The McGraw-Hill Companies

Generation & Transmission Industry Trends

Douglas M. Logan, Principal

Platts Research & Consulting / RDI

Presented to:

PES Policy Development Coordinating Committee

IEEE Summer Power Meeting

Chicago - July 24, 2002

2

Outline

• North American generation outlook

• Global generation outlook

• Transmission trends

• Regulatory trends

3

North American Generation Development

NEWGen July 2002 database shows 715,000 MW of projects in the U.S. and Canada.

112,812

100,000

40,180

167,752

116,295

91,638

86,464

Operating

Under Constr

Advan Develop

Early Develop

Proposed

Tabled

Canceled

4

Tabled and Canceled Projects

Tabled and canceled projects have surged since November 2001.

0

5,000

10,000

15,000

20,000

25,000J

ul-

98

Oc

t-9

8

Ja

n-9

9

Ap

r-9

9

Ju

l-9

9

Oc

t-9

9

Ja

n-0

0

Ap

r-0

0

Ju

l-0

0

Oc

t-0

0

Ja

n-0

1

Ap

r-0

1

Ju

l-0

1

Oc

t-0

1

Ja

n-0

2

Ap

r-0

2

Ju

l-0

2

Tabled/Canceled Date

Ca

pa

cit

y A

dd

itio

ns

- M

W

Tabled

Canceled

5

What Is Getting Tabled or Canceled?

NEWGen March 2002 database shows 66,500 MW of projects in April 2001 database tabled or canceled since April 2001.

0

5,000

10,000

15,000

20,000

25,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2050

RDI On-line Date as of April 2001

Ca

pa

cit

y A

dd

itio

ns

MW

Early Develop

Advan Develop

Under Constr

Operating

Status in April 2001

6

What Is Getting Built?

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

Operating UnderConstr

AdvanDevelop

EarlyDevelop

Proposed

Ca

pa

cit

y A

dd

itio

ns

MW

Other

Renewable

Gas CT

Gas CC & Cogen

Coal

Gas still rules.

7

North American Generation Capacity Additions

After removing tabled or canceled projects there are 537,000 MW of “active” projects in the U.S. and Canada. But ...

0

20,000

40,000

60,000

80,000

100,000

120,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2013 ?

On-line Year

Ca

pa

cit

y A

dd

itio

ns

- M

W

Proposed

Early Develop

Advan Develop

Under Constr

Operating

8

North American Additions in Historical Perspective

The current boom is modest relative to what happened in the 1970s.

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

1970 1975 1980 1985 1990 1995 2000 2005 2010

Ann

ual C

apac

ity A

dditi

ons

- M

W

Under Devel

Under Const

Operating

9

Projected U.S. Supply / Demand Balance

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

SU

PP

LY

/DE

MA

ND

- M

W

EXISTING + OTHER NEW PEAK PEAK + RESERVE

Surpluses may persist in some regions through 2008. But shortages may return if generation development fails to pick up again.

10

Wholesale Power Market Price Trends

0

50

100

150

200

250

300

350

400

450Ja

n-9

7

Apr-

97

Jul-

97

Oct

-97

Jan-9

8

Apr-

98

Jul-

98

Oct

-98

Jan-9

9

Apr-

99

Jul-

99

Oct

-99

Jan-0

0

Apr-

00

Jul-

00

Oct

-00

Jan-0

1

Apr-

01

Jul-

01

Month

ly A

vera

ge M

W D

aily

On-P

eak P

rice

-

$/M

Wh

CINERGYERCOTFLORIDAMID-CNEPOOLNP15PALO VERDE

High prices in the West collapsed a year ago.Midwest price spikes have not recently recurred.

11

Projected Wholesale Power Market Prices

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.002001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Pro

ject

ed M

ark

et Pri

ce $

/MW

h

CALIF ECAR

ERCOT FRCC

MAAC NE

High prices last year in the West and moderate prices elsewhere have given way to low prices as surplus develops.

12

RDI Baseline Gas PriceForecast

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

1998 2000 2002 2004 2006 2008 2010 2012 2014

RE

AL

20

02

$/ M

MB

TU

Henry HubNew York City HubChicago HubAECO-C, ABTopock, AZOpal, Rockies

The long-term price outlook is between $2.75 and $3.50 per mmBtu.

13

Sources of U.S. Incremental Supply

• The Gulf-of-Mexico, the Rocky Mountains, Eastern Canada, and Arctic supply all will share a role with LNG in growing the U.S. gas supply base.

• Several of these marginal sources – deep onshore gas, LNG, the Eastern Canadian offshore areas - and the Northern Frontier have surprisingly similar full-cycle development costs.

(5,000)

(4,000)

(3,000)

(2,000)

(1,000)

-

1,000

2,000

3,000

2000 2002 2004 2006 2008 2010 2012 2014

INC

RE

ME

NT

AL

SU

PP

LY

- M

MC

FD

LNG

CANADIAN IMPORTS

ROCKY MOUNTAINS

OFFSHORE GULF OF MEXICO

OTHER U.S. L48 SOURCES

14

Global Generating Capacity Additions

0

20,000

40,000

60,000

80,000

100,000

120,000

140,0002001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Ann

ual C

apac

ity A

dditi

ons

- M

W

North America

Latin America

Asia

E Europe & FSU

Western Europe

Africa & Middle East

The global outlook is heavily dependent on what happens in Asia.

15

Global Generating Capacity Additions

-

20,000

40,000

60,000

80,000

100,000

120,000

140,0002001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Annual C

apaci

ty A

dditio

ns

- M

W

Other

GT

CC/Cogen

Coal

16

Trend in Planned Transmission Additions

0

2,000

4,000

6,000

8,000

10,000

12,000

1996-2005

1997-2006

1998-2007

1999-2008

2000-2009

2001-2010

Planning Horizon

Su

m o

f M

iles

4.0%

3.4%3.3%

3.4%

4.0%

5.0%

The declining trend in planned transmission additions has bottomed out.

Source: NERC ES&D database, various years.

Planned additions as % of existing miles

17

Length Distribution of Planned Transmission Additions

0

20

40

60

80

100

120

140

160

<0 0-10 10-20 20-50 50-100 100-200 200-300 >300

Length Miles

Nu

mb

er

of

Pro

jec

ts

Planned additions are still dominated by short projects.

Source: NERC ES&D database, 2001.

18

Generation DevelopmentMid-Atlantic

The current pattern of generation development is dominated by gas-fired projects near load centers.

Source: NEWgen database; POWERmap.

19

Financing Transmission Projects

• Rolled in– ERCOT Transmission Expansion

• Allocated between system & generation– PJM RTEP

• Participant funded with firm rights– Path 15 Upgrade

• Merchant– Neptune

20

Path 15 Upgrade - Participants

• Trans-Elect 72% $249.6M Line• PG&E 18% 55.1M Substations• Western, PM 10% 1.3M Land

21

What Is a Merchant Project?

• Assumes full market risk• Creates tradeable transmission rights• Makes initial capacity allocation by open

season• Allows access by competitors• Is subject to market monitoring• Does not impair existing rights• Is subject to RTO coordination & reliability

requirements

22

Trans-Elect

• Formed early 1999• First “truly independent” transmission

company• First acquisition July 4, 2001• Goal: Two acquisitions per year• Owns 12,600 miles of line, acquired from:

– TransAlta– Consumers Energy

23

Business Plan

• Roll-up of transmission assets in North America

• Purchase from:– Investor-owned utilities– Municipals and cooperatives

• Construction of additional transmission capacity

• Privatization of government facilities

Source: Presentation by Fred Buckman, January 24, 2002.

24

Business Plan

• Premises– Transmission is not a growth asset.– Transmission divestiture is a growth

strategy.– Transmission divestiture is a solution to

the issue of marketplace independence.

Source: Presentation by Bernie Schroeder, March 25, 2002.

25

Business Plan

• The case for divestiture– Utility stock prices have under-performed

most major averages.– Aggressive restructuring is rewarded in

share price.– Regulators will reward divestiture.– Passive control devalues asset.

Source: Presentation by Bernie Schroeder, March 25, 2002.

26

Business Plan

• Benefits to the seller– No more FERC regulation– Opens up several options to improve shareholder

value– Creates cash for seller– Regulatory incentives for independent acquisition

to be shared with seller– Expansion and quality of service assured by “for-

profit transmission utility with the single goal of maintaining high standards of reliability”

– Seller controls reinvestment of sale proceeds

Source: Trans-Elect web site.

27

Business Plan

• Buyer’s expectations with divestiture– Higher ROE– Favorable capital gains treatment– Favorable capital structure treatment– Incentives to invest new capital– Long-term rate freezes.

Source: Presentation by Bernie Schroeder, March 25, 2002.

28

How Trans-Elect Will Make Money -- The Risks

• What is assured– Regulated rate of return

• What is not assured– ROE premium on acquisition– Recovery of acquisition premium– ROE premium on new facilities– Performance-based regulation

29

FERC’s Repeated Attempts to Create Open Power Markets

• Attempt #1 - Orders No. 888 & 889– To establish non-discriminatory access

• Attempt #2 - Order No. 2000– To promote independent control of systems

• Attempt #3 - July 2001 Mediation Orders– To address recalcitrance and potential problems

with small RTOs

• Attempt #4 - Standard Market Design– To address unwillingness to form super-RTOs

FERC’s orders are multiple attempts to eliminate discrimination in transmission access and administration.

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RDI Transmission Study