The Post-Recession Environment: An Industry Perspective SURFA Financial Forum 2011 Draft: 27 March 2011.

The Post-Recession Environment: An Industry

PerspectiveSURFA Financial Forum 2011

Draft: 27 March 2011

THENlarge periodic

projects to support strong load growth

required infrequent, but

major, rate cases

NOWOngoing

investment well above

depreciation and slower sales

growth requires ongoing rate

increases

Illustrative

A Paradigm Shift

CostsCosts

Sales GrowthSales Growth

CostsCosts

Sales GrowthSales Growth

Regulatory LagCapital Investment

Cost of Capital Credit Worthiness

Realized Return

Energy Growth Per Customer

Overview of the Problem

Natural Gas

SURFA Presentation Vincent L. Ammann, Jr.Vice President & CFO

April 14, 2011

6

Decoupling Mechanisms

District of Columbia:

Virginia:

Maryland:

• March 2010, Virginia SCC approved RNA for residential customers (“CARE”)

• Approval for commercial customers dependent tariff changes which included in rate case filed in January 2011

• Filed for Revenue Normalization Adjustment in December 2009

• DC PSC deferred review until next rate case

• RNA mechanism approved in 2005

7

Infrastructure Trackers

District of Columbia:

Virginia:

Maryland:• Approved Settlement Agreement for $28 million

in additional infrastructure investments over 7 years

• Surcharge allowed after rate freeze expires 10/1/11

• Proposed legislation in 2011 to permit accelerated infrastructure spend and surcharge was unsuccessful

• Potential proposal in upcoming rate case to be filed soon

• Accelerated infrastructure spending legislation with surcharge mechanism passed into law in 2010

• Approval of spending plan and surcharge calculation currently pending

Electricity

Electricity Sales (GWh)

Three Year Average Demand Growth %

Source: Department of Energy, Energy Information Agency Annual Energy Outlook 2009, Updated Reference Case

Period Growth

50's 9.8%

60's 7.3%

70's 4.7%

80's 2.5%

90's 2.3%

00's 1.4%

10’s (p) 1.1%

20’s (p) 1.0%

Industry

Industry Trend

By 2030, the electric utility industry will need to makeinfrastructure investments of $1,830 Billion

This level of investment is nearly triple the US Shareholder –OwnedElectric Utilities’ current net plant value of roughly $650 billion

$654B

$1,830B

Source: Transforming America’s Power Industry, The Brattle Group, November 2008

Looking Out 20 Years

Capital Expenditures and Depreciation U.S. Shareholder-Owned Electric Utilities; $ Billion

Depreciation

Capital Expenditures

Gap of $50 billion in capital would translate into $8 billion in rate requests

Capital Investment vs Depreciation

Source: SNL Financial, company reports and EEI Finance Dept.Note: Starting in 2008, the universe of companies drops from 69 to 63, removing six companies that did not file Form 10-K with the SEC.

Decline in Credit Quality

Source: Standard & Poor’s, SNL Financial and EEI Finance Dept.

Water

14

The U.S. Water Industry

Aging US Infrastructure Investment Remains Critical

15

Source: U.S. Environmental Protection Agency’s 2007 Drinking Water Infrastructure Needs Survey and Assessment.In billions, adjusted to January 2007 dollars.

US EPA Estimated 20 Year Total Needs of US Public Water Systems

American Society of Civil Engineers (ASCE) grades US infrastructure

• 2009: $335 billion

• 2005: $277 billion

• 2002: $154 billion

• 2009 Grade: D-

• 2005 Grade: D-

• 2001 Grade: D

Transmission &Distribution:

$200.8

Treatment: $75.1

Storage: $36.9

Source: $19.8

Other: $2.3

Total: $334.8 Billion

US EPA estimates upwards to $1 trillion needed for public water and wastewater systems

16

Excellent, 69%

Good, 19%

Fair, 3%

Poor, 3%

Very Poor, 2%

Life Elapsed,

5%

1980

Excellent, 43%

Good, 17%

Fair, 18%

Poor, 14%

Very Poor, 2%

Life Elapsed,

7%

2000

Excellent, 33%

Good, 11%

Fair, 12%

Poor, 13%

Very Poor, 23%

Life Elapsed,

9%

2020

Without renewal or replacement of existing systems, pipe classified as poor, very poor or life elapsed will increase from 10% to 44% by 2020

Source: American Water Works Association, Dawn of the Replacement Era: Reinvesting in Drinking Water Infrastructure, May 2001

Aging Pipe Infrastructure Network Propels Need for Capital Expenditures

Percentage of Pipes by Classification

Water Utility Expenditures

17

Water vs Other Utility Expenditures Water Use in the Home

Appendix

Electricity Infrastructure Needs

For continued reliability and carbon mitigation: Transmission ($297.8 billion) – To support new non-wind

generation, bring wind generation to market, reinforce the grid for reliability

Distribution ($581.5 billion) - To replace aging infrastructure, connect new customers, enhance reliability, improve power quality, deploy “Smart Grid” components

Generation ($951 billion) – To serve new load, meet renewable resource mandates, build new nuclear generation, build new coal generation with CCS, retire carbon-intensive generation, deploy advanced metering and programs for realistically achievable EE/DR improvement

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