Regulatory Update

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Environmental Regulatory Developments and Issues. Henry EbyLower Colorado River Authority. Environmental Developments and Issues. Major EPA and State RulemakingsImpact on Electric Utilities and the State of Texas Future Outlook and Challenges. Major Environmental Regulations Impacting the Electric Utility Industry.

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Regulatory Update

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1. Regulatory Update TPPA Annual Meeting August 1, 2006 Austin, Texas

2. Environmental Regulatory Developments and Issues Henry Eby Lower Colorado River Authority

3. Environmental Developments and Issues Major EPA and State Rulemakings Impact on Electric Utilities and the State of Texas Future Outlook and Challenges

4. Major Environmental Regulations Impacting the Electric Utility Industry Clear Air Interstate Rule (CAIR) EPA issued March 10, 2005 TCEQ adopted State CAIR July 12, 2006 Clean Air Mercury Rule (CAMR) EPA issued March 15, 2005 TCEQ adopted State CAMR July 12, 2006

5. The Fundamentals of CAIR and CAMR Clean Air Interstate Rule (CAIR) Intended to improve air quality in downwind states – ozone and fine particulate Establishes SO2 and NOx caps for affected States to be implemented in two phases States allocate emission allowances to power plants Clear Air Mercury Rule Establishes Mercury caps for all States to be implemented in two phases States allocate emission allowances to coal fired plants Sets performance standards for new plants

6. CAIR and CAMR A Brief History A push for “multi-pollutant” control legislation Objective: provide integration, certainty, flexibility and reforms Obstacles: debate over targets, timeframes, reforms and carbon dioxide Outcome: stalled in Congress A shift from a legislative to regulatory approach Action: CAIR, CAMR and New Source Review Reforms Outcome: reductions without reforms, continued uncertainty

7. Power Plant Emissions under CAIR and CAMR

8. CAIR Affected Region and Emission Caps

9. Ozone and Fine Particulate Nonattainment Areas

10. Texas Nonattainment Areas

11. Ozone Standard Compliance Trend

12. The Texas Nonattainment Challenge Timing and Schedule Nonattainment designations – June 2004 Adopt SIP revisions – May 2007 Controls in place – January 1, 2009 Achieve attainment – June 15, 2010 Limited Control Options and High Costs Ozone Transport Jurisdictional Issues

13. Nonattainment Projections -- 2015

14. Future Outlook and Challenges Nonattainment State Implementation Plans (SIPs) Potential Tightening of Standards – Fine Particulate and Ozone Challenges to Rules – CAIR, CAMR, New Source Review Greenhouse Gas Emissions and Climate Change New Coal Units

15. Public Utility Commission Issues Wendell Bell Texas Public Power Association

16. PUC Issues Implementation of SB-20, Renewables Emergency Electric Disconnection Rule Deposit Waivers: Victims of Family Violence, Senior Citizens Independent Market Monitor Resource Adequacy and Wholesale Market Power Rulemaking

17. SB-20 Review Passed in special session, summer 2005 Increased requirements for additional renewable capacity from 2,000 MW by 2009 to 5,000 MW by 2015 “Target” of 10,000 MW by 2025 “Target” of 500 MW non-wind renewables Incentives for transmission lines related to renewable generation Expedited process (certification and cost recovery) Competitive Renewable Energy Zones (CREZs) Misc. provisions include authority to cap prices for Renewable Energy Credits or suspend goal in special circumstances; treatment of voluntary programs Still n/a to public power until opt-in to competition

18. PUC Renewable Energy Rulemaking Published initial questions, Jan. 2006 Workshops in Feb. and May PUC staff strawman, April Comments submitted, May Next step, formal rulemaking proposal

19. Strawman Proposal Adjusts goals for total MW of renewable capacity: 2,280 by 2007; 3,272 by 2009; 4,264 by 2011; 5,256 by 2013; and 5,880 by 2015 CREZs: candidates submitted by ERCOT and IOUs outside ERCOT every other year CREZ candidate: geographic description, estimated production potential, estimated costs for transmission upgrades, land use impacts Transmission planning: utilities providing service to CREZ apply for CCN within 1 year of CREZ designation

20. Strawman (cont.) Capacity goals converted to Renewable Energy Credits (RECs) per current method Splits the application of voluntary REC retirements evenly between current year’s requirements and early sunset of overall goal; (conflict between requirements to retire RECs to validate renewable energy claims of voluntary programs while putting additional renewables into the stream) Proposes compliance premium or “extra credit” for each REC produced from non-wind renewables and for zero emission generators located in nonattainment areas.

21. Strawman, Outstanding Issues Minimum or maximum size for a CREZ? Level of detail on land use and wildlife impact of proposed CREZ? Compliance premiums for specific types of non-wind resources such as photovoltaics? Treatment of voluntary programs? Formal rulemaking anticipated late August

22. Emergency Electric Disconnection Rule Petition by Office of Public Utility Counsel, low-income advocates, filed June 29 Proposed moratorium on all residential disconnections for nonpayment by IOUs in regulated areas and competitive retailers in ERCOT through Sept. 30 Instead, PUC modified rules on disconnection and deferred payment plans on July 21 Disconnections: moratorium through Sept.30 for critical care and low-income elderly Liberalized deferred payment for all low-income Extended to five months Requires 25% minimum payment Does not apply to MOUs or electric coops

23. Deposit Waivers: Victims of Family Violence, Senior Citizens Rule adopted June 7, effective July 2 Applies to all retail electric providers (REPs) in ERCOT Provides deposit waivers for victims of family violence and anyone over age 65 Family violence victims may obtain a certification letter from law enforcement agencies, treating medical personnel, district attorneys, and other agencies Senior citizens must not be in arrears for electric service and may be asked to provide proof of age Does not apply to MOUs or coops, but similar policies followed in Denton, Austin, San Antonio, others

24. Independent Market Monitor Rule Implements requirement of PUC “sunset” bill Rule adopted April, 2006 Creates ERCOT Independent Market Monitor to: (1) detect and prevent wholesale market manipulation strategies and market power abuse, and (2) evaluate operations of wholesale market and recommend improvements IMM will be established independent from ERCOT, but funded through the ERCOT administration fee IMM will report to PUC, which has enforcement authority RFP issued jointly by ERCOT and PUC; selection process nearing completion

25. Resource Adequacy, Wholesale Market Power Rulemaking Combines PUC projects on ERCOT generation adequacy, market mitigation and definition of market power (spin-off from rulemaking on enforcement of wholesale market rules) Formal rulemaking published in March Proposed definition of market power abuse: Practices by persons possessing market power that are unreasonably discriminatory or tend to unreasonably restrict, impair, or reduce the level of competition… Includes predatory pricing, withholding of production, precluding entry, collusion… “Energy only” approach to generation adequacy (no separate capacity market such as ICAP)

26. Resource Adequacy (cont.) New mechanisms for ERCOT projections of existing and planned generation resources, load resources, and transmission facilities (annual Statement of Opportunities, short-term and long-term Projected Assessment of System Adequacy) New reporting requirements for resource entities and transmission service providers; resource plans, transmission information Repeals existing ($1,000) offer caps, mitigation tools New scarcity pricing mechanism, increased caps Accelerated disclosure of market data (concerns over timing of release of disaggregated information) Applies to ERCOT-operated markets – not bilateral contracts PUC vote anticipated August 10

27. Questions

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