1. Identifying the Appropriate Allocation Approach A Response to the RFF White Paper Mark D. Younger Slater Consulting RGGI Regional Meeting April 6, 2005

2. Identifying the Appropriate Allocation Approach _________________________________________________ If the decision is made to go forward with an RGGI Model Rule, any of the proposed alternatives – historic, updating, auction or some combination thereof – will achieve the desired cap. If the decision is made to go forward with an RGGI Model Rule, any of the proposed alternatives – historic, updating, auction or some combination thereof – will achieve the desired cap. The alternative that is chosen, however, can lead to significant adverse reliability and market impacts. The alternative that is chosen, however, can lead to significant adverse reliability and market impacts. Unlike SO 2 and NO x, there are no equipment alternatives to limit CO 2 emissions by some types of units. Unlike SO 2 and NO x, there are no equipment alternatives to limit CO 2 emissions by some types of units.

3. Identifying the Appropriate Allocation Approach _____________________________________ Identifying the appropriate allocation approach becomes the most critical consideration in this process. Identifying the appropriate allocation approach becomes the most critical consideration in this process.

4. RFF White Paper - Need for Further Information and Analysis _________________________________ A number of concerns about the over- simplification of the electric system were raised last fall, which have not been addressed. A number of concerns about the over- simplification of the electric system were raised last fall, which have not been addressed. A review of this most recent paper also reveals a number of incongruous results. A review of this most recent paper also reveals a number of incongruous results.

5. The Appropriate Allocation Approach - Key Considerations _____________________________________ Fuel diversity Fuel diversity Natural gas availability – infrastructure limitations Natural gas availability – infrastructure limitations Impact on competitive wholesale markets Impact on competitive wholesale markets Leakage ramifications Leakage ramifications Impact on electric prices faced by consumers. Impact on electric prices faced by consumers.

6. Choosing an Approach - Shortcomings of the Auction Model __________________________________________ Auction model will lead to negative effects in each of these areas: Auction model will lead to negative effects in each of these areas: Places significant financial strain on units critical to maintain fuel diversity in the region Places significant financial strain on units critical to maintain fuel diversity in the region Assumes significant increased reliance on natural gas units without addressing whether sufficient infrastructure exists to support such reliance Assumes significant increased reliance on natural gas units without addressing whether sufficient infrastructure exists to support such reliance Likely to lead to the need for RMR contracts and other “band-aid” rules that will erode competitive markets Likely to lead to the need for RMR contracts and other “band-aid” rules that will erode competitive markets Likely to lead to increased generation by external down-wind resources Likely to lead to increased generation by external down-wind resources

7. Choosing an Approach - Shortcomings of the Auction Model _____________________________________ Largely untested approach Largely untested approach In the Federal Acid Rain program, 2.8% of annual SO 2 allowances are auctioned on an annual basis. In the Federal Acid Rain program, 2.8% of annual SO 2 allowances are auctioned on an annual basis. Proceeds flow back to sources. Proceeds flow back to sources. In Virginia, 8.75% of NO x allowances were auctioned on a 1-time basis for a 2-year term. In Virginia, 8.75% of NO x allowances were auctioned on a 1-time basis for a 2-year term.

8. Choosing the Appropriate Approach - Proven Success of Historic Model _____________________________________ In contrast, historic model has been used successfully for other allowance programs In contrast, historic model has been used successfully for other allowance programs National SO 2 program National SO 2 program Regional NO x programs Regional NO x programs State allocation programs State allocation programs

9. Choosing the Appropriate Approach - Limited Impacts of Historic Model _____________________________________ Historic model will provide desired results with the most limited impacts. Historic model will provide desired results with the most limited impacts. Historic model will allow continued fuel diversity. Historic model will allow continued fuel diversity. Historic model will have the most limited effect on the competitive wholesale markets. Historic model will have the most limited effect on the competitive wholesale markets.