epsa

1. GETTING THE BEST DEAL FOR ELECTRICITY CONSUMERS: THE COMPELLLING CASE FOR COMPETITIVE PROCUREMENT John E. Shelk President and CEO Electric Power Supply Association November 14, 2006 www.epsa.org

2. Role of Competitive Power Sector • Nearly 40% of installed generating capacity • Competitive sector built almost all new generation since early 1990s – primarily natural gas • Improved operating results at plants acquired through restructuring – coal and nuclear • Competitive Power’s Fuel Diversity: Coal – 36%; Natural Gas – 27%; Nuclear – 27%; Renewables – 5%; Other – 5%

3. The Need for New Generation is Clear • Demand up three times supply (2006-2015): 19 percent (141 GW) v. 6 percent (57 GW) (NERC 2006 LTRA) • “Uncommitted” resources to double to over 100 GW (NERC) • Record peak demand (Merrill Lynch 7/06) (summer heat wave) • Crunch starts 2008-2012, not at end of the forecast period • GE Financial Energy Services: $250 billion/150,000 MW by 2025 • How to meet demand is up for grabs – multiple fuels • Who will meet demand is also up for grabs – choices

4. Costs and Risks Are Rising • Fuels – global market, infrastructure needs • Environment – Carbon, CAIR, CAMR, NSR • Labor – benefits, wages, shortages • Construction materials – ordering at once • Technology risks are high, but manageable • What system better handles costs and risks: “cost-plus” or “cost discipline”?

5. Buy vs. Build Debate is Joined • Some say no need for competitive procurement – what are they afraid of? • Only rate-base can do new coal and nuclear – disagree • Competitive suppliers are national in scope • Case for competitive suppliers is compelling – risk transfer • Nature of competitive procurement will vary by state

6. Taxpayers Protected by Competitive Procurement, Why Not Ratepayers? • Connecticut – sealed bid for anything over $50,000 • Illinois – anything over $30,000 • Louisiana – most purchases over $25,000 • Massachusetts – most purchases over $5,000 • North Carolina – anything over $25,000 • Ohio – services over $50,000, supplies over $25,000 • Rhode Island – nearly all construction over $10,000 • Virginia – anything over $50,000, if practical

7. Credible Procurement Solicitations • Collaborative Process • Local utility submits recommended approach • Multi-day, commission-facilitated collaborative meetings • State PUC resolves outstanding issues • Independent, Third Party Evaluator • Performs independent evaluation • Monitors communication between the utility and affiliates • Benefit: Extra pair of “eyes” • Recent solicitations – IL CC, MD PSC, NJ BPU, GA PSC

8. Credible Procurement Solicitations • Fair Process Must: • Be free from actual, apparent conflicts • Provide all bidders similar access to information • Require full public view of the utility decision-making process • If the utility or affiliated entity participates, additional protections are required • Use of an independent evaluator – reports to commission • Separation of utility personnel – utility proposal vs. evaluating bids • Utility winner must honor its bids as submitted

9. Competitive Procurement Pitfalls • Don’t be dazzled by “debt equivalency” • Don’t change rules/terms in mid-stream • Don’t restrict solicitations to new builds • Don’t carve out or exempt specific projects • Don’t forget role of marketers and generators • Don’t over-compensate rate-base plants not subject to competitive procurement

10. QUESTIONS? John E. Shelk President and CEO Electric Power Supply Association 1401 New York Ave., NW 11th Floor Washington, DC 20005 Telephone: (202) 628-8200 Fax: (202) 628-8260 E-mail: jshelk@epsa.org Website: www.epsa.org