A presentation by: Dr. John A. Anderson, President & CEO

1. The Odyssey of Affordability:How Can Regulators, Utilities & Consumers Reconcile the Need to Raise Rates with Affordability? A presentation by: Dr. John A. Anderson, President & CEO Electricity Consumers Resource Council (ELCON) Washington, D.C. At the: 2010 MARC Conference Kansas City, MO June 8, 2010

2. What Is ELCON? • The national association for large industrial users of electricity in the U.S. • Founded in 1976 • Members from a wide range of industries from traditional manufacturing to high-tech • The views today are mine alone

3. Current Economic Conditions • We are in the midst of a terrible recession • Unemployment is at historical levels • The Bureau of Labor Statistics has found: • US employment declined by 4.7 million in 2009 alone – the largest calendar-year job loss since 1939 • ⅓of the total manufacturing jobs have been lost since 1998 • This truly is the worst recession since the Great Depression of the 1930’s • The next two slides vividly demonstrate these conditions

4. Unemployment

5. Recessions Over Time

6. The Importance of Energy Prices to Manufacturers • Energy prices impact both the quantity and location of manufacturing jobs • Studies suggest that a 3% increase in energy prices results in roughly a 1% decline in manufacturing jobs • Clearly, the impact varies by type of manufacturing • Some industries are far more energy intensive than others

7. The Importance of Energy Prices to Manufacturers (Cont.) • Manufacturing is a multi-stage process • Each stage has varying energy intensity • Often the most energy intensive stages are upstream • I offer a couple of examples

8. Aluminum • Bauxite ore is processed to make alumina • Bauxite comes from (in descending order): • Australia, Guinea, Brazil, China, India, Jamaica and Vietnam • Aluminum metal is refined from alumina in a very energy-intensive electrolytic process • Electricity represents over ⅓of the total costs • Aluminum ingots can (and are) made anywhere in the world and shipped to markets for final processing

9. An Aluminum “Pot Line”

10. Integrated Steelmaking • The basic raw material is iron ore • Iron ore comes from (in descending order): • China, Brazil, Australia, India and Russia • The ore is combined with a carbon source (usually coke) and limestone and is heated to a very high level to remove oxygen and other impurities to make iron • Basic steel making further refines the iron by removing carbon, silicon, sulfur, phosphorous and manganese • Electricity represents 15% to 20% of the total costs of integrated steel making • Steel ingots can (and are) made anywhere in the world and shipped to markets for final processing

11. Basic Integrated Steelmaking

12. Electric Arc Furnace Steelmaking • Scrap steel is placed in a “scrap bucket” (a very large clam shell shaped container) • The bucket is “charged” by lowering electrodes into the bucket, thus melting the scrap • The type and quality of the steel is a function of the type of scrap and additives • Electricity represents 30% to 35% of the total costs

13. Electric Arc Furnace Steelmaking

14. The Importance of Energy Prices to Manufacturers • Increases in energy prices may not drive entire industries offshore • But they may well drive certain stages of manufacturing to other locations • And such dislocations will result in both losses of domestic jobs and also increased world-wide emissions

15. Stated Objective of this Panel • This panel is based on the assertion that there is a “need” for capital investment for new energy infrastructure • Generation, transmission and/or distribution • But what is meant by the word “need”? • Is infrastructure “needed” to meet requirements of legislation? • Or is it intended for some future requirement(s)? • Is infrastructure “needed” for reliability? • Is the “reliability trump card” validated? • We certainly understand that new infrastructure is needed • But we don’t necessarily agree that a complete overhaul of the electricity grid is justified

16. If Infrastructure Is Truly Needed • At the outset, I emphasize: • If consumers understand that new infrastructure is both truly needed and implemented at least cost, consumers more than likely will agree to pay • However, if consumers are not convinced that the expenditures are needed and/or are not least cost there will be strong opposition • I raise several areas of concern

17. Is the Infrastructure Really Needed? • If infrastructure is truly “needed” • Which customers should be required to pay? • As simply an example: • We agree that improvements to the grid may well bring benefits to customers • But are the improvements truly “cost-effective” • For instance: Do we really need a completely new 765 kV overlay transmission grid? • It MAY well be justified • But many consumers have not yet seen the evidence that it is truly “needed” today

18. Is the Infrastructure Really Needed? (cont.) • Do we need to spend hundreds of billions of dollars on a “smart grid” that isn’t yet defined? • Will we get HD DVD or Blue Ray? • Will the smart grid be internet or wireless driven? • Can radio controlled switched on customers’ appliance work as well as sophisticated, centrally controlled devices? • Are “smart meters” needed for environmental purposes – Or just to bring real-time prices to residential consumers? • Are there cyber security and privacy concerns? • Such proposals MAY well be justified • But we have not seen the evidence yet that they are truly “needed” today

19. How Should Costs Be Allocated? • Should costs of infrastructure be socialized across regions? • As an example: Wind power may be plentiful in the mid-west – a region particularly hard hit by the recession • But the power may be needed in load centers on the coasts • Transmission may then be needed to move the wind power from source to sink • We know that customers will pay – they always do • But should it be customers in the regions where the transmission is actually located? • Or should it be the customers that benefit from the renewable power – and hence the transmission?

20. How Should Costs Be Allocated? (cont.) • Further, should the costs be socialized across customer classes? • As an example: It is often asserted that energy efficiency (EE) is a very low cost option (too cheap to meter?) • And that utilities may be key to the development of EE programs • But world-wide competition has forced many (most?) industrials to implement cost-effective EE on their own • Should they be required to pay for EE that benefits only other customers?

21. Recommendations • Understand the interaction between your regulatory decisions and the economy • Unnecessary energy price increases may bring both job losses and environment harm • There is no such thing as a free lunch • And nothing is too cheap to meter (measure and verify) • Scrutinize carefully all proposals brought before you • Be sure that the option chosen is truly the least-cost • And actually will achieve the desired result

22. Recommendations (cont.) • Recognize that the role of regulators is (or should be) to regulate • Not to set broad social or environmental policies • Regulators should only require those things actually required by law • It is true that today some regulators are instructed by lawmakers to: • “promote energy efficiency” or “increase the use of renewables” or protect the environment” • However, in these very difficult economic times we simply cannot afford the luxury of over-implementation

23. Recommendations (cont.) • Finally, make every effort to understand who benefits (and who doesn’t) • It is often difficult to identify the beneficiaries • However, socialization of costs is only justified if benefits are uniformly distributed to all or most affected consumers • Obviously, socialization is appropriate if everyone benefits equally • But that is the exception – rather than the rule • Socialization is never justified if the degree of benefits is unknown or cannot be reasonably estimated

24. To Contact ELCON Phone: 202-682-1390 E-mail: elcon@elcon.org Web site: www.elcon.org Address: 1111 19th Street N.W., Suite 700 Washington, DC 20036