State of the Electric Industry Mark Agnew, Edison Electric Institute 2010 IEA Energy Conference September 23, 2010

1. State of the Electric IndustryMark Agnew, Edison Electric Institute2010 IEA Energy Conference September 23, 2010

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3. Financial State of the Electric Industry 3

4. We are no longer a declining cost industry Aging workforce increasingly important Electricity demand will increase 21% by 2030 Increasing concerns about the environment Effectively managing regulatory relationships and capital investment decisions 4

5. Electric industry not immune to economic downturn Output fell by 3.7% in 2009, largest year-to-year drop since 1938, 2008 = -0.9% Bad economy and mild summer in 2009 Output up 4.4% in 2010 (year-to-date) Electricity sales (only IOUs) down 5.2% in 2009 Residential = -1.5%, Commercial = -4.3%, Industrial = -11.9% 2004-2008 Residential grew by 3.4% avg, Industrial fell by 1.5% annually Industrial - represented 57% of the 2009 drop in sales Typically accounts for 25% of sales 5

7. Industry Capital Expenditures

8. Capital Spending Drives Regulatory Lag

9. Rate Case Volume Remains High

10. Awarded ROEs Remain Low

11. Coupons “Normal,” Spreads Remain Elevated

12. Credit Quality

13. Decline in Credit Quality1992 vs. 2008

15. Lower Dividend Tax Rates Will Expire December 31 Congress passed a law in 2003 that temporarily reduced tax rates on dividends 15 Current capital gains tax rate is 15%; maximum tax rate will rise to 20% at end of year if Congress does not extend current rates

16. The maximum tax rate on dividend income will soar as much as 164%—from 15% to 39.6%—if Congress doesn’t act to stop a dividend tax hike. 27 million Americans from all income levels and age groups directly own stocks that pay dividends. Tens of millions own dividend-paying stocks indirectly through pension funds, 401(k) plans, IRAs, mutual funds, or life insurance policies. Raising dividend tax rates to previous levels will create a tax policy that favors capital gains over dividends. Maintaining parity between tax rates for dividends and capital gains is essential so tax policy doesn’t favor growth stocks over dividend-paying investments. 16

17. Higher dividend tax rates, along with the double taxation that dividends receive, promotes the issuance of more debt financing. Raising dividend tax rates would disadvantage the largest dividend-paying sectors, such as electric and natural gas utilities, making it more difficult to finance critical infrastructure projects that are sources of high-quality job creation. Raising taxes on dividend income—even just for higher-income taxpayers—would affect ALL taxpayers who receive dividends by discouraging investment in dividend-paying companies. 17

18. Obama budget proposal Dividends & capital gains to 20% for: >$200k (single) & >$250k (joint) Congress extends current rates for a year or two Tax cuts return to pre-2003 levels Parity with Cap Gains above 20% 18

19. Ads Advocacy materials Sample letters to employees, shareholders, and retirees Web sitewww.DefendMyDividend.org Grassroots advocacy center Emails/phone calls Web stickers 19

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21. 21 The Current Political Landscape

22. Other Tax Issues 22

23. Expired at end of 2009 Provides 50% depreciation in year 1 Trying for one-year extension 23

24. Senate – one-yr. extension included in Small Business Jobs Act of 2010 House – voting on the Senate-passed bill this week 24

25. IRS guidance in March 2010 SGIG are not taxable Ruling immediately spurred activity Demonstration Grants are taxable 25

26. OTC Derivatives 26

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31. Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law in July contains an end-user exception from mandatory clearing and exchange trading the exception allows utilities to continue to use both exchange products and Over-The-Counter (OTC) derivatives OTC derivatives offer the benefits of: reduced financing costs (utilities benefit from their strong balance sheets) and greater customization 31 - Financing costs mean the costs associated with cash margins that, for riskier counterparties like leveraged investors, protect their OTC counterparties in the event of default. - Cash margins also allow for convenient risk management for companies that trade standard products like Henry Hub natural gas – they do not need to evaluate the credit risk of individual counterparties.- Financing costs mean the costs associated with cash margins that, for riskier counterparties like leveraged investors, protect their OTC counterparties in the event of default. - Cash margins also allow for convenient risk management for companies that trade standard products like Henry Hub natural gas – they do not need to evaluate the credit risk of individual counterparties.

32. Customized hedges available through OTC transactions can reduce costs and also help to limit cash flow volatility.Customized hedges available through OTC transactions can reduce costs and also help to limit cash flow volatility.

33. 33 SD and MSP should exclude end-users (are meant for financial intermediaries like investment banks, and large investors including hedge funds)SD and MSP should exclude end-users (are meant for financial intermediaries like investment banks, and large investors including hedge funds)

34. Climate 34

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39. Mark Agnew Director, Financial Analysis Edison Electric Institute (202)508-5049 magnew@eei.org 39