1. 1 PG&E Model Thursday, April 19, 2012 Marginal Generation Costs

2. 2 Portfolio Modification PG&E will present : Refresh on PG&Es internal model Differences of PG&Es model with the CPUCs E3 Model Results using PG&Es internal model but with inputs based on publicly available data rather than PG&Es confidential data. Agenda

3. 3 Portfolio Modification Balance year: the year in which there is insufficient existing resources to meet capacity requirements Marginal Capacity Cost each year calculated based on Net capacity cost of an new unit on and after the Balance Year, net capacity cost of an existing unit prior to the Balance Year, and Which new unit sets the margin? Either CT or CC, whichever has the lower net capacity cost for the year Which existing unit sets the margin? Either CT, CC, or ST, whichever has the highest net capacity cost of the marginal unit meeting capacity requirements for the year PG&Es Avoided Capacity Cost Model (1)

4. 4 Portfolio Modification PG&E Calculates Net Capacity Cost for year k for a new unit as: The fixed real annual payments for a unit that comes online in year k that when escalated at the inflation rate are sufficient for investors to recover the return on investment that they do not recover from selling energy over the life of the unit Specifically, Net Capacity Cost is NCC in the following formula: Levelized After-tax inflation-adjusted NCC = Levelized After-tax Fixed Cost - Levelized After-tax Energy Gross Margin Where After-tax Fixed Cost = Initial Equity Investment + After-tax [Insurance + Property Tax + Fixed O&M ] + Debt Principal Payments + After-tax Debt Interest Payments - Depreciation Tax Deduction * Levelization and present value is done using the real cost of equity rate. PG&Es Avoided Capacity Cost Model (2)

5. 5 Portfolio Modification PG&E Calculates Net Capacity Cost for year k for an existing unit as: The going-forward fixed cost of an existing unit that cannot be recovered from selling energy over the year, assuming the plant was fully depreciated. Specifically, Net Capacity Cost is NCC in the following formula: NCC = MAX( Fixed Cost - Energy Gross Margin, 0) Where Fixed Cost = Insurance + Property Tax + Fixed O&M PG&Es Avoided Capacity Cost Model (3)

6. 6 Portfolio Modification E3 Calculates Net Capacity Cost for year k for a new unit as: The fixed real annual payments for a unit that comes online in year k that when escalated at the inflation rate are sufficient for investors to recover the return on investment, less energy margin that a unit can earn in year k Specifically, Net Capacity Cost is NCC in the following formula: NCC = Annualized Fixed Cost - Energy Gross Margin Where Annualized Fixed Cost is X in the following formula: Levelized After-tax inflation-adjusted X = Levelized After-tax Fixed Cost Where After-tax Fixed Cost = Initial Equity Investment + After-tax [Insurance + Property Tax + Fixed O&M ] + Debt Principal Payments + After-tax Debt Interest Payments - Depreciation Tax Deduction * Levelization and present value is done using the cost of equity rate. Difference with the E3 Model (1)

7. 7 Portfolio Modification E3 Model does not calculate the Net Capacity Cost for existing units. E3 Model assumes $28.07/kw-yr for 2008 and take the linear interpolation from 2008 to the Net Capacity Cost for the Balance Year There are methodological differences on energy margin calculation PG&E: Based on the forward price curves, volatilities and correlations E3: Based on historical heat rate and gas price forecast Difference with the E3 Model (2)

8. 8 Portfolio Modification When using the price data in E3 in the PG&E Model, the results are as follows: Using Real-time Prices Using Day-ahead Prices Results from PG&E Model using E3 price data

9. 9 Portfolio Modification Compared with PG&Es Model using PG&Es confidential price data, Using real-time price data and gas price forecast in E3 model provides much lower MGCC Using day-ahead price data and gas price forecast in E3 model provides a similar value for MGCC E3 Model has much higher estimate for MGCC due to its Balance Year Assumption and the Transition Method. Results from PG&E Model using E3 price data

10. 10 Portfolio Modification When using the same inputs, the two models result in similar estimates for the net capacity cost for new CT. Results from PG&E Model using E3 price data (New Units)