American Public Power Association Pre-Rally Workshop February 28, 2006 Washington, D.C.

1. Climate Change: Making Community-Based Decisions in a Carbon Constrained World American Public Power Association Pre-Rally Workshop February 28, 2006 Washington, D.C.

2. Assessing the Risk of Future Carbon Constraints February 2006 APPA Meeting Washington, D.C. Kevin Wanttaja, SRP

3. Purpose of Carbon Study • Identify the compliance requirements of potential national polices • Identify a range of strategies for controlling carbon • Estimate the financial risks under various polices • Determine critical elements of a long-term carbon management program • Identify actions that should be taken now February 2006

4. General Approach to Quantifying Carbon Risk • Translate policies into estimates of future carbon allocations • Quantify “gap” between projected carbon emissions versus allocations • Assess potential changes to resource mix to meet carbon allocations • Estimate cost of buying carbon credits to achieve compliance • Financial risk falls between costs of changing resource mix to purchasing credits February 2006

5. Climate ChangeRecent National Policy Developments • Bush Global Climate Challenge Initiative • 18% Reduction in GHG Intensity by 2012 • Greater investment in science and technology • Voluntary incentive based programs (Power Partners) • McCain/Lieberman Climate Stewardship Act • Caps CO2 Emissions to 2000 levels by 2010 • Allowances distributed based on historical emissions • Administered by EPA • Severe penalties for exceeding allowances (3 x market rate) February 2006

6. Climate ChangeRecent National Policy Developments • Senator Bingaman 2005 Proposal – based on National Commission on Energy Policy (NCEP) • 2.4% annual reduction of GHG emissions intensity from 2010 -2019. Translated into annual emissions caps. • 91% -87% of allowances allocated to regulated sectors • Safety valve price of $7/ton CO2 in 2010 adjusted by 5% per year • DOE regulates program February 2006

7. Climate ChangeRecent National Policy Developments • Regional Greenhouse Gas Initiative (7 NE States) • 2009 - 2014 CO2 Cap ~ 2004 emissions • 2015 – 2019 CO2 Cap – 2.5% reduction per year through 2019 (10% below 2004 levels by 2019) • 25% of allowances reserved for consumer benefit or strategic energy purposes • Unlimited banking of allowances and early reduction credits • Compliance demonstrated every three years February 2006

8. 2009-2019 Production = 391,200 GWh 2009-2019 Fleet Intensity = 1359 lb/MWhr February 2006

9. Potential GHG Emissions Reductions • On-System • Environmental Dispatch* • Renewables* • Generation Efficiency • New Generation*/Fuel Switching • Biomass Co-Firing • Capture and disposal • Off-System • Demand-side management • Market purchases* • Offsets (Terrestrial sequestration, clean projects) * Options considered in SRP study February 2006

10. Bush: By 2012, 18% reduction in 2002 intensity 2009-2019 Reductions Needed = 4.7 Million Tons 2009-2019 Fleet Intensity = 1335 lb/MWhr With target REN at 6.3%, goal exceeded February 2006

11. McCain : Starting in 2010, absolute cap at 2000 levels, no price cap 2009-2019 Reductions Needed = 48.2 Million Tons 2009-2019 Fleet Intensity = 1113 lb/MWhr At $7/ton, $ Impact = $337 Million over 2009-2019 February 2006

12. Bingaman: Starting in 2010, reduce intensity by 2.4% per year, $7/ton price cap 2009-2019 Reductions Needed = 35 Million Tons 2009-2019 Fleet Intensity = 1181 lb/MWhr At $7/ton, $ Impact = $245 Million over 2009-2019 February 2006

13. RGGI: 75 % of current levels (2009-2014), 2.5% per year (2014-2018), No price cap 2009-2019 Reductions Needed = 119 Million Tons 2009-2019 Fleet Intensity = 752 lb/MWhr At $7/ton, $ Impact = $833 Million over 2009-2019 February 2006

14. Critical Elements of a Utility Carbon Risk Management Program • Accurate inventories • Estimate financial risks under future Climate Change policies • Gain knowledge of cost-effective reduction methods • Develop low emissions technologies for long-term generation needs • Enhance business image by joining voluntary programs. Demonstrate voluntary reductions. • Stay engaged in policy debates February 2006

15. SRP Short-Term Actions • Participation in Climate VISION/Power Partners • Developing accurate GHG inventories for reporting under 1605(b) and potential voluntary registry programs • Increase renewables in generation mix • Participation in R&D • CoalFleetforTommorrow • Arizona geologic carbon sequestration (pilot study) • Refine risk analysis • Firm up capital cost requirements • Perform sensitivity analysis using alternate carbon costs February 2006

16. Key Elements of a National GHG Program • Who is regulated? • Sector specific or economy-wide • Where is the point of regulation? • Upstream (fuel extraction, fuel processing, fuel transportation) • Downstream (electric generators, large industrials) • How should economics be addressed? • Intensity based targets vs hard cap, price caps, allocation of allowances, consumer protection • What should be done to stimulate technology and R&D? • How should program be integrated with other international efforts? February 2006

17. Climate Change: Making Community-Based Decisions in a Carbon Constrained World American Public Power Association Pre-Rally Workshop February 28, 2006 Washington, D.C.