3. Future Outlook for the Power Sector David Owens Executive Vice President

4. Changing Electric Utility Landscape  Utility industry has embarked on a major investment cycle, driven by the need to address:  Generation, Transmission, and Distribution to ensure reliability  Energy Efficiency and deploying new technologies (SG, renewables)  Significant Environmental CAPEX  Increasing concerns about the Environment has Changed our Power Supply Mix  Short –term: Rely on Energy Efficiency, Renewables, and Natural Gas  Medium-term: Targets should be harmonized with the development and commercial deployment of advanced technologies and measures (e.g., Nuclear Energy, Advanced Coal Technologies with Carbon Capture and Storage, Plug-in Electric Vehicles, and Smart Grid)  We are no longer a declining cost industry

5. Changing Electric Utility Landscape (2)  An Increasing Amount of Rate Cases to Pay for Investments  Our Workforce is Aging and our Children are Less Educated  The Utility Role for Driving New Technology has become increasingly complicated  Current combination of low economic growth, flat electricity demand growth, deficit concerns and sustained high unemployment is slowing down the deployment of smart technologies including Smart Grid  New Congress with vastly different priorities

6. Electricity Game Changers Public Policy Environmental Energy Source Shale Gas Technology Smart Grid Japan Nuclear Disaster?

7. Divergent Forces Markets/ Technology Public Sales/Economic Recovery Environmental Regulations Congress/States/FERC

8. Overview of the Federal Political Landscape August 10, 2011 Brian Wolff Senior Vice President

9. 2012 Election  2012 election features both the Presidential race and races for control of the Senate  Current Senate ratio: 51 Democrats, 47 Republicans, and 2 Independents who usually vote with Democrats

10. 2012 Election  Democrats must defend 23 seats  15 are solid, likely, or lean Democrat; 8 are toss-ups or likely Republican  Republicans must defend 10 seats  8 are solid or likely Republican; 2 are toss-ups  Key issues remain the economy and jobs

11. Political Environment  Jockeying for 2012 election = partisan gridlock in Congress  Public response to Congress:  6% of likely voters rate Congress’ job performance as good or excellent  61% of likely voters think Congress is doing a poor job (7/26/11 Rasmussen poll )

12. Political Environment  Public response to President Obama :  23% strongly approve of President Obama’s performance  42% strongly disapprove  Overall, 44% at least somewhat approve and 55% at least somewhat disapprove (8/1/11 Rasmussen poll)

13. Debt Ceiling Package  House passed debt ceiling bill by 269-161 vote on August 1; Senate passed bill by 74-26 vote on August 2  Raises debt limit by $400 billion initially; establishes procedures for additional increases (limit eventually raised by at least $2.1 trillion)  Establishes caps on discretionary spending through 2021  Requires House and Senate to vote on balanced budget amendment by end of year

14. Debt Ceiling Package (cont’d)  Creates a congressional joint committee to propose additional budget savings of at least $1.5 trillion over 10 years  Establishes automatic procedures for reducing spending by as much as $1.2 trillion if legislation by joint committee does not achieve sufficient savings by January 15, 2012

15. Energy Legislation Outlook  Focus on deficit reduction and increased partisanship makes it unlikely this Congress will consider major energy legislation  House passed several controversial environmental provisions to limit EPA authority – but they won’t get 60 votes in Senate  Senate Energy Committee approved several bills on efficiency, EVs, clean energy development, oil and gas development – unclear whether full Senate will consider

16. Cyber Security Legislation Outlook  Bipartisan support for cyber security legislation – despite gridlocked Congress  President Obama’s proposal in May provided additional guidance and push for Congress to act  Challenges include navigating 14 committees in House and Senate with jurisdiction  House Speaker John Boehner appointed GOP task force to develop a framework for comprehensive, multi-sector bill  Senate Majority Leader Harry Reid will use a draft bill with language from Commerce and Homeland Security Committees as base for new bill - and use President’s proposal to arbitrate differences among other committees involved

17. Cyber Security Legislation Outlook  If Congress cannot produce a comprehensive bill, a sector- by-sector approach may be taken  Most likely to move would be utility-only bill focused on electric grid security  EEI supports a comprehensive approach due to the interdependent nature of critical infrastructure  Strong cyber security legislation should:  Limit scope of any new federal emergency to imminent threats against truly critical assets  Ensure emergency orders come from only one government entity  Include all critical infrastructure sectors in a cyber security regime  Encourage more information-sharing between gov’t and industry

18. Generation Update August 10, 2011 Richard McMahon Vice President, Energy Supply and Finance

19. Capital Expenditures August 10, 2011 Aaron Trent Manager, Financial Analysis

20. Industry Capital Expenditures p = projected ($ Billions) Source: SNL Financial, company reports and EEI Finance Department

21. Investment by Category  Industry committed to reliability, making needed investments in generation, transmission, smart grid/distribution and environmental controls  Prospective EPA rules could increase total capex by 30% annually

22. By 2030, the electric utility industry will need to make infrastructure investments of $1,830 Billion This level of investment is nearly triple the US Shareholder –Owned Electric Utilities’ current net plant value of roughly $650 billion (3/3 1/11 =$748 B) $654B $1,830B Source: Transforming America’s Power Industry, The Brattle Group, November 2008 Capex - Looking Out 20 Years

23. Rate Case Volume Remains High * 2011 includes activity through June 30, 2011.

24. Awarded ROEs Remain Low

25. US Electric IOUs Rating History 1970 – 2010 S&P Credit Ratings Distribution, U.S. Shareholder-Owned Electric Utilities AAAAA+, AA, AA-A+, A, A-BBB+, BBBBB+, BB, BB-, B+, B, B-, CCC+BBB- 4% 22% 46% 27% 1% Source: Standard & Poor’s, Macquarie Capital

26. Changing M&A Trends  Prior mega mergers focused on increasing scale and scope of competitive generation operations, with a multi-regional focus  Recent merger announcements:  Focus on creating a larger regional footprint for regulated utility operations  Upsize the balance sheet to aid with future environmental compliance, allow for larger capex projects such as nuclear, transmission, etc.  Local economy and Jobs impact remain as key factors  Complementary generation fleets, renewable mandates  Ratings agency reactions will be watched closely

27. M&A Themes in 2010-11  Feb. 11 – FE-AYE: Improve generation mix, operating performance, transmission growth, financial strength  Apr. 28 – PPL-E.ON U.S.: Increase regulated focus  March ’11 – announces purchase of E.ON AG’s U.K. Power Grid  Oct. 18 – NU-NST: Leverage NSTAR’s financial strength into Northeast Utilities’ transmission growth ops  Jan. 10, 2011 – DUK/PGN – greater financial strength for environmental capex, need greater efficiency  Apr. 28, 2011 – EXC/CEG – combine generation and customer-facing businesses; improve generation mix and financial strength

28. Tax Reform and Electric Utilities  Potential Trade-off – Lower corporate rate with less industry specific tax incentives.  Accelerated Depreciation  Dividend Tax Rates  Expire at end of 2012  Maintaining parity with Capital Gains remains key

29. FERC Update James Fama Vice President, Energy Delivery

30. Overview of Presentation  Transmission  Transmission Incentives and Investment  Transmission Planning & Cost Allocation Order  Reliability

31. Transmission Incentives and Investment

32. Current Policy Implementing Section 219 of the FPA  Articulated in 2006 in Order No. 679  Companies can seek incentives for projects that improve reliability or reduce congestion  FERC evaluates incentive requests on a case-by-case basis and determines whether resulting rates are J & R  Companies must show that:  Project improves reliability or reduces congestions  That there is a nexus between incentives sought and risks and challenges of the project

33. EEI Response  Transmission is hard to build and provides societal benefits  Incentive policy has resulted in transmission development which in turn ensures reliability, reduces congestion, facilitates renewable and other generation  Incentives or sufficient ROE are necessary to obtain capital necessary for development

34. Notice of Inquiry  Promoting Transmission Investment Through Pricing Reform NOI issued May 19, 2011  Comments due August 25, 2011  NOI states that FERC has received over 75 applications for incentives for investment in over $50 billion in proposed transmission infrastructure  Purpose of NOI to seek comment on what steps the FERC could take to ensure that incentives encourage development of transmission policy consistent with statutory obligations

35. Transmission Investment on the Rise

36. Actual and Planned Transmission Investment By Shareholder-Owned Utilities (2004-2013)

37. Transmission Projects: At A Glance Represents $61.2 Billion (nominal dollars) in transmission investment: 2010 - 2021 Highlights 26 EEI Member Companies and over 100 projects $39.5 Billion in Transmission Supporting the Integration of Renewable Resources $41.1 Billion in Interstate Transmission

38. Transmission Planning & Cost Allocation

39. Final Rule – Order 1000  Issued July 21, 2011  Addresses –  Transmission Planning o Public Policy Consideration o Regional o Inter-regional o Right of First Refusal Provisions (“ROFR”) o Reliability  Cost Allocation

40. Highlights  Applies to all regions  Requires regional planning and inter-regional coordination  No requirement for interregional transmission plan  Establishes broad criteria. Allows regions the flexibility to meet the criteria through regionally developed plans  Allows non-incumbents to submit proposals and receive cost recovery on same basis as incumbents if project selected through regional planning process

41. Highlights – Transmission Planning  Emphasis on regional planning and identifying least cost solutions  Require consideration of public policy goals reflected in state or federal law  Federal ROFR provisions must be removed from tariffs for facilities selected in a regional plan for cost allocation purposes  Protections to assure:  Needs met  Delays avoided  Reliability protected

42. Highlights – Transmission Planning cont.  Incumbent public utilities retain ROFR for:  Local upgrades for which regional cost allocation not sought  Upgrades to existing assets  Projects on existing right of way  Requires adoption of “backstop” mechanism to ensure that delays in development of transmission facilities will not prevent incumbents from complying with reliability needs and service obligations.  Not impact state authority (e.g. siting, construction)

43. Highlights - Cost Allocation  Regional and inter-regional cost allocation method must meet six principles  Costs allocated “roughly commensurate” with benefits  No involuntary cost allocation to non-beneficiaries  If benefit-cost ratio is used, must not be so high to exclude facilities with significant net benefits  Costs allocated solely within region or regions unless those outside voluntarily assume costs  Method and data requirements must be transparent  Different method may be chosen for different types of facilities ( e.g., reliability, congestion relief, public policy)

44. EEI Thoughts  Support flexibility and emphasis on allowing regions to develop their own plans  Support retention of the ROFR  Avoid making planning process longer  Still evaluating reliability impacts

45. Reliability

46. Highlights: NERC and Section 215 implementation  NERC continues to reflect strong industry commitment to bulk power system reliability  Changes in mandatory standards are a significant cost driver  Managing compliance is focus of senior management  Challenging issues ahead  Balancing reliability risks and costs to address those risks  Critical Infrastructure Protection standards and implementation  Building effective government-industry relationships  Redesigning compliance and enforcement

47. Smart Grid and Technology Update David Owens Executive Vice President

48. Smart Grid

49. Why Do We Need A Smarter Grid? (Grid Modernization)  Utilities are facing major challenges:  Infrastructure investment needs--$1.5-2 Trillion  Climate change other environmental issues  Energy independence  Cyber-security  A smarter grid will enable utilities to :  Empower customers to control and optimize their energy usage  Rely on greater amounts of distributed generation—wind, solar, etc.  Use electricity as a fuel for vehicles  Enhance the reliability and efficiency of the power grid  Provide the framework and foundation for future economic growth

50. Smart Grid Implementation Challenges  There is tremendous and growing pushback from customers and regulators to the smart meter. It focuses on  Accuracy of meters  Health concerns: Radio Frequency Exposure  Who decides whether a meter should be installed?  Cost of installation  Access to information: privacy intrusion  Impact “at risk” customers  Dynamic pricing  Customers are not seeing immediate benefits

51. Smart Grid Implementation Challenges (Cont’d)  We need to get ahead of the resistance to shape and change the discussion  Collaboration and customer engagement initiatives are crucial  Critical Consumer Issue Forum  EEI /CenterPoint Member Workshop, “Transforming the Utility Customer Relationship: The New Paradigm”  Smart Grid Communications Campaign Advisory Committee

52. Smart Grid Interoperability Standards

53. Background  Per EISA, Congress and the Administration stress urgent need for interoperability protocols and standards to ensure smart grid functionality and interoperability in interstate transmission and wholesale electricity markets  EISA defined responsibilities for two Federal Agencies:  NIST was directed to coordinate development of communication protocols and standards to achieve an interoperable smart grid; and  FERC was charged with instituting a rulemaking to adopt the standards necessary to ensure smart grid functionality and interoperability once it determined “sufficient consensus” had been achieved in the standards identification and development process

54. Current Activity  October 2010, NIST identified five families of standards that help to enable efficient and secure exchanges of information within and across smart grid domains.  Commission found on July 19, 2011 that there was insufficient consensus on the five standards and declined to open a rulemaking.  Smart Grid Interoperability Panel (SPIG) will continue to identify gaps and make recommendations to Standards Development Organizations to ensure any standards utilized to implement the Smart Grid are interoperable. Regardless of whether the standard impacts the transmission, distribution, consumer or other domains

55. EEI’s Involvement  Participate in SPIG process to ensure that standards that impact the development and implementation of the Smart Grid are workable.  Educate consumers and regulators (both federal and state) on the benefits of implementing Grid modernization technologies and the economic feasibility of enabling Smart Grid applications.  Investigate, evaluate and implement Grid modernization technologies to ensure the reliability of the Grid that maintains customer satisfaction levels and enables them to be more energy efficiency and to better utilize alternative energy solutions.

56. Update on EPA Regulation and Implications for the Utility Industry Quinlan Shea Vice President, Environment and Daniel Chartier Director, Environmental Markets and Air Quality Programs

57. Outline I.Overview II.EPA rules – status and next steps  Utility HAPs MACT  NAAQS  Cross-State Air Pollution Rule  316(b)  Coal ash  GHGs III.Implications

58. Overview

59. *Includes generation by agricultural waste, landfill gas recovery, municipal solid waste, wood, geothermal, non-wood waste, wind, and solar. ** Includes generation by tires, batteries, chemicals, hydrogen, pitch, purchased steam, sulfur, and miscellaneous technologies. Sum of components may not add to 100% due to independent rounding. Source: U.S. Department of Energy, Energy Information Administration, Power Plant Operations Report (EIA-923); 2009 preliminary generation data. May 2010 © 2010 by the Edison Electric Institute. All rights reserved. Different Regions of the Country Use Different Fuel Mixes to Generate Electricity 58

60. Coal Units by Age, Capacity and Emissions U.S. Generating Units, 10 Year Increments Age of Units* Generating Units Total Nameplate Capacity Total Net Generation Year 2008 Total CO 2 Emissions Year 2008 Total SO 2 Emissions Year 2008 Total NO X Emissions Year 2008 # Percent of Total GW Percent of Total GWH Percent of Total MTons Percent of Total Tons Percent of Total Tons Percent of Total 0-10 Years 161.4%5.31.6%19,7881.1%28.71.4%18,0830.2%13,7790.5% 11-20 Years 645.8%14.94.5%78,2614.2%78.13.8%137,8031.9%108,1153.8% 21-30 Years 18616.7%86.126.1%541,40829.0%615.029.6%1,336,03318.0%763,20726.9% 31-40 Years 23821.4%122.537.1%724,20638.8%780.737.6%2,750,02537.1%1,053,25937.1% 41-50 Years 27024.3%60.818.4%316,02916.9%352.216.9%1,879,15225.4%533,03818.8% 51-60 Years 30427.3%39.311.9%187,47310.0%220.710.6%1,265,38817.1%356,90212.6% 61-70 Years 302.7%0.90.3%1,1660.1%2.50.1%19,2230.3%6,5540.2% > 70 Years 40.4%0.00.01%50.0003%0.10.004%870.001%4840.02% Coal Unit Totals 1,112100.0%329.95100.0%1,868,336100.0%2077.9100.0%7,405,794100.0%2,835,339100.0% Source: Ventyx, Inc.—EV Suite MTon = million tons * Does not include units that came online in 2009

61. Power Plants Reduce Emissions Despite Increasing Electricity Demand

62. Power Sector Objectives  Minimize economic impacts to consumers  Continue environmental improvements  Maintain system reliability  Maintain fuel diversity options  Develop and deploy new technologies  Obtain access to capital and cost recovery  Negotiate myriad political landscapes

63. Update on EPA Regulations

64. Possible Timeline for Environmental Regulatory Requirements for the Utility Industry Ozone (O 3 ) PM/PM 2.5 '08'09'10 '11'12'13 '14 '15 '16 '17 Begin CAIR Phase I Seasonal NOx Cap HAPs MACT Proposed Rule Revised Ozone NAAQS Begin CAIR Phase I Annual SO 2 Cap -- Adapted from Wegman (EPA 2003) Updated 05-31-2011 Proposed PM-2.5 NAAQS Revision PM Transport Rule SO 2 Primary NAAQS SO X /NOx Secondary NAAQS NO 2 Primary NAAQS SO x /NO x CAMR & Delisting Rule vacated Hg/HAPS Transport Rule Proposal Issued (CAIR Replacement) HAPs MACT Final Rule Expected CAIR Vacated HAPS MACT Compliance 3 yrs After Final Rule CAIR Remanded CAIR/Transport Begin CAIR Phase I Annual NOx Cap 316(b) Proposed Rule 316(b) Final Rule Expected 316(b) Compliance 1-8 yrs After Final rule Effluent Guidelines Proposed Rule Expected Water Effluent Guidelines Final Rule Expected Effluent Guidelines Compliance 0-5+ yrs After Final Rule Begin Compliance Requirements Under Final CCB Rule (ground water monitoring, double liners, closure, dry ash conversion) Ash Proposed Rule for CCBs Management Final Rule for CCBs Mgmt Final Transport Rule Expected (CAIR Replacement) CO 2 CO 2 Regulation (PSD/BACT) Ozone NAAQS Revision Transport Rule Phase I Reductions Transport Rule Phase II Reductions Ozone Transport Rule GHG NSPS Proposal GHG NSPS Final Expected Final PM-2.5 NAAQS Revision

65. Utility MACT Proposal  Proposed rule published in Federal Register May 3, 2011; comments due August 4  Final rule published by November 16, 2011 (required by consent decree)  Rule will require most coal plants to upgrade existing controls and/or install additional controls:  Acid gases: wet or dry scrubbers; DSI (trona, etc.)  Mercury: activated carbon injection (ACI)  Non-mercury metals: fabric filters (baghouses)  As a result, some plants will close or re-power

66. Affected Facilities  Approximately 1,350 EGUs at 525 facilities  Approximately 1,200 coal-fired boilers at approximately 450 facilities  Coal-fired EGUs include units that burn coal, coal refuse, or a synthetic gas derived from coal either exclusively, in any combination together, or in any combination with other supplemental fuels (e.g., petroleum coke, tire-derived fuels)  Bituminous coal ~ 50% of coal generation  Subbituminous ~45% of coal generation  Lignite ~ 5% of coal generation  Approximately 150 oil-based boilers at approximately 75 facilities  Approximately 1% of nationwide net generation  EPA expects most facilities would install technologies to comply

67. Utility MACT Proposal  Normal MACT timing: 3 years after final rule effective date (~January 2015)  EPA Administrator (or approved State Program) can grant 1-year extension if more time “necessary for the installation of controls”  Extensions granted on case-by-case basis  Presidential exemption: not more than 2 years if: 1) technology to implement standard is not available and 2) in national security interests to do so o Additional 1-year extensions available

68. EEI Utility MACT Comments: Key Messages  EEI commends EPA for incorporating some flexibility in the proposal—such as the use of surrogates, work practice standards and emissions averaging—to help companies meet the proposed standards.  There are a number of areas where the proposed standards (including many of the compliance, testing and monitoring requirements) are unduly restrictive or inconsistent with § 112 of the CAA, or could benefit from additional flexibility afforded to EPA under the CAA.  Our overarching concern is the limited timeframe for implementation of, and compliance with, the proposed rule.

69. EEI Unity MACT Comments: Substantive Concerns  EPA should establish a single, category-wide filterable particulate matter (PM) emissions standard and designate filterable PM—not total PM—as a surrogate for the non- mercury metals standard.  Dry sorbent injection (DSI) will be a useful and cost-effective control tool for many units, but it is not a viable option for all coal-based units for compliance with the acid gas standard.  The mercury standard must be recalculated because it was not established as the average of the best-performing 12% of existing sources, but rather was based on an unrepresentative sample group.

70. EEI Utility MACT Comments: Substantive Concerns (2)  EPA’s approach to basing new unit standards on a hypothetical “ideal” unit that has never operated is inconsistent with CAA § 112(d)(3).  Many of the proposed measures for demonstrating compliance impose unnecessary burdens and excessive costs in contravention of the President’s recent Executive Order No. 13563.  EEI urges EPA to allow work practice standards to apply during periods of startup and shutdown (SS), as the agency has done in the Boiler MACT rule.

71. EEI Comments: Substantive Concerns (3)  EEI urges EPA to allow broad emissions averaging as an alternative compliance mechanism to provide regulatory flexibility and decrease costs.  Many of EPA’s proposed compliance, testing and monitoring requirements are confusing, inflexible or costly and would yield little benefit.  EEI encourages EPA to recognize investments made for emissions reductions consistent with state HAPs regulations.

72. National Ambient Air Quality Standards (NAAQS)  NAAQS continually ratcheted down over time  Ozone – 1997, 2008, 2011, 2014  PM 2.5 – 1997, 2006, 2012  “Transport Rule” to address 1997 and 2006 standards  New 1-hour NO2 and SO2 standards in 2010  New ozone and PM standards in 2011 and 2012, respectively, will drive additional new Transport Rules  State Implementation Plans  Interstate transport – state SIP revisions & EPA rules  In-state sources  Health vs. "secondary” environment/welfare standards

73. Cross-State Air Pollution Rule (proposed as Transport Rule, replaces CAIR)  Final rule signed by Administrator July 6, 2011 (expected to be published in Federal Register July 21, 2011)  Affects power companies in 27 eastern states  Emission budgets for NO X and/or SO 2 (both for most states)  Supplemental proposal (July 11) to add NO X ozone season requirements for IA, KS, MI, MO, OK, WI (OK = 28 th state)  Reduction requirements must be met in 6 and 30 months (January 1, 2012 and January 1, 2014)  Provides only limited long-term certainty  Requirements to be superseded by subsequent “Transport Rules” addressing 2011 ozone standards and 2012 PM standards

74. Cross-State Air Pollution Rule (2)

75. Cross-State Air Pollution Rule (3)  Changes for individual states  Final rule includes TX in annual NO X and SO 2 program  Three states removed in final rule: CT, DE, and MA (plus D.C.)  FL and LA removed from annual NO X and SO 2 program  “Air quality-assured allowance trading”  Allows unlimited in-state and limited inter-state trading  Limits on inter-state trading reduced  Allowances from previous programs not carried over (as proposed)  Most state emissions budgets reduced, some significantly, from proposed rule  Total region-wide SO 2 budgets are about 15 percent lower than proposed  Net impact of less restrictive limits on trading and lower emission budgets – most states have lower allowable emissions

76. Separate SO 2 Control Groups

77. Cooling Water Intake Structures 316(b)  Proposed rule published on April 20, 2011  Comments due on July 19, 2011  EPA is required to finalize the rule by July 27, 2012  Proposed rule sets separate standards for impingement mortality and entrainment mortality  Impingement standard is a national numeric standard – must be met ASAP or in no more than 8 years ( ~ 2020); is not be achievable by EPA recommended technology  Entrainment standard delegated to state permit writers; states will set compliance deadline

78. Cooling Water Intake Structures (2)  Implications  Every facility over 2 MGD withdrawal will likely have to make modifications  Approx 890 steam electric generating facilities affected  Fairly prescriptive rule; with aspects of site-specific decision-making and cost-benefit analysis for entrainment but no flexibility for impingement  Closed-cycle cooling may not meet all requirements  Other water regulations

79. Power Plants Affected by Proposed 316(b) Rule

80. Coal Combustion Residuals  EPA proposed 2 options in June 2010:  Subtitle C, “Special” hazardous waste listing o Beneficial use exempt from regulation  Subtitle D regulations  Final Rule expected in 2012; EPA not acting under deadline  If regulated under Subtitle C, each state has to adopt the listing in the hazardous waste regulations before effective (2+ years)  If regulated under Subtitle D, rule goes into effect within 6 months

81. Coal Combustion Residuals (2)  Once finalized:  Have to install groundwater monitors – within 1 year for existing disposal units; before opening for new units  Have 5 years to retrofit surface impoundments with liners or close pond in 2 years  Must comply by ~ 2018 if Subtitle D; ~ 2020 if Subtitle C  Will significantly impact operations:  Expedite conversion to dry handling  Force closure of older plants where too expensive to comply  Facilities with ponds will have to construct wastewater treatment facilities (which will be impacted by effluent guidelines)  EPA not required to review/revise CCR rule

82. GHG Regulation  Best Available Control Technology (BACT) reviews  Currently in effect for some large sources; EPA issued guidance in late 2010  Permits issued on case-by-case basis; states are generally the permitting authority  Emission limits based on technologies and efficiency measures / actions after considering availability, feasibility, cost  Very uncertain as applied for first time to GHGs  EPA guidance emphasizes options that improve energy efficiency  Fuel switching / redefining the source?  CCS must be considered

83. GHG Regulation (2)  GHG new source performance standards being developed for fossil power generators, including existing sources  Proposal due in September 2011  New plant standards final by May 2012  Applicable upon proposal  Standards for existing EGU fleet also  EPA guidance/procedure for states final by May 2012  States plans due to EPA 9 months later  Compliance for EGUs in 2015-16?  Issues:  Subcategories (size, type/class), cost, energy efficiency, CCS, NSR, state programs, etc.

84. Implications

85. Clean Air Act & EGUs – Future  The challenge utilities face is unprecedented in terms of:  The number of rules coming due simultaneously  The compressed timeframe for compliance with the near-term rules  The fact that this is continuing – future obligations due to ongoing reviews will result in unknown future reduction obligations

86. Potential Impacts  Virtually every coal plant will have to be retrofit, retired or repowered  Estimates of retirements vary widely  Less than half that capacity replaced with new generation  Impacts on reserve margins  ~34 GW of coal-fired generation retirements have been announced already  Take place between 2010 and 2022  Most will be 50-60 years old upon retirement  Due to fuel and/or compliance costs, consent decrees, age, etc.  Some will be replaced with natural gas

87. Potential Impacts (2)  Will require significant amount of investment  Impacts on power prices  Key factors and uncertainties:  What will final rules look like  Litigation  Congressional activity  Impact of 2012 elections  Compliance on or around 2015  Will there be extensions?  What about long-term carbon policy?

88. Industry’s Predicament  Industry will need to comply with pending EPA regulations on air, water, and coal ash on or around 2015  Will require retrofit, retirement or replacement of substantial portion of existing coal fleet in short period of time  Could impact reliability; need to assess feasibility; regional differences  Yet, without a long-term carbon policy, industry faces the possibility of uneconomic investments  Need both a satisfactory resolution of the current regulatory challenges and a long-term legislative solution on carbon to allow for the most efficient transition to a cleaner generation fleet

89. Closing Remarks David Owens Executive Vice President

90. Conclusion

91. THEN… large periodic projects to support strong load growth required infrequent, but major, rate cases NOW… Ongoing investment well above depreciation and slower sales growth requires ongoing rate increases Illustrative A Paradigm Shift Costs Sales Growth

92. Regulatory Lag Capital Investment Cost of CapitalCredit Worthiness Realized Return Energy Growth Per Customer Overview of the Problem

93. Overview of the Solution: Electric Ratemaking  Innovative regulatory policies and mechanisms:  Future test year  Tracker/rider mechanisms  CWIP in rate base  Formula rate plans  Decoupling  Performance-based rate plans (rate caps, revenue caps)  Strategies to mitigate rate shock, preserve credit worthiness, incent efficient management

94. Call To Action  New rate regulatory approaches essential to financing needed infrastructure in today’s environment and protecting consumers  There is no standard framework, but there is a fairly standard tool kit of component policies  Rebalancing risk does not mean shifting all the risk to consumers.