1. CEO Climate Change Task Force Meeting A Wall Street Perspective Karl H. Pfeil III Managing Director Public Power December 3, 2007

2. www.fitchratings.com2 The Credit Impact of Environmental Compliance >Criteria – Managing Your Risks. >Public Powers’ Environmental Credit Drivers

3. www.fitchratings.com3 Primary Credit Factors Utility’s Credit 1. Mgmt 2. Customer Base 3. Risk Management 4. Power Supply 5. Finances 6. Rates7. Legal

4. www.fitchratings.com4 Location, Location, Location >Each region has distinct characteristics affecting the utilities’ credit profile: —Fuel supply of wholesale market. —Status of deregulated markets. —Status of transmission environment. —Regional politics. —Service territory characteristics. —Environmental mandates. —Ability to implement?

5. www.fitchratings.com5 CO 2 Regulation: Not if but when >Fitch believes that there will be a carbon law at the federal level; however, it may be a number of years off. >Increasing number of state regulators are placing a cost on carbon in rate making proceedings. >More traditional Wall Street investors are now looking at carbon issues. >Desire of industry participants to reduce regulatory risk by reducing uncertainty.

6. www.fitchratings.com6 Current Industry Response to a Carbon Constrained Environment >Build Clean Coal Plants >Estimate and inform Investors as to Possible Costs >Improved Efficiency >Demand Side Management

7. www.fitchratings.com7 Challenges for CO 2 >The power industry will need economically feasible CO 2 emission control technology >The development of these devices will be challenged by: –The time horizon for investors and developers –The time horizon for electric power generators –A realistic estimate for the price of “carbon” is challenged by the lack of US regulation. >Ultimate market size >Uncertainty of –Timing –Regulatory framework

8. www.fitchratings.com8 Environmental Regulation: Effect on Credit Profiles >Increasing CapEx >Higher Operating Costs >Leading to: –Higher energy costs –Increasing wholesale and retail rates –Increased leverage –Lower financial margins

9. www.fitchratings.com9 Environmental Regulation: Effect on Credit Profiles (cont.) >Who pays? –Deregulated States (SO2, NOx, CO2, Mercury) - the generator? >Public Power –Deregulated States (Renewables) - the LSE? >Public Power –States with vertically integrated utilities? >Public Power >Who might benefit? –Large nuclear operators >Most vulnerable? –Generators in deregulated states where gas is on the margin –Companies with weak credit profiles

10. www.fitchratings.com10 Renewable Portfolio Standards (and Goals) State Goal ☼ PA: 18%¹ by 2020 ☼ NJ: 22.5% by 2021 CT: 23% by 2020 MA: 4% by 2009 + 1% annual increase WI : requirement varies by utility; 10% by 2015 goal IA: 105 MW MN: 25% by 2025 (Xcel: 30% by 2020) TX: 5,880 MW by 2015 ☼ AZ: 15% by 2025 CA: 20% by 2010 ☼ * NV: 20% by 2015 ME: 30% by 2000 10% by 2017 - new RE State RPS HI: 20% by 2020 RI: 16% by 2020 ☼ CO: 20% by 2020 (IOUs) *10% by 2020 (co-ops & large munis ) ☼ DC: 11% by 2022 ☼ NY: 24% by 2013 MT: 15% by 2015 IL: 25% by 2025 VT: RE meets load growth by 2012 Solar water heating eligible *WA: 15% by 2020 ☼ MD: 9.5% in 2022 ☼ NH: 23.8% in 2025 *VA: 12% by 2022 MO: 11% by 2020 ☼ *DE: 20% by 2019 ☼ NM: 20% by 2020 (IOUs) 10% by 2020 (co-ops) ☼ NC: 12.5% by 2021 (IOUs) 10% by 2018 (co-ops & munis) ND: 10% by 2015 OR: 25% by 2025 (large utilities ) 5% - 10% by 2025 (smaller utilities) ☼ Minimum solar or customer-sited RE requirement * Increased credit for solar or customer-sited RE ¹PA: 8% Tier I / 10% Tier II (includes non-renewables) Source: DSIRE (www.dsireusa.org), September 2007

11. www.fitchratings.com11 “Renewable” Technologies (state specific) Frequently on the list >Wind >Solar thermal electric >Photovoltaic >Landfill gas/methane >Fuel cells >Municipal solid waste >Geothermal electric >Biomass >Tidal/wave/ocean thermal Also included >Geothermal heat pump >Hydroelectric >Small power generation >Poultry litter >Sustainably harvested biomass >Resource recovery facilities >Ethanol, methanol, biodiesel >Anaerobic digestion >Waste energy >Coal bed methane

12. www.fitchratings.com12 Where the Wind Blows

13. www.fitchratings.com13 Where the Sun Shines

14. www.fitchratings.com14 Summary of Issues Strengths >Low operating costs –No fuel –Minimal O&M (wind, PV) >Annual production is reliable >Peak shaving (solar) >Distributed generation (PV Solar) >Proven technologies >Environmentally friendly Weaknesses >High capital costs >Day to day production is volatile –Need for back-up power >Best locations far from load center >Large land requirements Indicative Total Installed Cost CCGTSSWindSolarPV $700$475$2000$4500$6000

15. www.fitchratings.com15 RPS Compliance vs. Technology Issues >Expect wind to be primary means of compliance. –Requires additional investment for back-up capacity –Increased ancillary services >Prime locations for wind and solar are distant from load. –Significant transmission –Difficult to satisfy in-state production requirements >Allow purchase of green credits (especially in Southeast) >Encourage consumer involvement –Financial incentives to conserve –Financial incentives to self-generate (PV solar)

16. www.fitchratings.com16 The Credit Impact

17. www.fitchratings.com17 Many coal units will be replaced

18. www.fitchratings.com18 For a Stable Sector – The issues are very complex Housing Declines Housing Declines Rates / Regulation Fuel Costs Fuel Costs Environmental Regulation Environmental Regulation New Generation Increasing Capital Costs Increasing Capital Costs

19. www.fitchratings.com19 Governance / Management >Single most important credit factor that affects all other areas of a utility. –Organizational strategy. –Working relationship between Management and Board of Directors (council). –Ability to get things done (track record). –How will this impact your utility compared to others in your region? –Know your risk – The more you understand your risks the better you can plan for them.

20. www.fitchratings.com20 Fitch Public Power Credit Outlook for 2008 >Outlook for 2008 is Stable with the longer term Outlook reflecting increasing Negative pressures. >While our near-term outlook for the sector is stable, the public power industry remains vulnerable to challenges that could pressure some credit ratings into the future. >Public power has historically proven itself to be a very solid investment despite past complexities facing the industry such as deregulation, fuel price volatility, and the corporate credit crisis. >Q: Going forward how will public power address the new issues: growing power resource needs, higher capital and labor costs, and uncertainties associated with environmental policies and renewable portfolio standards, which have made it harder to build new coal-fired generation and limits the options for new base-load power resources? –The answer rests with management!

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