An Electric Utility Perspective

1

Eric AckermanDirector, Alternative Regulation

MD/DC Utilities Association89th Annual Fall Conference

September 12, 2013

Overview

Infrastructure investment needs are great Financing needs are large Benefits justify investments

Financing new investment under today’s market conditions requires alternative regulatory approaches Because of declining sales growth, utilities cannot

finance improvements in the old way To maintain credit worthiness, new regulatory

approaches needed

Industry Capital Expenditures

p = projected

30

40

50

60

70

80

90

100

43.0 41.1 48.4

59.9

74.1

83.0 77.8

74.2 79.3

94.4

83.5 79.3

U.S. Shareholder-Owned Electric Utilities($ Billions)

Source: EEI Finance Department, company reports, SNL Financial (August 2012)

3

4% 7%6% 6%11%9%

14%15%

25%20%

41%

42%

$0 B

$20 B

$40 B

$60 B

$80 B

$100 B

2010P 2012P

Generation

Distribution

Transmission

Gas-Related

Environment

Other

Projected Functional CapEx

Source: EEI Finance Department, company reports (August 2012)

2010P 2012P

$82.8 B

as of August 2010 as of August 2012

$94.4 B

Generation

Distribution

Transmission

Gas-Related

Environment

Other

14%

4

Benefits Are Substantial

Economic stimulus - jobs

Increased reliability & power quality Reinforce the grid Replace aging infrastructure Harden the system Connect new customers Deploy new “smart” components

Meet renewable resource mandates Ability to integrate renewables

Increased energy efficiency

Regulatory LagCapital Investment

Cost of Capital Credit Worthiness

Realized Return

Energy Growth Per CustomerOverview of the

ProblemFinancing Infrastructure In Today’s Environment

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Can Utilities Earn Their Allowed ROEs?

Source: SNL Financial, FactSet, Bureau of Economic Analysis, The Federal Reserve, Barclays Research Estimates

• Due to improved regulatory mechanics, regulatory lag has outperformed expectations. Lag has averaged 100-150bp vs a 200-300bp forecast.

• Lag is virtually non-existent where fully forecast test years and/or tracking mechanisms are employed.

2011

US$

Mill

ion

($25,000)($20,000)($15,000)($10,000)($5,000)

$0$5,000

$10,000$15,000$20,000$25,000

1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013E-4.0%-3.5%-3.0%-2.5%-2.0%-1.5%-1.0%-0.5%0.0%0.5%1.0%

Pre-Div FCF in 2011 $'s Actual less Allowed ROE

Alternative Regulation Toolkit

Limited scope remedies: Capex cost trackers Revenue decoupling

Comprehensive remedies: Forward test years Multi-year rate plans (price caps, revenue caps,

negotiated) Formula rate plans

http://www.eei.org/whatwedo/PublicPolicyAdvocacy/StateRegulation/Pages/RegulatoryFrameworks.aspx

Conclusions

1. Infrastructure investment is a great way to fuel the economic engine in Maryland and the District of Columbia.

2. It’s important to manage investment in a way that preserves utility credit worthiness.

3. Alternative regulatory approaches are the key to preserving utility credit, access to capital on the most reasonable terms possible.

Appendix

Allowed vs Realized Returns

Allowed returns - what regulators focus on Return levels (debt, equity) the PUC approves in a

rate case Objective is to determine the return on equity

required by the market A cost of business, goes in to revenue requirements

Realized returns – what investors focus on ROE the utility actually earns Affected by actual kWh sales and costs, regulatory

lag Usually diverges from allowed level

US Electric IOUs Rating History1970 – 2012

Source: EEI Finance Department, Standard & Poor’s, Macquarie Capital

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1970 1980 1990 2000 2012

AAA

AA+, AA, AA-

A+, A, A-

BBB+, BBB

BBB-

Below BBB-

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Rating Agency Perspective

“Moody’s views automatic adjustment clauses …as supportive of utility credit quality…Generally, the more of these clauses a utility has in place… the lower the credit risk.”

“Forward test years are generally better predictors of future utility conditions than historical test years, and their usage is more likely to reduce regulatory lag.”

“The inclusion of CWIP in rate base provides great regulatory certainty.”

“Decoupling mechanisms to ‘de-link’ utility revenues and profits from volumes are essential to credit quality if energy efficiency and demand side management programs become more prevalent in the sector as anticipated.”

Cost Recovery Provisions Key to Investor Owned Utility Ratings and Credit Quality, Moody’s June 18, 2010