Shale Gas One Power Industry Perspective

1. Shale Gas One Power Industry Perspective Lauren Quam Manager, Market Analytics FirstEnergy Solutions

2. Who is FirstEnergy Solutions • Competitive subsidiary of FirstEnergy Corp. • Nation’s largest investor-owned electric utility based on serving six million customers • Ten utilities throughout OH, PA, NJ, MD, VA and WVA • Fourth largest retail supplier of electricity in US to C&I accounts • Fifth largest retail supplier to residential electric accounts • FES’ family of companies owns approximately 21,000 MW of unregulated generating capacity • Non-emitting nuclear, scrubbed baseload coal, natural gas, pumped-storage hydro and other renewables

3. FirstEnergy’s Unregulated Generating Sources Ohio Ohio Edison The Illuminating Company Toledo Edison Pennsylvania Met-Ed Penelec Penn Power West Penn Power West Virginia/Maryland/Virginia Mon Power Potomac Edison New Jersey Jersey Central Power & Light Coal Gas/Oil Hydro Wind Nuclear

4. States We Serve Actively serving and selling Michigan

5. Natural Gas Industry Background • Previously • North America would be increasingly reliant on Liquefied Natural Gas (LNG) imports to: • Meet a growing natural gas demand • Replace declining domestic production • Future natural gas prices would be strongly influenced by global gas/oil prices • Natural gas as a fuel for power generation was limited to a peaking role • Today • Domestic gas reserves measured in decades and centuries • Massive volumes for small increments in drilling expense • Relatively low long-term gas prices • North American natural gas prices are effectively de-coupled from global gas prices • Poised to become a “more baseload fuel” due to low emissions and cost

6. Outline • Power market mechanics • Historic gas and power prices • Key issues for the power industry • Role of natural gas in power sector • Impact of unconventional plays like Marcellus/Utica

7. Electricity Market Fundamentals Demand Curve (Load) • Load Shape • Load Growth Supply Curve (Generation): • Generation Stack Makeup • Generation Stack Costs Peaking Intermediate / Load Following Increasing Variable (Dispatch) Cost - $/MWh Baseload Time – Hours (Months, Years)

8. Natural Gas “Spot” Price Kingsgate Ventura Dominion North Point Tetco M2 PG&ECitygate Panhandle Transco Z5 Henry Hub Source: Intercontinental Exchange 10x Day Ahead Natural Gas Pricing Report (Weighted Average Index $ per mmBtu.)

9. Electricity “Spot” Price (On-Peak) Source: ISO Day-Ahead prices from PJM, ISO New England, CAISO, ERCOT, MISO and SPP where available. Otherwise daily physical power prices from Enerfax

10. '11 '12 '13 '16 '15 '17 '08 '09 '10 '14 Environmental Regulatory Timeline Ozone (O3) SOx/NOx Water CAIR/Transport Effluent Guidelines proposed rule expected Transport Rule proposal issued (CAIR Replacement) Final Transport Rule Expected (CAIR Replacement) Begin CAIR Phase I Seasonal NOx Cap Effluent Guidelines Final rule expected Revised Ozone NAAQS Effluent Guidelines Compliance 3-5 yrs after final rule SOX/NOx Secondary NAAQS Ozone NAAQS Revision PM Transport Rule SO2 Primary NAAQS CAIR Vacated 316(b) final rule expected NO2 Primary NAAQS CO2 Regulation (PSD/BACT) GHG NSPS Final 316(b) Compliance 3-4 yrs after final rule CAIR Remanded Ozone Transport Rule Transport Rule Phase II Reductions Begin CAIR Phase I Annual SO2 Cap HAPS MACT Compliance 3 yrs after final rule Begin Compliance Requirements under Final CCB Rule (ground water monitoring, double liners, closure, dry ash conversion) Final Rule for CCBs Mgmt Next PM-2.5 NAAQS Revision 316(b) proposed rule expected CAMR & Delisting Rule vacated GHG NSPS Proposal Proposed Rule for CCBs Management Begin CAIR Phase I Annual NOx Cap HAPs MACT final rule expected Transport Rule Phase I Reductions HAPs MACT proposed rule Ash Hg/HAPS CO2 PM/PM2.5 -- Adapted from Wegman (EPA 2003) Updated 01-12-11

11. Expected Results of Environmental Regulation • Effect on coal plants: • Estimated 9 GW to 90 GW coal plants will be retired • Remaining plants retrofitted with environmental controls • Natural gas fired power plants: • Existing plants will be required to generate more • New natural gas fired power plants will be constructed, further adding to power sector gas demand

12. Wide Range of Retirement Expectations

13. 2010 PJM Supply Curve

14. 2010 PJM Supply Curve Based on $9 Gas

15. End result…Opportunities • Natural gas plants will play increasingly important role in setting the hourly price of electricity and in energy production in general • Power sector gas demand could increase by 8-9TCF/year (~25%) by 2020 • This represents about 1/3 of the total power sector electricity production and about 1/3 of the total US natural gas demand

16. Final Points • Marcellus/Utica shale production contributes to healthy economies and strong domestic natural gas supply • Strong economy benefits the power sector; however, lower gas prices lead to lower electricity prices • Power industry’s generation fleet is changing, with natural gas expected to become an increasingly important fuel • Local natural gas resources like Marcellus and Utica are key to future U.S. natural gas supply picture • New market dynamics set the stage to achieve “operational synergies”