Rate Setting in New York Case Study : Con Edison Electric Rate Proceeding

1. Rate Setting in New YorkCase Study:Con Edison Electric Rate Proceeding • NY DPS Staff Position • Summary of Joint Proposal Thomas Dvorsky Director, Office of Electric, Gas and Water New York State Public Service Commission May 24, 2011

2. After four months of formal discovery and analysis of the rate filing, Staff developed its own position and submitted expert testimony. • The following schedule reconciles Staff’s position with the Company’s filing on each of the revenue requirement components.

5. After testimony was filed by Staff and other parties in the case, discussions took place over a three week period in an attempt to reach a negotiated settlement. • The following summarizes the Joint Proposal that was reached.

6. Revenue Requirement Issues • Three year agreement • Levelized rate increase each year of approximately $423 million per year, this equates to an approximate 9.9% annual increase on T&D or 3.8% on total bill. (This is based increased of $550 million – RY1, $315 million – RY2 and $298 million – RY3. For reference, the Company’s original filing requested $840 million for RY1 and Staff’s filed case supported a $511 million increase for RY1)

7. Revenue Requirement Issues (con’t) • ROE 10.15% with sharing thresholds and deferral limitation • Earnings Sharing – RY1 (see below re RYs 2&3) • 1% dead-band (100 basis points); • 50%/50% sharing (cust/comp) for ROE above 11.15%; • 75%/25% sharing for ROE above 12.15%; • 90%/10% sharing for ROE above 13.15%; • Sharing will be calculated per books, excluding incentives and tax refunds, using the lower of Con Edison’s actual average equity ratio or 50.0%. • The earnings sharing provision will be lower in RY2 and RY3 in order to capture a greater proportion of benefits for customers that may be achieved from the implementation of the Management Audit recommendations: • Earnings sharing starts 50 BPs above ROE • 60/40% sharing of earnings (10.65% - 12.15%) • 75/25% sharing of earnings (12.15% - 13.15%) • 90/10% sharing of earnings above 13.15%

8. Revenue Requirement Issues (con’t) • T&D Capital Expenditure Caps, RY1 - $1.2 billion, RY2 - $1.16 and RY3 - $1.14 billion (includes $100 million of capitalized pension expense added in Company’s formal update) • For RY1, expenditures above the caps that do not meet an extraordinary circumstances threshold, but are demonstrated to be needed, will not be allowed to earn an equity return on those investments in future rates. The return would be limited to the Company’s embedded cost of debt. • For RY2 and RY3, on a cumulative basis, the company must demonstrate in its next base rate case, that any capital expenditures above the caps were prudent and necessary. • Downward reconciliation of carrying charges related to T&D Plant as one bucket and Production, Shared Services, Interference Capital as another bucket. • Reconciliation is annual for RY1 and cumulative for RY2 and RY3

9. Revenue Requirement Issues (con’t) • Labor Productivity - 2% per year; RY1, RY2, RY3 • No new O&M programs for RY2 and RY3. O&M increased for labor rates and general escalation for RY2 and RY3. •  Interference O&M - 100% downward reconciliation, 80%/20% (company/customer) sharing upward within 30% band, unless attributable to major new municipal projects, then sharing continues. • Property Taxes - reconciliation with 80%/20% sharing, upward and downward, with 10 basis point ($12 million) cap on Company exposure • Pensions – 100% reconciliation • Austerity - $45 million in RY1, of which $14 million gets phased back in; $7 million in RY2, and $7 million in RY3

10. Non-Revenue Requirement Issues • Improved Reliability Performance Mechanism • $112 million at risk tied to Network Outage Duration, CAIDI (radial), Network Outages per 1000 customers, SAIFI (radial), Remote Monitoring System Reporting and Restoration Times • Improved Customer Service Performance Incentive mechanism • $40 million at risk tied to Complaint Rates, Call Answer Rate and Customer Satisfaction Surveys of Emergency Callers, Phone Center Callers and Service Center Visitors • Increased Low-Income discount program • Participants receive a $8.50 discount on the Customer Charge • Con Edison customer charge $15.76 per month, Low Income customer would pay $7.26 per month • To qualify, a customer must be receiving public benefits based on income such as Supplemental Security Income, Temporary Assistance to Needy Persons/Families, or Food Stamps • Approximately 375,000 residential participants out of 2.5 million residential customers. Total cost of program $40 million per year. Cost is spread to all utility customers

11. Non-Revenue Requirement Issues (con’t) • Revised Business Incentive Rate to include new incubator program, increased biomedical research, and increased allocation to Westchester County. • Collaborative to examine Standby Rate cost allocation between contract and as-used demand charges • Collaborative to consider Rate Ready Consolidated Billing model to enable ESCOs to provide multiple rate components • Collaborative to discuss the Company’s current distributed generation and renewable energy initiatives. • Phase-in of $10.8 million of the $14 million NYPA deficiency by RY3. • Phase-out of declining block delivery rates to foster energy efficiency