State of the Electricity State of the Electricity Utility IndustryUtility Industry

David K. OwensExecutive Vice President Edison Electric Institute

Annual Fuel Oil/Energy Buyers ConferenceOctober 27, 2009

America’s ChallengesAmerica’s Challenges

Resolve financial crisis

Stimulate economy and get America back to work

Address Climate Change

Transform our society to be greener and more efficient

A Significant Transformation is Underway A Significant Transformation is Underway Stimulated by ……….Stimulated by ……….

Restructured Financial Market

Major Initiatives to Address Climate Change

Emerging Technologies

Gaps / Lack of Clarity in Federal / State Decisions on Infrastructure and Market Issues

Financial Crisis Impacts … Financial Crisis Impacts …

Access to CapitalAccess to CapitalShort-term lines of credit for small businessShort-term lines of credit for small business

Long-term investmentsLong-term investments

Ultimately Impacting Small Business, Consumers, and Reliability

OverviewOverview Recession has dampened demand, but forecasted to rebound and

grow Commodity, equipment, and labor costs are down, making it an ideal time to

build and prepare for future demand increases

Wall Street Restructuring affects access to capital markets and increasing cost of capital As one of the most capital-intensive industries, reduced access to capital

markets at higher costs, means that enhanced liquidity and financial flexibility is important

Utility industry at the beginning of a major investment cycle Driven by new technology, demand growth, efficiency and environmental CAPEX

Addressing climate change and new priorities will be costly

Industry Capital Expenditures are GrowingIndustry Capital Expenditures are Growing

Industry committed to reliability - making needed investments in generation, transmission, smart grid/distribution & the environment

Financial crisis initially brought sharp revisions for 2009

Multi-year trend of soaring construction /materials costs reversed in Q3 2008

Increased spending expected to continue into the future Total CAPEX for 2010-2030 ~ $1.5 trillion*

Excludes impact from climate legislation

U.S. Shareholder-Owned Electric Utilities

* The Brattle Group, preliminary findings from The Edison Foundation presentation titled Transforming America’s Power Industry. Represents the entire Power sector.

Request Mark Agnew to Update this Slide10/13/09

Industry Faces Difficult DecisionsIndustry Faces Difficult Decisions

Defer or cancel infrastructure

projects to enhance current liquidity position

Electric reliability could be impacted when economy and demand rebound

To Invest or Not to Invest?

Opportunities with sharply

declining commodity and

input costs

Higher financing costs

Uncertainty ?

View ForwardView Forward

President Obama’s President Obama’s Energy / Environmental ViewsEnergy / Environmental Views

Climate ChangeClimate Change

EnergyEnergy Efficiency Efficiency Smart GridSmart Grid

Renewable PortfolioRenewable PortfolioStandardsStandards

25% by 2025

Overhaul of Federal Efficiency Codes

Increased Government Support

80% reduction by 2050 H.R. 2454 83% reduction by 2050 H.R. 2454 20% by 2020

In H.R. 2454 In H.R. 2454 and stimulus

package

Climate Change QuestionsClimate Change Questions We Must Answer!We Must Answer!

How do you minimize the impact of compliance costs on low-income consumers?

What must U.S. climate change legislation and carbon management strategy include to

Ensure economic growth?

Ensure energy security?

Avoid unfairness?

Key Climate ProvisionsKey Climate Provisions Economy Wide?

Cap-and-Trade or Tax?

Mitigating Customer Impacts? Allowances

Offsets

Strategic allowance reserve

Other approaches

Targets and Timetables?

Targets and TimetablesTargets and TimetablesQuestions / ConcernsQuestions / Concerns

To meet short-term targets Power sector will rely on energy efficiency, renewables and

natural gas

In the medium term (i.e., 2020-2025) Targets should be harmonized with the development and

commercial deployment of advanced climate technologies and measures

(e.g., nuclear energy, advanced coal technologies with carbon capture and storage, PHEVs, smart grid)

The American Clean Energy and Security Act of The American Clean Energy and Security Act of 2009 (H.R. 2454) 2009 (H.R. 2454)

Economic Impact ProjectionsEconomic Impact Projections

Allocation of AllowancesAllocation of AllowancesPrimary Goals Primary Goals

Help mitigate the impact of increased energy prices on consumers

Assist in transition to clean energy economy

Advance development and deployment of clean energy technologies, including energy efficiency

15

Allowances Under Kerry-Boxer Bill (S.1733) Allowances Under Kerry-Boxer Bill (S.1733) Clean Energy Jobs and American Power ActClean Energy Jobs and American Power Act

S.1733: Does not specify how many allowances each covered

industry would receive Contains the same allocation distribution as H.R. 2454 Total number of allowances for 2012-2016 are the same

under H.R. 2454 Auctions 25% of the allowances (15% in H.R. 2454). Source

of these additional allowances is unclear Establishes a minimum auction price of $10 in 2012,

escalating at 5% per year plus inflation Contains a so-called “soft” price collar

What Will It Take to Address Climate What Will It Take to Address Climate Change?Change?

Renewables

Energy efficiency

Clean coal technologies

Carbon capture and storage

Nuclear

Plug-in hybrid electric vehicles (Smart grid)

We need it all … but it will be costly!

There is no silver bullet!

The Enhanced Role for RenewablThe Enhanced Role for Renewableses

Renewable / Energy Efficiency Renewable / Energy Efficiency QuestionsQuestions We Must Answer! We Must Answer!

Renewable Technology

How much can increased renewable capacity contribute going forward?

How do we get transmission constructed for renewables?

Energy Efficiency How significant of a role can energy efficiency play in the future? How can customers benefit and actively participate in energy

efficiency programs from the residential and commercial perspectives?

State Renewable Energy State Renewable Energy Portfolio StandardsPortfolio Standards

31 states with quota obligations – RPS

Each state has different natural resource endowment, different industrial and socio-economic characteristics…

…So each state RPS has: Different targets Different timelines Different eligible resources Different compliance entities Different compliance mechanisms Different enforcement and penalties

Federal PoliciesFederal PoliciesA Federal ERES?A Federal ERES?

H.R. 2454

The American Clean Energy and Security Act of 2009

S.1462The American Clean Energy and Leadership Act of 2009

Contingent on climate (HR 2454 / S.1733)

Planned Capacity Additions Reflect Planned Capacity Additions Reflect State RPS RequirementsState RPS Requirements

Non-hydro renewables make up 4% of US capacity today but 34% of planned capacity additions through 2020.

US Generation Capacity in 2008 (1,061 GW in Service)

Planned Capacity Additions to 2020(352 GW)

Source; Ventyx Global Energy and Bernstein Analysis

Hydro9%

Gas41%

Coal30%

Nuclear10%

Oil6%

Non-Hydro Renewable

4%

Hydro16%

Gas23%

Coal14%

Nuclear13%

Oil0%

Non-Hydro Renewable

34%

Source: Bernstein Research

Biggest Challenge for Renewables … Biggest Challenge for Renewables … TransmissionTransmission

Planning

Siting

Cost Allocation

Renewables are Variable Resources!

Integrating RenewablesIntegrating RenewablesOperational ChallengesOperational Challenges

Higher RPS levels can create significant surplus energy Has created excess energy at night

Requires more system backup to maintain reliability Quick start and fast ramping technologies (peaking / storage) to

manage generation variability and maintain reliability when wind falls off or clouds appear

Smart grid can help mitigate some of these problems Energy storage / off-peak electric vehicle charging can mitigate

problem Smart grid will help enable these new technologies

The New Role for Energy Efficiency

Demand Projected To Demand Projected To Increase 40% 21% by 2030Increase 40% 21% by 2030

Sources: U.S. Department of Energy, Energy Information Administration

0

1,000

2,000

3,000

4,000

5,000

6,000

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

2025

2030

Bill

on k

iloW

atth

ours

RecessionImpact?

The Energy Efficiency ChallengeThe Energy Efficiency Challenge

Average US household owns 24 consumer electronic products 2 DVRs use as much energy in 1 year as a refrigerator Play Station and X-Box use more electricity than a PC PCs and TVs now account for 10% of a home’s electricity usage 99% of these products must be plugged in or recharged 42” Plasma TV uses more than twice as much as a standard 27” TV

More efficient use of energy could significantly reduce energy bills

Need to educate all consumers about how to save energy and use it more efficiently

Aggressive campaign for technologies Smart buildings Smart appliances Smart electric meters and grid Smart rates

Use of “smart technologies” and new rate designs can: Allow consumers to control their energy usage to save money Avoid wasting energy Control how and when appliances do their jobs Help utilities efficiently operate their systems and maintain reliability Help keep supply and demand in balance Support more efficient use of generating resources

Commercializing plug-in hybrid electric vehicles

Intensified National Commitment To Intensified National Commitment To

Energy Efficiency Is NeededEnergy Efficiency Is Needed

Energy Efficiency - Our 1Energy Efficiency - Our 1stst fuel fuelAve. Cost Ave. Cost ~$0.035 / kWh Saved~$0.035 / kWh Saved

Source: The Edison Foundation – Institute of Electric Efficiency; EIA Form 861

$0.000

$0.005

$0.010

$0.015

$0.020

$0.025

$0.030

$0.035

$0.040

$0.045

$0.050

2000 2001 2002 2003 2004 2005 2006 2007

$/kW

h

Total Utility EE Costs per kWh Saved

Energy Efficiency Business Model Energy Efficiency Business Model ComponentsComponents

Program Cost Recovery

Lost Margin Recovery

Performance Incentives

Coal Must Remain in the Mix…

Carbon Capture and Storage ChallengesCarbon Capture and Storage Challenges

Capture Develop cost-effective means of capturing CO2 from combustion

Transport Ability to access current gas and CO2 pipeline structure Regulatory framework Liability concerns

Storage Permitting and siting Liability concerns Full-scale demonstration projects Public education and acceptance

New Coal GenerationNew Coal GenerationCarbon Capture and Storage (CCS) in (H.R. 2454)Carbon Capture and Storage (CCS) in (H.R. 2454)

“National strategy” for a CCS regulatory framework Federal agencies to develop a (sec. 111)

Geologic storage and propose regulations

EPA to finalize regulations for under the Clean Air Act (sec. 112)

Study of legal framework for geologic storage sites Establish task force (sec. 113)

New Carbon Storage Research Corporation Funded by charge on deliveries of fossil fuel electricity Fund commercial-scale (>250MW), integrated demo projects (sec. 114) $10 billion over 10 years; 50% of funds reserved for utility projects Corporation is an affiliate of EPRI and not an agent of the U.S. government

…And So Should Nuclear

U.S. Electricity Sources Which Do Not Emit Greenhouse Gases During

Operation 2008

Source: Energy Information Administration

Updated: 4/09

Expectations for the FutureExpectations for the Future

2010 2012 2014 2016 20202018

Suppliers ramp up component manufacturing capability

Second wave begins construction when it is clear that first wave can be licensed and built on time and within budget

Initial wave has 4 - 8 plants on lineby 2015-2016

Second wave begins COL preparation

Source: NEI

U.S. Shale – A Game Changer?U.S. Shale – A Game Changer?Gas Production PotentialGas Production Potential

BCFD

Source: Tristone Capital, Devon Energy

Historical Forecast

SMART GRID

A Game Changing Technology

What is the Smart Grid?What is the Smart Grid?

An advanced, telecommunication / electric grid with sensors and smart devices linking all aspects of the grid, from generator to consumer, and delivering enhanced operational capabilities that :

1. Provide CONSUMERS with the information and tools necessary to be responsive to electricity grid conditions (including price and reliability) through the use of electric devices and new services (from smart thermostats to PHEV)

2. Ensure EFFICENT use of the electric grid (optimizing current assets while integrating emerging technologies such as renewables and storage devices)

3. Enhance RELIABILITY (protecting the grid from cyber and natural attacks, increasing power quality and promoting early detection and self correcting grid “self-healing”)

Smart meter platform and home area Smart meter platform and home area network technologies will take EE and DR to network technologies will take EE and DR to

new levelsnew levels

HAN communication

SmartMeter communication

…Giving customers the tools and the know-how to be smarter energy consumers

The Changing Regulatory The Changing Regulatory EnvironmentEnvironment

Emerging New FERC FocusEmerging New FERC Focus“Going Green” - Environment / Climate Platform“Going Green” - Environment / Climate Platform

Regulation of Carbon Markets Clarify jurisdiction boundaries – FERC, CFTC, SEC Expand regulatory goals

Regulation of Combined Efficiency and Renewable Electricity Standard (CERES) Oversee Energy Efficiency Credit System Prescribe standards and protocols for defining and measuring electricity savings Specify types of Energy Efficiency measures Receive and evaluate all state applications for eligible electricity savings

Smart Grid Investment and Cost Recovery

Distributed Energy Resources

How do these areas fit together?How do they impact FERC / State relationships?

Evolving Areas of Evolving Areas of Federal / State CollaborationFederal / State Collaboration

The View ForwardThe View Forward

Respond to comprehensive energy and climate legislation Preserve all options Accelerate development of technologies Mitigate the impact of rising costs on consumers Ensure regulatory environment supports environmental initiatives

Develop a new regulatory model which … Stimulates new investment Provides timely cost recovery Equitably transforms our society to a greener and more energy

efficient economy