U.S. Climate Change Policy

1. U.S. Climate Change Policy American Council of Engineering Companies (ACEC) Indiana Wednesday, October 21, 2009 Indianapolis Downtown Sheraton David Bear- Duke Energy

2. Topics for Discussion • Duke Energy’s Position on Climate Change Legislation • Climate Change Policy Attributes • Potential Cost Impact to Duke Energy Customers if all Allowances Were Auctioned • Waxman/Markey Bill • Boxer/Kerry Proposal • EPA Action to Regulate GHG Emissions

3. Duke Energy Position on Climate Change Legislation • Duke Energy supports federal legislation mandating economy-wide reductions in GHG emissions – but not just any policy • Policy needs to protect consumers • Policy should incorporate the following attributes • Economy-wide in scope • Market-based (cap-and-trade) • Slow, stop and then reduce emissions trajectory • Effective cost containment measures • A fair allocation of allowances • Advances technology development, demonstration and deployment

4. Climate Change Policy Attributes Economy-wide Cap-and-Trade Cap-and-trade most economically efficient approach Covers multiple sectors Slow, Stop and Reverse Emissions Cap Trajectory Reduce emissions gradually over time Recognize the current state of technology development Effective Cost Containment Measures Domestic and international offsets Unlimited banking Multi-year compliance periods Strategic offsets and allowance reserve pool 4

5. Climate Change Policy Attributes continued • Fair Allowance Allocation • Program costs will fall disproportionately on consumers in the 25 states whose electricity comes primarily from coal • Auctioning all allowances from the beginning of the program would unfairly penalize consumers in these states – “polluter pays” is a myth • The additional cost from an auction would contribute nothing to reducing emissions – just a tax - and would result in a “double hit” to consumers • Allowances should be granted to local distribution companies – value will flow through to consumers – no windfall profits • Allocation level should be equal to recent emission levels associated with the electricity delivered • An allocation avoids initial rate shock that would result from a 100% auction

6. 9% 10% 2% 95% 64% NH 17% RI 0% CT 12% NJ 19% MA 25% VT 0% DE 59% MD 56% DC 0% 62% 67% 7% 14% 1% 46% 58% 95% 55% 78% 66% 87% 46% 94% 48% 98% 94% 45% 72% 1% 75% 85% 91% 60% 61% 14% 53% 39% 40% 85% 48% 64% 57% 37% 25% 37% 28% % = percent of total generation from coal for 2005 < 30% 30 – 50% >50% Hydro Source: Energy Information Administration, November 2006. National average: Coal share of total generation = 50%

7. Climate Change Policy Attributes continued • Promote Technology Development, Demonstration and Deployment • Policy must promote new low-and zero-emitting base load generation technologies – coal with CCS and nuclear • Coal must play a large role in country’s energy future • Currently no economically viable or proven technology for capturing and sequestering CO2 from coal • Funding is needed to support accelerated demonstration of several projects • New nuclear generation a key to achieving large reductions in CO2 emissions from electric sector • Remove regulatory and financial barriers to new nuclear • Expand loan guarantee program Congress authorized in 2005 • Ban on spent fuel reprocessing should be revisited

8. Smart Grid • Installed 89,500 smart electric meters; 62,000 smart gas meters (Ohio) • Installed distribution automation equipment (self-healing) • Conducting residential pilot programs • Duke Energy filed an application for stimulus funding under DOE FOA 58 • Requested maximum $200 million for projects on distribution systems; requested and additional $14 million for transmission and other demonstration projects. • Timeline: • Application filed in August • Awards anticipated in October • Negotiations in Oct/Nov timeframe

9. Coal Capture and Sequestration (Storage) • Duke’s Edwardsport project will be the largest and cleanest coal-fired power plant in the U.S. It will make IGCC technology a viable economic choice for Indiana electric customers. • Duke Energy and regulators will work to study the plant’s long-term costs, impact and the effectiveness of CCS to help advance the development of clean coal technology. • November 2007, IURC granted Duke authority to study the potential for partial CO2 capture and further study and potential implementation of CO2 sequestration • May 2009, Duke began working on a comprehensive engineering study for the design of a CO2 capture system • August 2009, Duke applied for DOE for 50% co-funding to offset cost of CCS

10. Waxman/Markey Bill In the U.S. House of Representatives • Progress was made over the course of the House debate. • In February, President Obama called for a 100 percent government auction of allowances and had built $636 billion of receipts into his proposed budget. This would have had a devastating impact on electricity prices, especially in the coal states (see chart below) • The final Waxman-Markey bill allocated 85 percent of the electricity sector’s allowances to regulated local distribution companies and specified their value flow back to customers. Other measures were taken to mitigate costs to disproportionately-impacted companies, especially those who might be trade disadvantaged.

11. Estimated Average Rate Increase-Duke Energy IndianaFull Action vs. Waxman/Markey Formula • Notes: • Cost estimates reflect emission projections in 2012 and are allocated to each customer class based on their share of total projected 2012 MWh sales. • Percentage increases were estimated using 2008 rates applied to projected 2012 sales. • Cost estimates do not include future capital spend, only cost to purchase allowances in 2012. (Assume program starts in 2012.) • Actual allowance prices are highly uncertain due to the uncertain role of international offsets in the early years of a program . Prices could be higher than $20.

12. Boxer/Kerry Proposal in the U.S. Senate • Support efforts to increase the number of economy-wide allowances to the electric sector; Waxman-Markey allocated 35 percent to the industry even though the industry is responsible for 40 percent of the emissions. A larger “utility sector pot” will reduce costs to customers. • Work to address any inequities in the allocation formula that cause a disproportionate share of the costs to fall on any one region of the country. • Work to extend the deadline for the total phase-out of the allocation. Waxman-Markey calls for a 5-year phase out of allowances starting in 2020 with a full auction starting in 2025. The allocation phase-out should be tied to the introduction of new clean technology and additional time (at least 5 more years) will be needed before technologies such as carbon capture and storage will be ready for mass commercialization.

13. Boxer/Kerry Proposal (continued) • Offsets ---- continue to work hard to ensure a robust offset market is available Day One of the program (if not sooner). Available and accessible offsets can dramatically reduce the costs of compliance and reduce costs to the consumer • Boxer/Kerry Proposal anticipated for Mark-up around Thanksgiving • Move cap from 17% of 2005 emissions to 20% of 2005 emissions • Possible Price Collars to control (ceiling and floor price of allocations) • Health Care, Financial Crisis, Climate Change

14. EPA Action to Regulate GHG Emissions • Supreme Court ruled in April 2007 that EPA has the authority to regulate GHG emissions under the Clean Air Act (CAA) • EPA recently proposed a rule to regulate GHG emissions from new motor vehicles – plans on finalizing by March 31, 2010 • Once finalized the door is open for EPA to regulate other sectors • Final rule automatically triggers Prevention of Significant Deterioration permitting requirements for major stationary sources of GHG emissions • President Obama has stated that his preference is the legislative approach, so why would his administration take this step?

15. EPA Action to Regulate GHG Emissions (Continue) • Duke Energy strongly opposes the regulation of GHG emissions using the CAA • CAA too inflexible a regulatory instrument to allow for the efficient regulation of GHG emissions • A program that can have such broad economic implications for the country’s economy should be the responsibility of an elected and accountable Congress

16. U.S. Climate Change Policy QUESTIONS