Salem Harbor Station: Can’t Live With It; Can’t Live Without It

1. Salem Harbor Station:Can’t Live With It; Can’t Live Without It Sanford L. Hartman Vice President and General Counsel National Energy & Gas Transmission, Inc. Presentation to: Electric Industry Restructuring Roundtable June 18, 2004

2. Brief Chronology • Sept. 1998 USGen New England purchases electric generating assets from New England Power; subject to the requirements of “Consumers First” • May 2000 Press conference with Gov. Cellucci to announce voluntary reductions at Salem Harbor including repowering of large oil unit at Salem • May 2001 Massachusetts DEP promulgates new air regulations for older power plants (“7.29 regulations”). - eliminates long-standing policy of “bubbling” across Brayton and Salem to achieve compliance at least cost

3. Brief Chronology • Dec. 2001 Salem Harbor submits ECP to comply by 2006; repowering no longer cost effective in New England market • June 2002 DEP approves Salem Harbor’s ECP but with 2004 compliance date • Dec. 2002 DEP issues draft approval of revised ECP with 2006 compliance date • Jan. 2003 Romney Administration begins • Feb. 2003 DEP reverses its position and issues disapproval of ECP with 2006 compliance date; Salem Harbor appeals

4. Brief Chronology • April 2003 Salem Harbor files an 18.4 request to ISO New England to retire by October 1, 2004 • June 2003 ACO signed with DEP, City of Salem, CLF, HealthLink, Wenham Watershed Association and MASSPIRG • July 2003 USGenNE files for bankruptcy ISO denies USGenNE request to retire Salem Harbor

5. Competing Objectives • Environmental Community: make further environmental improvements as quickly as possible or retire the plant • ISO: do not retire the plant – needed for reliability on the North Shore and in the Boston Import Area • City of Salem: sudden plant closure will mean catastrophic loss of tax revenues supporting schools, police and fire • USGenNE: in bankruptcy; compliance equipment investment not cost-effective (irrelevant ofbankruptcy); no access to capital

6. ACO’s Resolution of Competing Objectives • Environmental Improvements Near Term Compliance Measures • Immediate SO2 reductions from Unit 4 (lower sulfur oil) • Immediate NOx reductions from Units 1, 2 and 3 (run SNCRs year-round and implement Burner Tip Optimization Program) • Accelerate permitting of SNCR (NOx) for Unit 4 • Implement dust mitigation measures re: coal pile • Issue RFP for coal pile windscreen

7. ACO’s Resolution of Competing Objectives • Environmental Improvements Long Term Compliance Measures • Initiate critical path permitting for compliance equipment • Implement “Compliance Account” which tracks emissions of SO2 and NOx in excess of 7.29 regs as of Oct. 1, 2005, for payback once compliance equipment installed • Seek funding for compliance equipment • Install compliance equipment within 32months of initiation of funding

8. ACO’s Resolution of Competing Objectives • Reliability If compliance equipment funding is delayed, day-for-day extension allowed in construction milestone schedule Salem Harbor units may continue to operate so long as needed by ISO for reliability purposes

9. ACO’s Resolution of Competing Objectives • Tax Revenues Units will continue to operate so long as needed for reliability purposes by ISO – tax payments can continue so long as units operate Units may continue to operate up to one additional year after reliability need ceases to allow for an orderly transition Units may continue to operate indefinitely after reliability need ceases if in compliance with 7.29 regs and all other applicable regulations

10. ACO’s Resolution of Competing Objectives • Access to Funding Salem Harbor has obligation to seek funding Filed petition for approval of Reliability Agreement negotiated with ISO FERC approval of Reliability Agreement could occur within third quarter

11. Overview of Reliability Agreement • Negotiated between USGenNE and ISO • Enabling Agreement which establishes a mechanism for funding an escrow account for costs actually incurred by Salem Harbor in construction compliance equipment • Also establishes a mechanism for USGenNE to repay funds drawn from the escrow account assuming one or more of the units continue to operate

12. Innovations in Reliability Agreement • Repayment mechanism • Explicitly requires consultation between ISO and state agencies in process of deciding whether to initiate funding or halt funding • Minimizes the type of market interference created by traditional RMR contracts

13. Possible Outcomes • FERC approves funding mechanism Trigger may or may not be pulled on funding If trigger is pulled, Salem Harbor will submit to ISO cost estimates for project Project costs will be reviewed by ISO’s Independent Engineer If costs are approved, escrow will be funded Construction will commence

14. Possible Outcomes • FERC does not approve funding mechanism Salem Harbor will continue to comply with the 7.29 regs by implementing the Near Term Compliance Measures in the ACO ISO will continue to assess whether some or all of the units at Salem Harbor are needed for reliability