The Changing US Electric Sector Business Model CATEE 2013 Clean Air Through Energy Efficiency Conference San Antonio, Texas December 17, 2013

Copyright © 2013 Deloitte Development LLC. All rights reserved. Fundamentals of the US Electric Sector Business Model Today’s Challenges Faced by U.S. Electric Sector The Math Does Not Lie: A Look into the Sector’s Future Disruption to Today’s Electricity Business Model Observations on the Future and Conclusions Presentation overview 2

Copyright © 2013 Deloitte Development LLC. All rights reserved. Fundamentals of the US electric sector business model The regulatory compact – safe, reliable and affordable electricity And a new one – environmentally friendly Substantial investment in long lived infrastructure asset Electric sector investment is based on long-term forecast of future levels of electricity load, usage and prices 3

Copyright © 2013 Deloitte Development LLC. All rights reserved. Today’s challenges faced by U.S. electric sector Current sources of electricity generation ‒ Coal (37%) ‒ Natural Gas (30%) ‒ Nuclear (19%) ‒ Renewables (13%) ‒ Oil (1%) Current and forecasted future price of natural gas renders any other fossil fuel (and nuclear) most likely uneconomical for electricity generation Renewable portfolio standards (29 states and DC) put priority on solar, wind and energy efficiency regardless of associated economics Forecasts of future electricity demand are debatable, and in some cases expected to decline 4 In many cases, it may no longer be about adding incremental megawatts, but balancing future megawatts to ensure safe, reliable, affordable – and environmentally friendly – electricity

Copyright © 2013 Deloitte Development LLC. All rights reserved. The Math Does Not lie: A Look into the Sector’s Future The future can be evaluated with a simple mathematical equation 5 Cost per kWh sold ($/kWh) Cost of electricity sold ($) Number of kilowatt hours (kWh) consumed

Copyright © 2013 Deloitte Development LLC. All rights reserved. Variables to include in the equation 6 The Numerator: Cost of Electricity Sold The Denominator: kWh Consumed Capital and Operations CostsConsumption Capital costs Generation, transmission and distribution additions Environmental regulation compliance Renewable portfolio standards Nuclear safety regulations Cost of capital/interest rates Operations costs Cost of fuel, primarily natural gas and coal Incremental operations costs of environmental compliance retrofits New operating technologies Changes in weather Changes in the economy New sources of electricity demand Technological advances in energy efficiency Customer attitudes and behaviors

Copyright © 2013 Deloitte Development LLC. All rights reserved. The role of the U.S. electric customer - Consumers Findings of Deloitte reSources 2012 Study* of over 2,200 demographically-balanced household decision makers 7 83 percent of consumers reported they took steps to reduce their electricity consumption – up from 68 percent in the 2011 Study. The primary steps taken were behavioral in nature  turning off lights  shutting down electronics when not in use  adjusting the thermostat in the summer and winter  changing over to compact fluorescent lights While interest in purchasing smart energy technologies is relatively low, it is noticeably growing, with younger adults clearly more receptive to making the investment. * Deloitte Development LLC. Deloitte reSources 2012 Studies: Insights into Corporate Energy Management Trends and Insights into Emerging Trends of Energy Customers. May 2012

Copyright © 2013 Deloitte Development LLC. All rights reserved. The role of the U.S. electricity customer - Businesses Findings of Deloitte’s reSources 2012 Study* of business activities of over 600 companies with greater than 250 employees: 8 90 percent of U.S. businesses have set goals for managing electricity usage. Of these companies, 85 percent cite reducing electricity costs as essential to staying competitive – up from 76 percent in Other reduction goals: Natural gas – 58% Carbon footprint – 56% Transport fleet – 51% The average target for reduction in electricity consumption is 23 percent over approximately a 3.5 year period. Other average target reductions: Natural gas – 23% Carbon footprint – 23% Transport fleet – 25% 35 percent of businesses report some level of self-generation of electricity with another 17 percent planning to do so in the future. * Deloitte Development LLC. Deloitte reSources 2012 Studies: Insights into Corporate Energy Management Trends and Insights into Emerging Trends of Energy Customers. May 2012

Copyright © 2013 Deloitte Development LLC. All rights reserved. The Math in action: 9 The numerator is going up and the denominator may well be going down, over time, for the first time in the history of the U.S. electric industry

Copyright © 2013 Deloitte Development LLC. All rights reserved. The Math suggests a real dilemma 10 Will rising electricity costs and prices lead to further decreases in the denominator and even higher costs per kWh? Will the price to individual consumers invoke even greater end- user investment in energy efficiency? Will there be a wave of new, economically priced technologies designed to enable greater consumer and business control over their energy consumption? Since variables affecting results will vary from company to company, every company must do its own math.

Copyright © 2013 Deloitte Development LLC. All rights reserved. Disruption to today’s electricity business model Driving forces of disruption: ‒ Federal and state regulatory policy – the “cost” of environmental compliance ‒ Declining demand for electricity ‒ Technological advances in renewables, storage and energy efficiency Where will disruption occur and new business models begin to emerge? ‒ Disruption will likely occur in California and New England Electric companies do not have their “heads buried in the sand” ‒ Defensive and offensive strategies are emerging 11

Copyright © 2013 Deloitte Development LLC. All rights reserved. Observations on the future and conclusions Majority of new base load generation will serve to replace existing capacity – not to add new capacity For the foreseeable future, the only economic choice will likely be natural gas – and fuel diversity may be compromised Natural gas will play a pivotal role in the long term transition of the U.S. electricity sector – to large scale renewables, distributed generation and microgrids 12 Are we putting “all of our eggs in one basket”? What are we missing this time around?

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