Transmission Upgrades:Key to Reliable & Affordable

Energy

Transmission Upgrades:Key to Reliable & Affordable

EnergyRocky Mountain Subregional

Transmission PlanningRocky Mountain Subregional

Transmission PlanningSeptember 26, 2003

2 Reserves & 2002 sales volume in millions of short tons. Source: Peabody analysis & industry reports.

PEABODY ENERGY PROFILEPeabody Fuels More Than 9% of U.S. ElectricityPEABODY ENERGY PROFILEPeabody Fuels More Than 9% of U.S. Electricity

Queensland

St. Louis

Powder River BasinMarket Share #1Sales Volume 107.6Reserves 2,922

SouthwestMarket Share #1Sales Volume 21.0Reserves 1,244

MidwestMarket Share #1Sales Volume 31.4Reserves 4,077

AppalachiaMarket Share #6Sales Volume 16.7Reserves 690

Largest Private-Sector Coal Company in the WorldLargest Private-Sector Coal Company in the World

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BROAD BASED BUSINESS GROUP OF THE WEST Western Business Roundtable BROAD BASED BUSINESS GROUP OF THE WEST Western Business Roundtable

• Represents 22 businesses from West

– Financial services

– High technology

– Manufacturing

– Oil & gas producers

– Pharmaceuticals

– Pipeline

– Renewable energy production

– Telecommunications

– Private and Public Utilities

– Accounting

– Agricultural products

– Chemicals

– Coal and other forms of mining

– Construction and construction materials

– Conventional energy production

– Engineering services

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ENHANCED US TRANSMISSION SYSTEMSignificantly Reduced Impact of Last 3 Energy EventsENHANCED US TRANSMISSION SYSTEMSignificantly Reduced Impact of Last 3 Energy Events

• Western Energy crisis of 2000 – 01

– Low cost energy could not reach California

– Gas prices to move higher than they should have

– Enabled markets to be abused

• Natural gas price increases in winter 2002 - 03

– Extra coal based generation in Middle US could not reach markets in East and South to reduce demand for natural gas by 0.5 – 1.0 TCF

– Result was higher gas prices for all

• Blackout in August 2003 likely could have been completely mitigated if there were one or at most two more high voltage lines in the Cleveland area

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NEED BASELOAD GENERATION & TRANSMISSION Basic Electricity and Energy Infrastructure Needed NEED BASELOAD GENERATION & TRANSMISSION Basic Electricity and Energy Infrastructure Needed

• Load growth of more than 60% in last 20 years

– Little new baseload resources added

– HV transmission expanded less than 20%

• Hydroelectric output reached maximum potential – weather driven

• Nuclear generation capacity reaching output limit

– 1990, 66% capacity factor - 2002, 90% capacity factor

• Coal generation capacity becoming fully utilized

– 1990, 59% capacity factor - 2002, 69% capacity factor

– Western coal capacity factor at 82%

• 95% of capacity added since 1990 was gas But, …. 72% of increased electric consumption met by coal & nuclear – real prices fell

• Clear Skies-like legislation likely to close 5 - 10% of existing coal fleet – small, older, higher cost plants

6

7.3¢

30%

5.9¢

62%

5.6¢

95%

5.9¢

9%

5.5¢

63%

4.7¢

96%

6.0¢

78%

6.6¢

8%

6.3¢

75%

6.7¢

88%

8.4¢

52%11.8¢

2%

5.3¢

94%

6.4¢

42%

6.8¢

38%

6.1¢

84%

5.9¢

67%

5.6¢

64%

6.1¢

82%

7.4¢

46%

7.1¢

41%

6.2¢

69%

5.8¢

49%

6.1¢

26%

7.0¢

57%

5.3¢

95%

6.6¢

91%

9.2¢

3%

10.9¢

19%

6.3¢

36%

5.7¢

58%

6.3¢

66%

5.9¢

39%

4.3¢ 94%

6.2¢

51%

8.0¢

56%

5.1¢

98%

6.7¢

60%5.7¢ 62%

5.8¢

0%

10.4¢

5%

13.1¢

14%

NH 10.5¢ 27%RI 9.2¢ 0%CT 9.7¢ 10%NJ 9.4¢ 16%MA 10.0¢ 29% VT 10.9¢ 0%DE 6.8¢ 59%MD 6.5¢ 60%

¢ = average price per kilowatt hour for 2002

% = percent of total generation from coal for 2002

<7.0¢

7.0¢ - 9.0¢

>9¢

Hydro

RESULTS OF US ENERGY POLICYU.S. Low-Cost Electricity Comes from Coal and HydroRESULTS OF US ENERGY POLICYU.S. Low-Cost Electricity Comes from Coal and Hydro

Over 50% of the Electricity in the U.S. Comes from Coal

Source: Energy Information Administration, May 2003.

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FLAWED US ENERGY/ELECTRICITY POLICYEnhanced Transmission System NeededFLAWED US ENERGY/ELECTRICITY POLICYEnhanced Transmission System Needed

• De facto national electricity/energy policy of last 15 years fundamentally flawed

“Natural gas generation at load”

• Fundamentally flawed in two respects– Gas will not be cheap ($2 – 3/mmbtu) and plentiful

– Transmission far more valuable than generation at load

• All incremental electricity load in most of US served by gas– Electric rate increases/fuel adjustment increases coming

• Home heating and industrial process costs increase 30 – 50%

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FLAWED US ENERGY/ELECTRICITY POLICY Natural Gas Will Not Be Cheap and Plentiful FLAWED US ENERGY/ELECTRICITY POLICY Natural Gas Will Not Be Cheap and Plentiful

• US natural gas reserves cannot keep up with demand – decline rates

• Natural gas and therefore electricity prices have and will increase

• Recession and extreme mild weather only reason US did not have high gas prices 3 years in a row

• LNG is 5 – 7 years away and creates OPEC like dependence

• Interim, competition between home heating, industrial process and electric power generation

– Industry loses hence exit of petrochemical, fertilizer, aluminum, pulp & paper, etc

• Gas is most efficiently used to heat homes and in industrial process (80 – 95%) versus producing electricity (50 – 60%)

• More disposable consumer spending will go to heating and electricity bills versus consumer products, medical or other areas

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COAL IS LESS VOLATILE THAN OTHER FUELS Coal’s Consistent Price PlateauCOAL IS LESS VOLATILE THAN OTHER FUELS Coal’s Consistent Price Plateau

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-99

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Del

iver

ed $

/ M

M B

tu

Delivered cost of fossil fuel at steam electric utility plants. Source: Energy Information Administration, Electric Power Monthly and January 2003 Short Term Energy Outlook. NYMEX HH Futures closing price for July 2003.

Coal

Natural Gas

Delivered Cost of Fuel for Generation

NG Annual Avg.

NYMEX HH Futures

Forecasted Coal

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FERC RECENTLY NOTEDNatural Gas Frequently Sets Regional Electric PriceFERC RECENTLY NOTEDNatural Gas Frequently Sets Regional Electric Price

Note: Percent of time natural gas or oil is projected to be on the margin in 2003.Source: Cambridge Energy Research Associates (CERA), April 30, 2003.

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NuclearCoal Transmission Lines: Legend: 345 V 500 V 765 V Transmission Tie

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FLAWED US ENERGY/ELECTRICITY POLICY Transmission More Valuable Than Generation at Load FLAWED US ENERGY/ELECTRICITY POLICY Transmission More Valuable Than Generation at Load

• Enables lowest cost generation to serve load, be it hydro, nuclear, wind or coal and reduces demand on high cost fuels like gas

• Arbitrages hydro conditions and fuel price volatility

• Mitigates potential market power abuse (Western Crisis)

• Insurance against catastrophic events (August Blackout)

• Transmission is a market enabler

• Transmission value dramatically increases when high priced gas is displaced by low variable cost generation

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Western Generation Requires Multi-State Transmission Western Generation Requires Multi-State Transmission

• Wind in the Front Range and certain Coastal areas

• Coal in the Rocky Mountain Region

• Hydro in Pacific Northwest and Canada?

• Load growth in Southwest and Salt Lake

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Requirements to Develop New/Enhance Transmission Requirements to Develop New/Enhance Transmission

• Estimate economic value of enhanced transmission

– Over range of hydro availability and fuel price scenarios

– Over a few generation addition scenarios – gas, wind and coal

• Identify interregional beneficiaries of new transmission

– Provides state and federal regulators, decision and policy makers with much needed support for approval of projects

• State, regional and federal power agency approval of cost sharing and revenue recovery method for enhanced transmission

• Create mechanism to spread cost of new transmission according to beneficiary analysis

• Siting process for new or enhanced transmission done concurrently and coordinated in affected states with similar involvement from Dept. of Interior agencies, Dept. of Agriculture agencies and Tribal Nations

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• 2000 - 2010 electric energy load growth another 20%

• 2000 - 2010 new transmission miles less than 2%

• Total Generation Capacity 208,000 MW

Gas Only Balanced

Fuel Type % of Total % of Total

• Hydroelectric 31 31

• Natural Gas 40 29

• Coal 18 26

• Nuclear & Other 8 9

• Geothermal 1 2

• Wind 2 3

WESTERN GOVERNOR’S STUDY AUGUST 2001WESTERN GOVERNOR’S STUDY AUGUST 20012010 Western Energy Market – Two VisionsWESTERN GOVERNOR’S STUDY AUGUST 2001WESTERN GOVERNOR’S STUDY AUGUST 20012010 Western Energy Market – Two Visions

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• Cost of new transmission for Gas Only case $2 B

• Cost of new transmission for Balanced case $8 B – could be optimized

• Average market price savings of Balanced versus Gas Only case $7/MWh in 2010.

• Annual energy consumption in the West in 2010 - 960,000,000 MWh

• Market savings from Balanced versus Gas case in 2010 - $6.7 B annually

• Under high gas price scenario, the balanced case could pay for all the new transmission in less than a year.

WESTERN GOVERNOR’S STUDY AUGUST 2001WESTERN GOVERNOR’S STUDY AUGUST 2001Costs & Savings of Two AlternativesWESTERN GOVERNOR’S STUDY AUGUST 2001WESTERN GOVERNOR’S STUDY AUGUST 2001Costs & Savings of Two Alternatives

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• Without Pacificorp’s dedication of significant staff, there is insufficient resources dedicated to execute studies in timely fashion

• Necessary follow-on studies have no resources

• Lack of authority and unclear responsibilities

• No formal or legal entity to develop cost sharing arrangements for projects which show good consumer value

• Unclear if states will support analysis conducted by SSG-WI

• SSG-WI has no role in the siting process

• Who has lead authority to get new or enhance transmission built?

SSG-WI Process Logical Next Step, But…..SSG-WI Process Logical Next Step, But…..

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• “Natural gas generation at load”, a flawed energy policy

– Will not lead to affordable electricity and energy

• New baseload generation needed in the West

– Wind and coal will come from distance resources

• Regional electricity entities, like the Rocky Mountain Planning Group, needed to facilitate states access to low sources of electricity under variety of scenarios

• Electricity and energy consumers of the West (industry and residential consumer) very dependent on the West implementing a sustainable energy policy for generation and transmission

ROCKY MOUNTAIN TRANSMISSION GROUPROCKY MOUNTAIN TRANSMISSION GROUP Can Be West’s First Effective Regional Electricity EntityROCKY MOUNTAIN TRANSMISSION GROUPROCKY MOUNTAIN TRANSMISSION GROUP Can Be West’s First Effective Regional Electricity Entity