THE ECONOMIC FEASIBILITY OF POWER PLANT RETIREMENTS ON THE ENTERGY SYSTEM Presented to the LOUISIANA PUBLIC SERVICE COMMISSION November 9, 2005 Open Session Phil Hayet, J. Kennedy & Associates, Inc. Matt Kahal, Exeter Associates, Inc.

1 STUDY PROCESS Special Counsel – Stone Pigman Walther Wittman, LLC Staff Counsel – Matthew Loftus Study Monitoring Group --Jim Dauphinais (LEUG) --Mark Rossi (sponsoring merchant generators) --Steve Dingle (Entergy Companies) Numerous meetings and technical conferences. Opportunities for comments on both front end and back end. Merchants invited to provide certain data inputs.

2 STATEMENT OF THE PROBLEM Entergy has 14,000 MW of old, inefficient capacity, with 65 percent assigned to ELI/EGS. 17,000 MW more efficient merchant generation, most of which is uncommitted and connected to Entergy grid. SSRP will add 4,000 to 5,000 MW of new capacity to serve projected needs, but no plan to retire any of the old capacity. Entergy generates about 22 million mWh per year from old oil/gas units, about 18 percent of total system supply. Past studies showed enormous savings from a retirement/replacement plan. Claimed Solution: Allow merchant units to compete with Entergy’s old inefficient capacity.

3 A REALISTIC STUDY MUST ACCOUNT FOR FOUR FACTORS (1)Entergy’s ability to purchase from economy energy market and displace old generation. (2)The SSRP which adds thousands MW of new capacity, driving down usage of old units. (3)Transmission constraints that force certain old units to operate. (4)New capacity to replace retired capacity comes at a significant cost. --These factors not adequately reflected in past studies.

4 SOURCES OF RETIREMENT SAVINGS --Old, low value units occupy scarce transmission rights. Transfer those rights to higher value units. --Substitute generation from new, efficient units for generation from old units and from economy purchase power. --Avoid certain unit fixed costs incurred at old units (O&M, property taxes, cap adds). But – we must incur a cost to obtain the replacement capacity (Entergy is short on capacity, not surplus).

5 STAFF METHODOLOGY --Search for net savings Four retirement cases: -3,000 MW -2,000 MW -1,300 MW -Retire/replace one major unit in Amite South. --Utilize Entergy planning data and assumptions (including SSRP). --Energy cost impacts measured using Entergy’s Promod IV model. --Fixed costs developed using financial spreadsheet model and Staff judgment on capacity acquisition costs and Staff financial assumptions. --Net savings=Energy savings + avoided O&M of retired units – acquisition costs of new units. W:\2978\mik\Power Plant Slides.ppt

6 PROMOD MODELING --Entergy’s own customized model used for a variety of business and regulatory purposes. --It incorporates system agreement accounting and hence can provide individual operating company results. --Includes substantial transmission detail and generator must run constraints. --Staff’s challenge was to develop a “Base Case” that reflected the reality of its System operations. This required modifications to Promod modeling.

7 RESULTS OF ANALYSIS Retirement scenarios produced energy savings but in many cases this was offset by costs of replacement capacity. 1,300 MW revealed some net savings for System and ELI when acquisition prices were low to medium. High gas sensitivity case (20% increase) resulted in bigger net savings under 1,300 MW retirements under all acquisition prices. Amite South case produced net savings for System, ELI and EGS. Staff was asked to run “SSRP Sensitivity.” This sensitivity increases savings but is subject to different interpretations.

8 EMISSIONS ANALYSIS Not a full environmental impact analysis, restricted to CO 2 and NO X. Conducted for 1,300 MW retirement case as an illustration. NO X savings is about 1,512 tons per year. CO 2 savings is about 425,000 tons per year. Gas savings of about 7.2 million MMBtu per year. (Reduced gas usage helps reduce pressure on gas prices).

9 STAFF RECOMMENDATIONS (1)Whether net savings from retirements can be obtained may depend on market offers for new capacity. Hence, Entergy should “test” retirements as part of an RFP process. Staff study not a retirement blueprint. (1)If retirement is economically justified, the replacement capacity should be reasonably long term. (3)Entergy should proceed expeditiously to plan for a new energy resource in the Amite South subregion. (4)If Entergy incurs a major component failure of an older gas/oil unit (non-RMR) that requires a major capital investment, it should investigate the retirement option before making the investment. (5)Entergy should submit annual reports to Commission on progress to reduce its high cost generation.

10 STAFF RECOMMENDATIONS (Cont’d.) (6)Develop better data on fixed O&M costs that could be saved through retirement. (7)Revisit and correct Promod modeling (8)Entergy should continue to study opportunities to upgrade transmission to potentially mitigate RMR.

11 ADDITIONAL ANALYSIS Additional gas price sensitivities ($10 case has been completed). The $10 case produces a large net savings compared to the “gas sensitivity case” in our study. Clean Air Interstate Rule – little know for certain at this time. Potential compliance investments in certain RMR plants. Transmission upgrades – pursue this issue as part of the Entergy transmission study ordered by the Commission.

12 APPENDIX Net Savings for 1,300 MW Case ($ Millions per year, ) Systemwide Results Acquisition CostBase GasGas Sensitivity$10 Gas Extra Low$16$32$60 Low82453 Medium01645 High(8)837 ELI Results Acquisition CostBase GasGas Sensitivity$10 Gas Extra Low$19$25$39 Low Medium High EGS-LA Results Acquisition CostBase GasGas Sensitivity$10 Gas Extra Low($4)($2)$2 Low(6)(3)0 Medium(8)(5)(2) High(9)(7)(4)