Allegheny Power Residential Demand Response Program Demand Side Stakeholders Review February 26, 2008

Agenda RDR Program Summary Q&A Description Benefits Costs Benefit/Cost Ratio Sensitivity Analysis Conclusions Q&A

Program Description Voluntary residential A/C control program Device Options (one-way communication) Smart thermostat (indoor) Smart switch (outdoor) Available cycling options 100% during PJM declared (emergency) events 50% during PJM (emergency) or AP (economic) declared events Incentive Payments 100% cycling = $50/yr 50% cycling = $25/yr Credited equally to first four bills rendered from June through September Interruption quantity and duration Up to 10 events per year (June-May) Up to 6 hours duration per interruption Opting out of an event Participants would receive day-ahead notification of an event (delivery method is technology dependent) Participants may opt out of one event per year without penalty Participants that insist on more than one opt-out will be removed from the program and forfeit any remaining incentive payments

General Assumptions/Statistics Potential universe of participants 220,000 residential customers (2007) A/C saturation = 51% Electric heat pump saturation = 13% Eligible participants = 148,800 by 2011 Assumed participation rate = 10% Assumed participant cycling option selection 100% cycling = 10% 50% cycling = 90% Assumed device selection Smart thermostat = 50% Smart switch = 50% Weighted-average participant load reduction = 0.778 kW

Program Benefits Benefits were identified in four areas: Direct benefits are savings derived from a customer participating in the program Direct Capacity Direct Energy Indirect benefits are savings that result from greater demand elasticity and more efficient market operation Indirect (Mitigation) Capacity Indirect (Mitigation Energy

Direct Benefits Direct capacity benefits Available ILR or DR resources Capacity value

Direct Benefits (Cont.) Direct capacity benefits (Cont.) Bid Strategy Resources available in February each year would be offered into the ILR program for the upcoming delivery year Resources available in February each year would also be offered into the RPM BRA for the delivery year 3 years in the future NPV = $6,522,068 Direct energy benefits Assumes full 60 hrs per year Energy price = $195.89MWh 2005, 2006, 2007 PJM LMP for AP Zone Ten highest priced events, 6 contiguous hours NPV = $426,037

Indirect Benefits Indirect capacity benefits Indirect energy benefits Offering DR resources in the RPM BRA reduces the amount of more expensive capacity that must be cleared to meet PJM’s IRM Constrained LDA vs RTO AP Zone and SW MACC have different VRR curves Value of reducing 1 MW in SW MAAC is approximately 5 times greater than in AP Zone AP Maryland residual residential load is approximately 5 times smaller than BGE NPV = $643,062 Indirect energy benefits Relied on Brattle Group Study Net benefits to AP Zone = $400,000/yr Maryland residential allocation = $36,662/yr NPV = $303,814

T&D Benefits AP did not project any T&D benefits resulting from the RDR program AP is dual-peaking Since 2002, AP has set its annual peak during the winter season 3 times Over the same period, the winter peak has averaged 98.4% of the summer peak A summer demand response program may not alter the need for system upgrades or reinforcements

Program Costs Program costs are not vendor specific and include: Cost of, installation and on-going maintenance of field devices Cost of, integration and on-going maintenance for back-office IT hardware and software Operating costs, including program administration, contractor costs, M&V and customer incentives Since AP does not have the necessary communications infrastructure, communication is via 3rd party service estimated at $60/point/yr

Program Costs (Cont.) Utility Incentive Tiered shared-benefit structure calculated as a percentage of the sum of the direct and indirect capacity benefit and the direct energy benefit

Benefit/Cost Ratio NPV Benefits = $7,895,000 NPV Costs = $18,990,000 BCR = 0.39

Sensitivity Analysis

Conclusions AP does not recommend implementation of an air conditioner cycling program at this time AP will continue to explore ways to lower implementation costs, such as the Advanced Utility Infrastructure Pilot AP will also continue to evaluate and recommend cost effective DSM programs for implementation, such as the those included in this filing Energy Conservation Kits for Residential Customers LED Traffic Signals LED Exit Signs