POSITIVEENERGYTOGETHER®

Industry Trends Discussion

MEC ConferenceSan Antonio Texas, October 19th, 2009

Jesse B. Langston

POSITIVEENERGYTOGETHER®

The way I see it, here’s what’s happening to our industry…

• Trend # 1: Continued increase in Federal involvement

– More active enforcement, in addition to traditional tariff and policy making

– Increasingly stringent environmental and energy efficiency policies• Carbon emission legislation delayed for now, but will lead to

increase in overall cost to customers

• Supporting Information

– FERC new market enforcement power from 2005 policy act and now reliability oversight; increase in staffing

– EPA expanding enforcement decisions; new source review notices of violations issued; proposing to regulate Co2

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POSITIVEENERGYTOGETHER®

The way I see it, here’s what’s happening to our industry…

• Trend #2: Continued movement toward competitive markets and retail disintermediation

– Federal program incentives and local Commission IRP/RFP requirements facilitate announcements of new entrants to fulfill traditional Utility investments…

• Supporting Information– New entrants are appearing downstream of generation (i.e.

Google, Microsoft via Smart Grid)– FERC regulatory agenda via RTO’s; independent boards; day

ahead market requirements

– i.e. Independent transmission Company (ITC) to construct Green transmission lines across the US

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POSITIVEENERGYTOGETHER®

The way I see it, here’s what’s happening to our industry…

• Trend #3: Continued decline in per capita electric consumption growth – Volume growth remain under additional pressure due to higher

prices and efficiency mandates– Sleeper: Industry DSM coupled with higher than

expected rates will cause greater energy reduction than expected

– Issue: In an industry of 1.5% annual growth… higher earning growth rates are driven by either higher return on equity granted, O&M reductions or increasing prices

• Supporting Information– Real price electricity decreased over the last 50 years; Expect

price increases of 30% over the next 10 – 15 years with flat to declining industrial sales

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POSITIVEENERGYTOGETHER®

What would my Grandparents say about these trends…

• Continued increase in Federal involvement

• Continued decline in per capita electric consumption growth

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We got to find another way out of here other

that that door… Grandpa Langston

• Continued movement toward competitive markets and retail disintermediation

The grass always looks greener on the other side…

but that water bill is… Grandpa Langston

Enough is enough and TOO much stinks… and this is

beginning to smell… Grandma Langston

POSITIVEENERGYTOGETHER®

If we want to prosper from these trends, we must…

• Lead the shaping of energy and regulatory policy– Implement State legislation to protect against the

cost impact of federal mandates– Advocate non traditional approaches to tariff

designs, recovery and ratemaking

• Leverage business relationships to extend opportunity reach– Broader / non traditional partners

• Create a “privileged” customer position– Enhance customer interfaces and target high

value products and services– Develop behind the meter strategies

• Expand the footprint by expansion into new markets – Earning growth from displacement of other

energy sources or expansion of customer base

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• Continued increase in Federal involvement

• Continued movement toward competitive markets

• Continued decline in per capita electric consumption growth

Trends Strategic Considerations

POSITIVEENERGYTOGETHER®In Summary…

• Current industry trends fundamentally challenges sustainable earning growth… thus Utilities must proactively find ways to fix the plane in the air

• Positioning for long term success requires “head room today”– Identify near term economic investments that must

either lower variable cost, or usage, while maintaining customer satisfaction

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POSITIVEENERGYTOGETHER®Questions

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