CriticalIssuesFacingthe Electricity yIndustry yandIts Customers

ExecutiveVicePresident Edison d Electric l Institute

DavidK.Owens

EEINationalKeyAccountsWorkshop
March21, 21 2011 Atlanta,GA

Todays Today sAgenda

CapEx AlternativeRegulatoryApprovals EnvironmentalChallenges SmartGrid SnapshotofIndustryChallenges

ChangingElectricUtility L d Landscape
WearenolongeraDecliningCostIndustry OurLeadershiponTechnologyisFaultering OurWorkforceisAgingandourChildrenareLessEducated SlowerElectricityDemandGrowthwillAlterourBusinessModel Increasing gConcernsabouttheEnvironmenthasChanged g our

PowerSupplyMix

Shortterm:RelyonEnergyEfficiency,RenewablesandNaturalGas Mediumterm:Targetsshouldbeharmonizedwiththedevelopmentand commercialdeploymentofadvancedtechnologiesandmeasures(e.g. NuclearEnergy,AdvancedCoalTechnologieswithCarbonCaptureand Storage PluginElectricVehicles, Storage, Vehicles andSmartGrid)

Industry yCapital p Expenditures p

($Billions)

U.S.ShareholderOwnedElectricUtilities

90 85 80 75 70 65 60 55 50 45 40 35 30

83.0 77 8 77.8 74.1

82.8

83.3

85.0

82.6

59.9 59 9 48.4 43.0 41.1

2003

2004

2005

2006

2007

2008

2009 2010p 2011p 2012p 2013p

p=projected p j

Source:SNLFinancial,companyreportsandEEIFinanceDept.

Note:Startingin2008,theuniverseofcompaniesdropsfrom69to63,removingsixcompaniesthatdidnotfileForm10Kwith theSEC.

ActualandPlannedTransmissionInvestment B Shareholder By Sh h ld Owned O dU Utilities ili i (2004 ( 2013) )

p = preliminary Note: The Handy-Whitman Index of Public Utility C t ti C Construction Costs t used d to t adjust dj t actual t l iinvestment t t for inflation from year to year. Forecasted investment data are adjusted for inflation using the GDP Deflator. *Planned total industry expenditures are preliminary and estimated from 91% response rate to EEIs Electric Transmission Capital Budget & Forecast S Survey. Actual A t l expenditures dit from f EEIs EEI Annual A l Property & Plant Capital Investment Survey and FERC Form 1 reports. Source: Edison Electric Institute, Business Information Group. 2010 by the Edison Electric Institute. All rights reserved. reserved

M&AActivity

Industry yFacesDifficultDecisions
ToInvestorNottoInvest?
Deferorcancel infrastructure projectsto enhancecurrent liquidity position p Opportunities withsharply declining commodity p andinput costs Electric reliabilitycould b impacted be i t d wheneconomy anddemand rebound

Higher g financing g costs

Uncertainty?

AParadigmShift
THENlarge
Illustrative

periodicprojectsto supportstrongload growthrequired infrequent,but major,ratecases

Sales Growth

Costs

NOW NOW Ongoing

investmentwell abovedepreciation andslowersales growthrequires ongoingrate increases

Costs

Sales Growth

OverviewoftheProblem

EnergyGrowth PerCustomer

Capital Investment

RegulatoryLag

Realized Return

CostofCapital

Credit Worthiness

OverviewoftheSolution
Alternativeregulatorypoliciesandmechanisms

totransitionsratechanges,mitigateregulatory lagandensuretimelycostrecovery:
Futuretestyear Tracker/ridermechanisms CWIPinratebase Formularateplans Mechanismstoensurefixedcostrecovery Performancebasedrateplans(ratecaps,revenuecaps)

ConsumerBenefits
Near N term t smoothing thi rate t t trajectories j t i to t avoid id

rateshock
ThelessonofMD alotoflittleincreasesareeasierto

acceptthanlargestepincreases

Longterm accesstocapitalonthemost

reasonableterms,highlevelsofreliabilityand servicequality

ElectricPower SO2 and dNOX Emissions i i

IndustryObjectives
Minimizeeconomicimpactstoconsumers Continueenvironmentalimprovements Maintainsystemreliability Maintain M i i f fuel ldiversity di i options i Develop panddeploy p ynewtechnologies g Obtainaccesstocapitalandcostrecovery Negotiatemyriadpoliticallandscapes

PossibleTimelineforEnvironmentalRegulatory RequirementsfortheUtilityIndustry
Ozone (O3)
Begin CAIR R i d Revised Ph Phase I Ozone Seasonal NAAQS NOx Cap CAIR Vacated CAIR Remanded Transport Rule proposal issued
(CAIR Replacement)

SOx/NOx
Final Transport Rule Expected Ozone NAAQS Revision
(CAIR Replacement)

CAIR/Transport
Effluent Guidelines proposed p p rule expected Effluent Guidelines Final rule expected PM Transport Rule 316(b) final rule expected

Water

SO2 Primary NAAQS NO2 Primary NAAQS

SOX/NOx Secondary NAAQS

Effluent Guidelines Compliance 3-5 yrs after final rule

CO2 Regulation (PSD/BACT)

GHG NSPS Final

316(b) Compliance 3-4 yrs after final rule

'08

'09

'10

'11

'12

'13

'14

'15

'16

'17

CAMR & Delisting Rule vacated

Begin CAIR Phase I Annual SO2 Cap Begin CAIR Phase I A Annual l NOx NO Cap

Ozone Final Next PM316(b) T t Rule for Transport 2.5 proposed Rule CCBs NAAQS rule Mgmt Revision expected GHG NSPS Proposed Proposal Rule for HAPs MACT Transport Rule HAPs MACT CCBs final rule Phase I proposed Management expected Reductions rule

Transport Rule HAPS MACT Begin Compliance Phase II Compliance 3 yrs Requirements Reductions after final rule under Final CCB Rule (ground water monitoring, double liners, closure, dry ash conversion)

PM/PM2.5

Ash

Hg/HAPS

CO2
-- Adapted from Wegman (EPA 2003) Updated 01-12-11

PotentialImpactsofEnvironmentalRegulationson the h U.S. U S Generation G i Fleet Fl Modeling M d li Framework F k

Industrys Industry sChallenges

HavetocomplywithpendingEPAregulationsonair(SO2, (SO2 NOx, NOx mercury,etc.),water,andcoalashinoraround2015

Willrequireretrofit,retirementorreplacementofsubstantialportionofexistingcoalfleetin shortperiodoftime Couldimpactreliability;needtoassessfeasibility;regionaldifferences

Couldcostupto$200billioninCAPEXby2015

Industryalreadyhascapitalexpendituresof$80billionannually Canitberaised?Assumingso, so atwhatcost?

Absenceofcarbonpolicyincreasesriskofstrandedinvestments

Changeseconomicoutlookandimpactsoncoalfleet ImplementationofEPAregulationofstationarysourcesbeginsin2011 Congressunlikelytopassclimatelegislationthisyear;prospectsforcurtailingEPAactivity veryuncertain

Needresolutiontohelp psmoothtransitionofcurrentcoalfleet

Needplanningandinvestmentcertaintytomeetfuturedemand;ensureindustrycanmeet regulationswhilemaintainingsystemreliability

GenerationFleetInitiative
Optionsfortransformingthecoalfleetoverthe

next~10yearsinthemostcosteffectiveand reliabilitysensitivemanner
Lookattraditionalpollutants;CO2performancea

nicebyproduct

Methodicalretrofitsoverareasonabletimeline Steadyimprovementsinfleetenvironmentalfootprint Minimizationofimpactstoconsumers Deploymentofadvancedcoaltechnologies

LikelywouldrequireCongressionalaction

ExpandingElectricVehicles
Gettingthecharging infrastructure ready Advocating gincentives forp purchaseanduseofPEVs Educating customersandstakeholders Enhancing electrictransportationoptionsthrough

utilityfleets

WhyDoWeNeedASmarterGrid? (G idM (Grid Modernization) d i ti )

Utilitiesarefacingmajorchallenges: Infrastructureinvestmentneeds$1.52Trillion Climatechangeotherenvironmentalissues Energyindependence Cybersecurity Asmartergridwillenableutilitiesto: Empowercustomerstocontrolandoptimizetheirenergyusage Relyongreateramountsofdistributedgenerationwind,solar, etc. t Useelectricityasafuelforvehicles Enhancethereliabilityandefficiencyofthepowergrid Providetheframeworkandfoundationforfutureeconomic growth

EconomicandRegulatoryContext
Currentcombinationofloweconomicgrowth, growth flat/possible

negativeelectricitydemandgrowth,deficitconcernsand sustainedhighunemploymentisslowingdownthe deploymentofsmarttechnology:

MajorconsumergroupssuchasAARPareraisingobjectionstothesmart griddueprimarily g p ytoeconomicconcerns ProspectsofadditionalfederalfundingsuchastheARRAprogramare virtuallynonexistent Stateregulatorsarehesitanttoapprovecostrecoveryformajorsmart gridinvestments challengingneedformanysmartgridinvestments basedonpotentialcustomerbillimpacts Newcompetitorsandventurecapitalistsareslowtoentertheindustry industry focusingonlowcapitalintensiveinvestments

EconomicandRegulatoryRealities
Given Gi the th current teconomic i environment, i t the th reality lit is i

thatthefurthermodernizationofthegridisdependent oncontinuedutility yinvestmentininfrastructure

Investmentbythirdpartiescannotberelieduponinthe

currenteconomicenvironment
Ourchallengein2011willbetoensurethatchangesto

theregulatorystructureorgovernmentpoliciesare madethatwillsupportandencouragecontinuedIOU investmentingridmodernization

KeyEmergingSmartGridRegulatory Issues
Technological T h l i lobsolescence b l risk i kand dt treatment t t

oflegacyinvestments
Trendtowardsafterthefactprudencereviewsto

determinecostrecoveryforsmartgrid i investments t t
Needforalternativeregulatoryparadigmsthat

willsupportIOUinvestmentinsmart technologies

EEIMembersareModernizing theGrid
AsofJune2010

ARRAFundsareBeingSpent
AsofFebruary Febr ar 4,20 2011,EEImembershave ha espent

approximately$577million(~30%)ofawardedsmartgrid ARRAfunds,a$58millionincreaseoverJanuary7,2011
EEIiscollaboratingwithDOEinanalyzingmetrics,

businesscases,andanarrayofbenefitssocietal, economic,operational,andconsumerrelatedforthe141 smartgridprojectsundertheSmartGridInvestment GrantProgramandtheSmartGridDemonstration Program

PotentialrevisionofDOEsmartgridfundingissue

TransformingTheCustomer/Utility Relationship
Many Man EEImembercompaniesarepursuing p rs inguse seofne new

informationtechnologiestosupplementtraditionalcall centerfunctions

IntegrationofAMI,advancedDistributionManagementSystemsand CustomerRelationshipManagementSystemsintoaseamless integratedsystemthatwillpushinformationouttothecustomer outageinformation,energyusage,pricealertsthatsupporta multiplicityofgoals Willusemultiplemodesofcommunicationthatwillmeetthe individualcustomersneeds

Platformforbuildingamorepositiverelationshipwiththe

customerinahightechworld

MultipleChannelUtility/Customer Engagement
Useofadvanced

customerservice channelstodeliver customerbenefits, b fi choiceandcontrol

Shiftfromreactive

issueresolutionto proactiveinformation transfer

Informationpush

versuspullcustomer service i model d l

EEICIOExecutiveAdvisory Committee
Givensignificanceofemergingtechnologyissues, issues

EEIrecentlycreatedanewEACthatbrings togetherCIOsfromourmembercompanies
Focusingonprovidingp0licyinputonsuch

technologyissuesas: as
Smartgridimplementation Spectrumissues Interoperabilitystandards Cybersecurityissue Dataaccessandprivacy

SummaryofKeyChallenges SmartGrid
Addressing dd i cutsin i ARRAfunding f di Ensuring gthatcyber y security yisatop pp priority y

andisaddressedatfederalandstatelevel
Enhancingcustomeroutreach, outreach education, education and

supportforgridmodernization

SnapshotofChallenges
Changing Ch i B Business i M Model d l withEPARegulation,CarbonPolicy,FinancialReform EVs, EVs IncreasedEnergyEfficiencyandSmartGrid ChangingRegulatoryModel withEnergyEfficiency,RES,SmartGridandCyberSecurity Changing g gIndustry yStructure withRenewables,DistributiveResources,Microgrids,and RightofFirstRefusal