The McGraw-Hill Companies Generation & Transmission Industry Trends Douglas M. Logan, Principal Platts Research & Consulting / RDI Presented to: PES Policy Development Coordinating Committee IEEE Summer Power Meeting Chicago - July 24, 2002

2 Outline North American generation outlook Global generation outlook Transmission trends Regulatory trends

3 North American Generation Development NEWGen July 2002 database shows 715,000 MW of projects in the U.S. and Canada.

4 Tabled and Canceled Projects Tabled and canceled projects have surged since November 2001.

5 What Is Getting Tabled or Canceled? NEWGen March 2002 database shows 66,500 MW of projects in April 2001 database tabled or canceled since April Status in April 2001

6 What Is Getting Built? Gas still rules.

7 North American Generation Capacity Additions After removing tabled or canceled projects there are 537,000 MW of active projects in the U.S. and Canada. But...

8 North American Additions in Historical Perspective The current boom is modest relative to what happened in the 1970s.

9 Projected U.S. Supply / Demand Balance Surpluses may persist in some regions through But shortages may return if generation development fails to pick up again.

10 Wholesale Power Market Price Trends High prices in the West collapsed a year ago. Midwest price spikes have not recently recurred.

11 Projected Wholesale Power Market Prices High prices last year in the West and moderate prices elsewhere have given way to low prices as surplus develops.

12 RDI Baseline Gas PriceForecast The long-term price outlook is between $2.75 and $3.50 per mmBtu.

13 Sources of U.S. Incremental Supply The Gulf-of-Mexico, the Rocky Mountains, Eastern Canada, and Arctic supply all will share a role with LNG in growing the U.S. gas supply base. Several of these marginal sources – deep onshore gas, LNG, the Eastern Canadian offshore areas - and the Northern Frontier have surprisingly similar full-cycle development costs.

14 Global Generating Capacity Additions The global outlook is heavily dependent on what happens in Asia.

15 Global Generating Capacity Additions

16 Trend in Planned Transmission Additions The declining trend in planned transmission additions has bottomed out. Source: NERC ES&D database, various years. Planned additions as % of existing miles

17 Length Distribution of Planned Transmission Additions Planned additions are still dominated by short projects. Source: NERC ES&D database, 2001.

18 Generation Development Mid-Atlantic The current pattern of generation development is dominated by gas-fired projects near load centers. Source: NEWgen database; POWERmap.

19 Financing Transmission Projects Rolled in –ERCOT Transmission Expansion Allocated between system & generation –PJM RTEP Participant funded with firm rights –Path 15 Upgrade Merchant –Neptune

20 Path 15 Upgrade - Participants Trans-Elect72%$249.6M Line PG&E18% 55.1MSubstations Western, PM10% 1.3MLand

21 What Is a Merchant Project? Assumes full market risk Creates tradeable transmission rights Makes initial capacity allocation by open season Allows access by competitors Is subject to market monitoring Does not impair existing rights Is subject to RTO coordination & reliability requirements

22 Trans-Elect Formed early 1999 First truly independent transmission company First acquisition July 4, 2001 Goal: Two acquisitions per year Owns 12,600 miles of line, acquired from: –TransAlta –Consumers Energy

23 Business Plan Roll-up of transmission assets in North America Purchase from: –Investor-owned utilities –Municipals and cooperatives Construction of additional transmission capacity Privatization of government facilities Source: Presentation by Fred Buckman, January 24, 2002.

24 Business Plan Premises –Transmission is not a growth asset. –Transmission divestiture is a growth strategy. –Transmission divestiture is a solution to the issue of marketplace independence. Source: Presentation by Bernie Schroeder, March 25, 2002.

25 Business Plan The case for divestiture –Utility stock prices have under-performed most major averages. –Aggressive restructuring is rewarded in share price. –Regulators will reward divestiture. –Passive control devalues asset. Source: Presentation by Bernie Schroeder, March 25, 2002.

26 Business Plan Benefits to the seller –No more FERC regulation –Opens up several options to improve shareholder value –Creates cash for seller –Regulatory incentives for independent acquisition to be shared with seller –Expansion and quality of service assured by for- profit transmission utility with the single goal of maintaining high standards of reliability –Seller controls reinvestment of sale proceeds Source: Trans-Elect web site.

27 Business Plan Buyers expectations with divestiture –Higher ROE –Favorable capital gains treatment –Favorable capital structure treatment –Incentives to invest new capital –Long-term rate freezes. Source: Presentation by Bernie Schroeder, March 25, 2002.

28 How Trans-Elect Will Make Money -- The Risks What is assured –Regulated rate of return What is not assured –ROE premium on acquisition –Recovery of acquisition premium –ROE premium on new facilities –Performance-based regulation

29 FERCs Repeated Attempts to Create Open Power Markets Attempt #1 - Orders No. 888 & 889 –To establish non-discriminatory access Attempt #2 - Order No –To promote independent control of systems Attempt #3 - July 2001 Mediation Orders –To address recalcitrance and potential problems with small RTOs Attempt #4 - Standard Market Design –To address unwillingness to form super-RTOs FERCs orders are multiple attempts to eliminate discrimination in transmission access and administration.

30 RDI Transmission Study