1. SOUTHWEST POWER POOL ANNUAL LOOKING FORWARD REPORT: Strategic Issues Facing the Electricity Business Slides prepared for: SPP Board of Directors/Members Committee Prepared by: Craig R. Roach, Ph.D. Vincent Musco April 26, 2016

2. TABLE OF CONTENTS I.The Shale Gas Revolution II.EPA’s Continued Environmental Campaign III.Federal vs State Jurisdiction IV.Decentralization and the Changing Utility Model V.Consolidation VI.Electric Vehicles 2 1

3. I. The Shale Gas Revolution Figure 2.1 U.S. Natural Gas Proved Reserves 2 Source: U.S. Energy Information Administration, Form EIA-23L, Annual Survey of Domestic Oil and Gas Reserves. Available at https://www.eia.gov/naturalgas/crudeoilreserves/.https://www.eia.gov/naturalgas/crudeoilreserves/

4. I. The Shale Gas Revolution A.Benefits of Abundance 1.Low electricity prices 2.Option for environmental compliance 3.Accommodation of intermittent wind and solar 3

5. I. The Shale Gas Revolution B.EIA – the revolution will continue 1.Underground risks a.Born of new technology – so difficult to predict b.Optimists – “Big data analytics” c.Pessimists – “too much to ask” 4

6. I. The Shale Gas Revolution B.EIA – the revolution will continue (cont’d) 2.Above-ground risks a.EPA’s drinking water study “We did not find evidence that these mechanisms have led to widespread, systemic impacts on drinking water resources in the United States.” 1 b.Methane emissions c.Earthquakes 5 1 Office of Research and Development. “Assessment of the Potential Impacts of Hydraulic Fracturing for Oil and Gas on Drinking Water Resources (External Review Draft).” Environmental Protection Agency, June 5, 2015. Available at http://cfpub.epa.gov/ncea/hfstudy/recordisplay.cfm?deid=244651 (“EPA Draft Drinking Water Assessment”). http://cfpub.epa.gov/ncea/hfstudy/recordisplay.cfm?deid=244651

7. II.EPA’s Continued Environmental Campaign 6

8. A.President Obama’s Clean Power Plan 1.Final regulations published October 2015 a.1,500-page draft in August b.Existing power plants – 32% reduction in CO 2 emissions by 2030 B.Stayed by the U.S. Supreme Court 1.Opportunity? 2.But recall Waxman-Markey legislation in 2009 7

9. II.EPA’s Continued Environmental Campaign C.Will the CPP stand as is? Three topics 1.Need to cut CO 2 2.Legal authority under Clean Air Act 111(d) 3.Detailed mechanics 8

10. II.EPA’s Continued Environmental Campaign Figure 3.2 Atmospheric CO 2 Concentration Source: Adam Voiland, “Four Graphics (and a Book) that Help Explain Climate Change,” NASA, January 25th, 2016, available at http://earthobservatory.nasa.gov/blogs/earthmatters/2016/01/25/four-graphics-and-a-book-that-help-explain-climate-change/.http://earthobservatory.nasa.gov/blogs/earthmatters/2016/01/25/four-graphics-and-a-book-that-help-explain-climate-change/ 9

11. II.EPA’s Continued Environmental Campaign Table 3.2 Historical Capacity Changes and Associated Generation Levels Source: CPP, Table 9, 64808. 10

12. III.Federal vs State Jurisdiction 11

13. III.Federal vs State Jurisdiction A.EPSA Case – decided 1.Lower courts overturned 2.Yes to demand-side bids in wholesale markets 3.Principles a.Price effect of “no legal consequence” b.Intent matters 12

14. III.Federal vs State Jurisdiction “When FERC sets a wholesale rate, when it changes wholesale market rules, when it allocates electricity as between wholesale purchasers—in short, when it takes virtually any action respecting wholesale transactions—it has some effect, in either the short or the long term, on retail rates. That is of no legal consequence.” 1 “We will not read the FPA, against its clear terms, to halt a practice that so evidently enables the Commission to fulfill its statutory duties of holding down prices and enhancing reliability in the wholesale energy market.” 2 13 1 EPSA Decision, Syllabus, 2. 2 Ibid., 29.

15. III.Federal vs State Jurisdiction B.Maryland case – pending 1.If apply same principles, lower court will be overturned 2.Preemption ruling relied heavily on state affecting wholesale price now of “no legal consequence” 3.Intent not considered Maryland’s intent was to keep the lights on, a state responsibility even under FPA 14

16. IV.Decentralization and the Changing Utility Model 15

17. IV.Decentralization and the Changing Utility Model A.No evidence of imminent large-scale displacement of grid services 1.Utility-scale renewables cheaper 2.Stand-alone technology not fully reliable, cost- effective 3.Net metering relies on grid – purchases and sales 16

18. IV.Decentralization and the Changing Utility Model Figure 5.1 Lazard’s Unsubsidized Levelized Cost of Energy Comparison Source: Lazard, “Lazard’s Levelized Cost of Energy Analysis – Version 9.0,” November 2015, 2. 17

19. IV.Decentralization and the Changing Utility Model B.Still, cultural drivers matter… 1.100% renewables 2.“Doorstep” reliability 3.Choice C.…as does policy 1.Net Metering 2.State Actions 3.Transmission Costs 18

20. V.Consolidation 19

21. V.Consolidation A.Active M&A scene 1.Number of IOUs cut from 100 to 48 in last 20 years 20

22. V.Consolidation A.Active M&A scene 2.Market capitalization for top 5 utilities – increased 105% 21

23. V.Consolidation B.Why matters? Competition, Governance 22

24. VI.Electric Vehicles 23

25. VI.Electric Vehicles A.Same small market share 1.EVs and hybrids only 1.7% of 253 million cars in U.S. B.How EV penetration may increase – the “SHEAM” Model 1.Driverless vehicles 2.Shared services like Uber and Lyft 3.Increase “utilization rate” of cars 4.Battery costs – not enough to predict 24

26. VI.Electric Vehicles C.Investors 25 Source: Wall Street Journal, “Car Makers Hunger for Self-Driving Tech,” March 24, 2016.