1. CALPINE February 28, 2005 SUSTAINABLE ENERGY ROUNDTABLE SERIES: MULTI-POLLUTANT LEGISLATION Peggy Duxbury, Calpine Corporation

2. CALPINE Multi-Pollutant Legislation1February 28, 2005 CALPINE OVERVIEW Power Portfolio  Operation26,500 mw  Construction5,500 mw  Development16,000 mw  TOTAL48,000 mw Fuel  Natural Gas98%  Geothermal2%

3. CALPINE Multi-Pollutant Legislation2February 28, 2005 CALPINE POWER PORTFOLIO In Operation – Gas-Fired (73 plants) In Operation – Geothermal (19 plants) Under Construction (11 plants) WECC MAPP SPP ERCOT MAIN ECAR SERC FRCC MAAC NPCC-NY NPCC-NE NPCC-O UK not to scale MEXICO

4. CALPINE Multi-Pollutant Legislation3February 28, 2005 ENVIRONMENTAL EXCELLENCE Calpine’s Average Fossil Emissions Compared to US Fossil Average (lb/mw-hr) (1) : Nitrogen Oxides – a major cause of smog 93.8% Less Sulfur Dioxides – a major cause of acid rain 99.9% Less Carbon Dioxides – the principal greenhouse gas, a contributor to global warming 49.6% Less Mercury – a neurotoxin, damaging to the development of the fetus, infant and young children 100.0% Less Particulate Matter – Contributor to respiratory problems 78.2% Less (1) The average emission rates for the U.S. fossil fuel fleet were obtained from U.S. DOE Electric Power Annual, Mercury Study Report to Congress, and The National Air Quality and Emissions Trends Report.

5. CALPINE Multi-Pollutant Legislation4February 28, 2005 GOALS FOR MARKET-BASED ENVIRONMENTALISM Protect human health and the environment Harness tools of economics to achieve cheaper, faster environmental goals. Allows markets – not regulators – to determine most cost-effective approach to environmental protection

6. CALPINE Multi-Pollutant Legislation5February 28, 2005 KEY ISSUES IN ESTABLISHING A CAP AND TRADE SYSTEM Targets and Timelines  How much to cut?  How fast? Single or Multi Pollutant  Should carbon be included?  Should mercury be traded? Allocation Methodology  Input?  Output?  Auctions?  Fuel Neutral/Fuel Specific? Baseline Calculation  Periodic updating?  Grandfathering?

7. CALPINE Multi-Pollutant Legislation6February 28, 2005 OUTPUT VERSUS INPUT EXAMPLE 1: Sam & Judy are competitors in a pizza delivery service. Both drivers need ‘exhaust tokens’ to drive. Sam’s car consumes 4 gallons over 40 miles while Judy’s consumers 2 gallons over 40 miles. Sam’s car emits twice the exhaust as Judy’s. Under input allocation, Sam’s gas guzzler is advantaged over Judy’s fuel efficient car. Under output allocation, Judy’s investment in fuel conservation and lower emissions is recognized. Common sense tells us that a market-based program should favor (or at least not penalize) Judy.

8. CALPINE Multi-Pollutant Legislation7February 28, 2005 UPDATING VERSUS GRANDFATHERING Example Two: Three years later, Tony moves to town because of the growing demand for pizza. He purchases a hybrid car that needs ½ a gallon to drive 40 miles, with comparable savings in emissions. Under grandfathering, Tony will need to purchase 100% of his tokens in order to drive for decades to come. He pays competitors (Sam and/or Judy) for this ongoing operating cost – even if one of the incumbent cars is retired. Under periodic updating, Tony will eventually be given equal treatment with Sam and Judy Competitive, dynamic economies should welcome new entrants, not create life-long entitlements. Periodic updating provides a balanced, phased-in approach between old and new sources.

9. CALPINE Multi-Pollutant Legislation8February 28, 2005 S. 131: The Clear Skies Act of 2005 Uses cap and trade program Applies to multiple pollutants Establishes timelines and targets Replace other aspects of the Clean Air Act

10. CALPINE Multi-Pollutant Legislation9February 28, 2005 S. 131: The Clear Skies Act of 2005 (Cont) Flaws w/ Clear Skies Allocation Methodology: Input, not output No updating for new entrants / new sources New Source Set Aside far too small Early action and past good behavior is mostly punished through lower allocation allowances

11. CALPINE Multi-Pollutant Legislation10February 28, 2005 S. 131: Clear Skies Act of 2005 (Cont) Calpine Fleet Combination of Judy and Tony Most plants too new to receive ANY allowances Others will receive few allowance due to low capacity factors, high efficiencies and low emission levels. No Good Deed Goes Unpunished  Low state NOx permits levels lead to even fewer allowance for cleanest generators (Calpine’s Fleet w/ SCRs = 75% / Industry Average = 13%) Key states will also face challenges  Fast growing states that need more generation (CA)  States that have made recent gains in efficiency (TX)

12. CALPINE Multi-Pollutant Legislation11February 28, 2005 Conclusion Multi-Emissions Policies w/ Output & Updates Creates strong incentive to invest in efficiency and lower emitting generation Focuses on results, not inputs Leaves room for clean coal (IGCC) w/out taxpayer subsidies Accelerates the upgrading of aging power fleet Allows many co-benefits – including lower CO2 emissions

13. CALPINE February 28, 2005 CALPINE