1. 1 Presentation A LOOK AT TIER 2 OPTIONS AND SOME WAYS TO EVALUATE THEM Presented by: Terry Mundorf, Partner Marsh Mundorf Pratt Sullivan & McKenzie May 7 2011

2. 2 Presentation Overview Some considerations for Tier 2 Options Criteria for evaluating Tier 2 Options Sorting Tier 2 Options How do the Tier 2 Options stack up Concluding thoughts

3. 3 Considerations for Tier 2 Options Before we talk details, want to put Tier 2 options in larger context What is happening at BPA and in Region that should be considered when making Tier 2 decisions Changes can make Tier 2 decision look really smart or really dumb At BPA things will change Tiered Rates and the CHWM contract are new, and will likely change over time There will be a new Administrator who may not like tiered rates and the TRM Over time, TRM and CHWM contract strictures will loosen, implementation will become more flexible, TRM may disappear entirely

4. 4 Considerations for Tier 2 Options (cont’d) Tier 1 entitlement to amount of lowest cost power will change Federal base system capability will likely decrease over time Under Tiered Rates, loss of capability will not be replaced Means amount of Tier 1 power available to City will likely decrease over time Some of the load being served with low cost Tier 1 power today will likely become Tier 2 load at some point in the future BPA power system is changing at the Regional level Federal system used to be capacity rich and energy constrained Advent of wind generation and fish constraints have reversed this relationship Federal system is now capacity constrained and energy rich during some portions of the year leading to negative energy prices during some periods Relative scarcity of capacity and abundance of energy reflected in BPA pricing Peak load will cost a lot, energy likely to be relatively cheap from time to time

5. 5 Non-BPA resources Can offer advantages such as keeping money in community The inexpensive resource opportunities are gone, and those that remain have a very long pay-back period Non-BPA resource acquisition is labor intensive even if done in a group setting Non-BPA resource operation is also labor intensive and has high risk profile Cannot control all variable, such as fuel costs, regulatory changes Market can be less expensive – sometimes Market can be less expensive than alternative resources episodically Market can also be far more expensive than alternative resources Trick is to be in the market when it is timely to do so, like right now To rely on market for low cost power requires expertise and is labor intensive Market is not a panacea replacement to BPA Tier 2 supply Considerations for Tier 2 Options (cont’d)

6. 6 How Tier 2 load comes to the City is also a key factor One type of Tier 2 exposure is a steady increase in indigenous load A second type of Tier 2 exposure is when a new large load appears (Wal Mart, industrial concern) Steady load growth can be accommodated within BPA planning windows, while large load increments do not always correspond to BPA planning windows What have we learned in the last 10 years Crystal balls don’t work, regardless of who operates them Many things have happened, many have been unexpected and unforecast (advent of wind, energy market meltdown, recession, load loss, departure of manufacturing base) Helps to plan, but plans do not control the future Considerations for Tier 2 Options (cont’d) (cont’d)

7. 7 Criteria for Evaluating Tier 2 Options Four major criteria for judging the Tier 2 options available to the City Does it provide a secure and relatively low cost supply of power Does it allow the City to spend money in the community Does in allow the City to stay within its core competencies (operating a distribution system and providing customer service) Does it provide a reasonable degree of flexibility in order to respond to changing and unforeseen developments, and to take advantage of new opportunities These criteria are of essentially equal importance and provide a good basis for judging Tier 2 options

8. 8 Sorting Tier 2 Options Tier 2 Options available include BPA Tier 2 Product Short Term Rate Load Growth Rate Vintage Rate Non-BPA resources Local biomass generation Group resource efforts such as ENW Non-BPA market purchases Conservation and demand side resources BPA funded Self funded Let’s see how they stack up to the criteria

9. 9 Tier 2 OptionsLow Cost Power Money Stays In City Relies on Core Competencies Provides Flexibility BPA Short Term Moderate – 2 yr rates based on market No – Money to BPA Yes – Contract management Moderate-Short purchase commitment BPA Load Growth Moderate- Longer purchases No-Money to BPA Yes – Contract management Least – Long purchase commitment BPA VintageModerate- Depends on market price No-Money to BPA Yes- Contract management Unclear – Commitment period varies Non-BPA Resource Low- Capital and fuel risk Maybe-Varies with location No-New cost and operational expertise Least-Long purchase commitment Market Purchases Low-Expose to market volatility No-Money goes to traders No-Requires market expertise Moderate-Short purchase commitment Conservation Demand Mngmt Maximum- Likely lowest cost Yes-Money spent in City Yes – Contract management and customer service Maximum-Subject to program limit

10. 10 City load forecast shows no Tier 2 until 2023 Things can change in a hurry, including loss of CHWM due to loss of Federal system resources Based on the foregoing analysis, looks like Conservation and demand management rate highest for Tier 2 service Of the power supply options, BPA Short Term product offers best combination of low cost, using core competencies and retaining flexibility If take this course, crucial that retail rates and conservation programs provide proper price signals and incentives Key to success depends on action by customers City has been very pro-active regarding power supply and changing electric utility environment Your decisions should continue that approach Concluding Thoughts