Natural Gas for Power Generation National Association of Regulatory Utility Commissioners Annual Meeting November 2010 Richard G. Smead Director, Navigant Consulting Inc. Navigant Consulting Inc. 30 South Wacker Drive Suite 3100 Chicago, IL (312) Fannin Street Suite 1900 Houston, TX (713) ©2010 Navigant Consulting, Inc.

Just how abundant is U.S. Natural Gas supply? How is gas-fired power generation doing in today’s price environment? What are the dynamics of gas-fired power generation in a higher- priced, carbon-constrained environment? ©2010 Navigant Consulting, Inc. 1 To Tell the Story of Gas-Fired Power Generation, There are Three Questions

QUESTION I— U.S. NATURAL GAS ABUNDANCE 2 ©2010 Navigant Consulting, Inc.

3 3 Proved Reserves Plus Assessed Resources—Life of the Gas Resource Yes, There Is a Lot of Gas Resource: The Recognition Started with the American Clean Skies Foundation years at 2006 Prod. Rate 88 years at 2007 Prod. Rate 118 years at 2007 Prod. Rate - U.S. Total Gas Supply (Tcf) 500 1,000 1,500 2,000 2,500 PGC 2006 Mean Assessment Navigant StudyPGC 2008 Estimate Released June 2009 tcf Shale Resource All Other Technically Recoverable Resource In 2006, the Potential Gas Committee (PGC) estimated 1,530 Tcf of total Recoverable Resource. In 2008, the American Clean Skies Foundation had Navigant perform the North American Natural Gas Supply Assessment. This study found that shale and other unconventional supplies had increased the resource to as much as 2,247 Tcf, including 842 Tcf of shale gas.. This would be 118 years of production at 2007 levels. In June 2009, PGC issued its 2008 updated study—2,076 Tcf, including 616 Tcf of shale, also over 100 years’ worth.

4 ©2010 Navigant Consulting, Inc. For 15 years, Domestic Production was Flat, with Growing Imports— Then in 2005, the Ramp-up Began

5 ©2010 Navigant Consulting, Inc. The Last Five Years Have Been Very Different—Thanks to Domestic Growth, Supply Now Exceeds Demand, and Imports are Shrinking

©2010 Navigant Consulting, Inc. 6 The Really Dramatic Story is Onshore, where Between 2005 and 2008, Enough Production Was Added to Replace Offshore From 2005 to 2008, the daily energy added from onshore sources exceeds the thermal content of all the oil we import from Saudi Arabia.

7 ©2010 Navigant Consulting, Inc. What about Shale Gas? EIA Developed a Robust Forecast in 2010

8 ©2010 Navigant Consulting, Inc. But Actual Production has Far Exceeded Even the 2010 Aggressive Forecast

9 ©2010 Navigant Consulting, Inc. Producers Expect the Trend to Continue if There’s a Demand for the Gas— 2010 Actuals Exceeded Even the Producers’ 2009 Forecast

10 ©2010 Navigant Consulting, Inc. The Recent MIT Gas Study Sponsored by ACSF Shows Similar Rates of Increase Source: “The Future of Natural Gas, Massachusetts Institute of Technology, 2010

11 ©2010 Navigant Consulting, Inc. Based on that Producer Forecast, There Would Be Enough Additional Supply by 2020 to Displace Over Half of All U.S. Coal-Fired Generation

QUESTION II— GAS-FIRED GENERATION TODAY 12 ©2010 Navigant Consulting, Inc.

13 ©2010 Navigant Consulting, Inc. Gas Use for Power Generation Has Been on a Steady Increase

14 ©2010 Navigant Consulting, Inc. Gas Has Gained Market Share vs. Coal, A Little Over 2 Percent

15 ©2010 Navigant Consulting, Inc. Why? For the last two years, this is mostly just a matter of price Delivered Eastern Coal vs. Appalachian Gas $0.00 $2.00 $4.00 $6.00 $8.00 $10.00 $12.00 $14.00 $16.00 Dominion, South PointCentral Appalachian Coal Delivered Price per MMBtu

QUESTION III— GAS-FIRED GENERATION WITH HIGHER PRICES AND CARBON CONSTRAINTS 16 ©2010 Navigant Consulting, Inc.

17 ©2010 Navigant Consulting, Inc. More than one-half of U.S. Gas fired-electric generation is generated by peaking facilities that operate at extremely low capacity factors and high heat rates. It is High-Efficiency Combined Cycle Capacity that is critical to examine. U.S. Generation—What Do We Have, and What Do We Use? 2009 U.S. Total Generation and Capacity for Gas, Coal and Other CapacityPct. of TotalGenerationPct. OfCapacityHeat Rate MWCapacity1,000 MWhTotal Gen.FactorBtu/kWh Other Gas202,33520%175,2174%10%10,011 Combined Cycle196,17519%745,16119%43%7,423 Coal Generation312,88731%1,764,48645%64%10,386 Other Generation302,04430%1,268,24732%48%- US Total 20091,013,441100%3,953,111100%45%-

But $3 to $4 is not a Sustainable Range for Gas Prices—So What Are the Economics vs. Coal if Gas is $6 at the Wellhead and $7 at the Plant? ©2010 Navigant Consulting, Inc. 18 Fuel Cost PriceHeat Rates$ per Mwh Gas$7.00 per MMBtu 7000$49.00 Coal$50.00 per Ton 10000$25.00 Difference$24.00 Carbon CO2 load per EIAHeat Rates lb per Mwh Gas115 lb/MMBtu lb/Mwh Coal213 lb/MMBtu ,130lb/Mwh Difference1,325lb/Mwh or,0.60 Tonnes/Mwh Break-even Carbon Price Fuel Price Difference:$24.00per Mwh Divided by CO2 Difference:0.60Tonnes/Mwh Equals $40per Tonne

19 ©2010 Navigant Consulting, Inc. Cap FactorGenerationHeat RateFuel UsedCarbon 2009Pct1000 MWhBtu/KwhTBtuMMT Gas CC43%745,1617,4235, Coal64%1,764,48610,38618,3261,772 2,061 Same Capacity Factor Gas CC56%967,1327,4237, Coal56%1,542,51510,38616,0211,549 1,924 Difference:137 Coal and Gas CO2 Emissions, 19901,822 Coal and Gas CO2 Emissions, 20082,415 Increase:593 Share of Increase Relieved by Gen Shift: 23% Carbon Dioxide—How Much Could Be Done with Existing Facilities (Realistically)?

Key C O N T A C T S 20 ©2010 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy. ENERGY Rick Smead | Director direct Gordon Pickering \ Director direct