demand Purchase location (Location Basis) Timing of delivery (Futures Basis) What Drives Natural Gas Prices?

35. Page 35 Natural Gas Pricing (Purchase Location)  Purchase Location (Location basis)  Influenced by: Supply at purchase locations Transportation capacity at purchase locations (Receipt Points) Demand at Delivery Points along pipeline

36. Page 36 Natural Gas Pricing (Purchase Location) Example - Location Basis (Trade date: Sept. 10, 2012 Delivery) LocationPrice ($/Dth)Basis ($/Dth) NYMEX$2.81- ANR Ok$2.54 ($0.27) ANR La.$2.59 ($0.22) Chicago$2.76 ($0.05)

37. Page 37 Natural Gas Pricing (Timing of Purchase)  Timing of Delivery (Futures basis)  Influenced by: Point in time the gas is to be delivered Gas storage costs (factor)

38. Page 38 NYMEX Future Strip Prices

39. Page 39 Natural Gas Pricing Mechanisms  Pricing Mechanisms (Physical Supplies)  First of month index Price fixed for the month  Daily price Price fixed for the day  Fixed price Price fixed for a future delivery period

40. Page 40 Natural Gas Market (Price and Volatility) Any event or trend that indicates a change in gas supply or gas demand can also trigger a change in price

41. Page 41 Natural Gas Price (Market) NYMEX First of Month Natural Gas Prices Delivery Months: January 2001 through August 2012 Cold Winters Hurricanes Energy Complex Price Run-up

42. Page 42 Natural Gas Market (Price and Volatility) The price volatility of a commodity is a function of the relative rate at which the price of a commodity moves up or down Volatility Metric (Std Dev of the % change in gas prices month to month)

43. Page 43 Natural Gas Price Annualized Volatility NYMEX First of Month Natural Gas Prices Delivery Months: January 2001 through August 2012 67% Volatility 48% Volatility

44. Page 44 Gas Markets