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Update on Texas’ Electric Industry September 23, 2009 Legislative advertising paid for by: John W. Fainter, Jr. • President and CEO Association of Electric Companies of Texas, Inc. 1005 Congress, Suite 600 • Austin, TX 78701 • phone 512-474-6725 • fax 512-474-9670 • www.aect.net

AECT Principles • AECT is an advocacy group composed of member companies committed to: - Ensuring a modern, reliable infrastructure for the supply & delivery of electricity. - Supporting efficient competitive markets that are fair to customers and market participants. - Supporting consistent and predictable oversight and regulation that will promote investment and ensure the stability of Texas’ electric industry. - Promoting an economically strong and environmentally healthy future for Texas, including conservation and efficient use of available resources. • AECT member companies remain dedicated to providing Texas customers with reliable service and are committed to the highest standards of integrity. The Association of Electric Companies of Texas, Inc. (AECT) is a trade organization of investor-owned electric companies in Texas. Organized in 1978, AECT provides a forum for member company representatives to exchange information about public policy, and to communicate with government officials and the public. For more information, visit www.aect.net.

U.S. Divided into Eight Reliability Regions Electric systems in Texas are located within four separate reliability regions: - Texas Regional Entity (TRE), which oversees participants in the Electric Reliability Council of Texas (ERCOT); - SERC Reliability Corporation; - Southwest Power Pool (SPP); and - Western Electricity Coordinating Council (WECC). The eight reliability regions in the continental U.S. are subject to the oversight and enforcement authority of the North American Electric Reliability Corporation (NERC), which is subject to the Federal Energy Regulatory Commission’s (FERC) oversight. NERC is responsible for developing standards to ensure and improve reliability for delivery of electricity on the bulk power system. FERC NERC (ERCOT)

AECT Member Companies Within ERCOT Generation Companies Transmission and Distribution Utilities Retail Electric Providers

AECT Companies Outside of ERCOT Western Electricity Coordinating Council (WECC) Southwest Power Pool (SPP) SERC Reliability Corporation

New Changes in the Electric Industry

Retail Market Changes Changes Related to Electric Bills and Promoting Switching in the Market REPs must now include on a residential customer’s bill a statement that customers can receive more information about residential electric service at www.powertochoose.org. (HB 1799) The PUC adopted revised rules that require an improved Electricity Facts Label to help customers understand the terms of the service being offered and to compare different companies’ service. (PUC Project No. 35768) Customers can now switch to a new REP within seven business days. (PUC Project No. 36536) Changes to Ensure Continued Reliable Service to Customers The PUC has strengthened the qualifications required to provide retail electric service in the ERCOT market. (PUC Project No. 35767) The PUC modified the Provider of Last Resort (POLR) rule to: include a decrease to the pricing formula for residential customers; encourage POLR providers to offer market-based prices when there is a POLR event; require all residential and small commercial POLR customers to be transferred to market-based prices no later than the billing cycle following the 60 th day of service. (PUC Project No. 35769)

Retail Market Changes Changes Related to Electric Contracts The PUC will define terms common to the telecommunications and electric industries, which will be labeled uniformly on each retail bill sent to a customer by a REP or electric utility, providing an additional tool for customers to assess their electric service and make informed decisions. (HB 1822) REPs must now comply with standard definitions for fixed, variable and indexed pricing plans to better define what prices, terms and conditions apply to the plans, when the plans may be changed and what notifications the customer will see. (PUC Project No. 35768) REPs must provide written notice to customers before the retail electric service contract is set to expire. This ensures customers will not be surprised when their long-term contract ends, and provides a helpful reminder to consider the electric service plan that provides the best combination of price and service to suit their needs. (HB 1822 and PUC Project No. 35768)

Transmission and Distribution Changes Changes Related to Emergency Storm Response Electric utilities may now file with the PUC for recovery of storm costs through "securitization,” which is a utility financing cost recovery process that will result in lower prices than traditional means of cost recovery. (SB 769) Each electric utility in Texas will file with the PUC a report on its infrastructure improvement and maintenance activities, including identifying areas susceptible to damage, vegetation management and distribution pole inspections, as well as its preparation for emergency operations. (HB 1831) The PUC is now authorized to require electric entities to sell electricity to another electric entity that loses power during a natural disaster or declared emergency, including the requirement to interconnection service if necessary. (HB 1831 and SB 1492) Changes Related to Reliability Performance Review Legislation changed the way performance of a utility is measured, providing the PUC additional flexibility when assessing the performance of electric utility distribution feeders. Thus, the PUC can now focus on the utilities’ overall system reliability. (HB 2052)

Summer Review: Electric System Remained Reliable

Record Electricity Demand In ERCOT During the Summer

ERCOT Restructuring Spurred Massive Generation Investment Wholesale Competition Begins 90-97 Additions= 6 GW 98-08 Additions= 30 GW Year in Service Retail Competition Bill Passed GW = 1000 MW Source: Energy Velocity; NERC, ERCOT, PUC. Full Retail Competition Begins

ERCOT Long-Term Projections Show Substantial Investment Still Needed Source: ERCOT, “Report on the Capacity, Demand and Reserves in the ERCOT Region,” May 2009

Retail Prices Continue to Fall

Retail Prices Falling Falling natural gas prices are good news for consumers September 4, 2009 “ Thanks to plunging natural gas prices, many Texans can secure electric rates that are 25 to 40 percent lower than what they were paying last summer. Rates had soared as a result of spiraling prices for natural gas, which is burned to generate much of Texas’ electricity. Competition delivers lower power prices in Texas September 3, 2009 “ Electricity is being offered for less than 10 cents per kilowatt-hour, down 20 percent from last summer in areas where electric retailers battle to attract customers, like Dallas and Houston.” Retail prices have continued to fall since the start of September

The ERCOT Competitive Market is Responding to Recent Drops in Natural Gas Prices

Better Prices Available Today Than One Year Ago Source: powertochoose.org

Every Competitive Area in ERCOT Has Variable and 1-Year Lock Offers Available that are Lower than the National Average Price Sources: powertochoose.org, U.S. Energy Information Administration

Benefits of Advanced Metering Customers can better manage their electric consumption, better manage their bills and lessen their environmental impact. Advanced meters and other new technologies and associated infrastructure will provide information and opportunities that will enable customers to better understand the impact of controlling their energy consumption (e.g., shifting usage to off-peak times). Advanced meters will also allow for more automation of utility functions such as meter reading and connections/disconnections, helping to reduce costs.

The Smart Grid Transforms the Way We Buy, Deliver and Use Electricity Key Stakeholder Consumers Electric Utility Retailers Real time grid feedback allows for more effective loading of utility assets Enables increased monitoring and diagnostics to enhance the life of utility assets Improved line fault detection and diagnostics Improved system reliability and greater ease/timeliness of power restoration Automated meter reading Power quality and reliability improvements Friendly access to detailed consumption information to make informed choices and enable faster transactions Enables and promotes energy conservation Expands retailer’s ability to offer new products Facilitates time-of-use rates and critical peak pricing Establishes platform to offer future home appliance monitoring and control Allows retailers to offer pre-payment programs Environment Enables demand-side management Facilitates integration of solar and wind generation into grid Promotes energy efficiency through immediate energy consumption awareness Facilitates reduced electric consumption which leads to reduced power plant emissions Benefits

Advanced Metering Activities in Texas CenterPoint Energy and Oncor have received approvals from the Public Utility Commission of Texas (PUC) to deploy advanced metering systems (AMS) across their respective service territories. The approved deployment plan for CenterPoint Energy calls for installation of advanced meters over five years beginning in March 2009. Through mid-September, CenterPoint Energy has installed over 76,500 advanced meters and expects to install a total of 145,000 meters by year-end. Oncor’s approved deployment plan initiated in late 2008 will have installation of advanced meters completed by the end of 2012. To date, Oncor has installed 294,000 meters. The cost for the meters will be recovered through a monthly surcharge, which may be adjusted over time to reflect both the inclusion of AMS costs in future base rates and variances between the estimated versus the actual cost of implementing the deployment plan. The respective surcharges for both Oncor and CenterPoint Energy take into account the savings advanced meters are expected to bring each company. AEP Texas has filed its deployment plan with the PUC and anticipates approval by the fourth quarter of this year.

Transmission Investment for Reliability and Renewable Generation

Transmission Investment in Texas Since 2006, TDUs have invested about $2.5 billion in the ERCOT transmission grid. ERCOT estimates that the electric grid will require adding or improving 2,888 circuit miles of transmission lines at a cost of about $3 billion from 2009 through 2013. In addition, the integration of Competitive Renewable Energy Zones (CREZs) into the competitive ERCOT market will require additional investment of about $4.9 billion. Source: ERCOT, “Report on Existing and Potential Electrical System Constraints and Needs,” December 2008

Competitive Renewable Energy Zones: Legislative and Regulatory Steps The Texas Legislature mandated steady increases in renewable power in TX76RSB 7 (1999) and TX791RSB 20 (2005). Starting Line: 880 MW in 1999 Old Goal 1: 2,880 MW by 2009 (Achieved by 2007) New Goal 1: 5,880 MW by 2015 New Target 1: 10,000 MW by 2025 New Target 2: 500 MW non-wind renewable generation TX791SB 20 (2005) also required PUC to: designate Competitive Renewable Energy Zones (CREZs) in areas in which renewable energy resources and suitable land areas are sufficient to develop generating capacity from renewable technologies; develop a plan to construct necessary transmission capacity in a manner that is most beneficial and cost effective to customers; and take into account transmission constraints, the need for generation and the level of financial commitment by generators when defining CREZs. PUC adopted Substantive Rule 25.174 in December 2006, which creates framework for determining CREZs. Texas currently has 8,976 MW of installed renewable generation capacity

Map of Adopted Competitive Renewable Energy Zones

Hurricane Season: Coastal Utility Preparations

Texas is prone to a wide array of inclement weather. The state faces hail, tornadoes and ice storms, along with the hurricanes and flooding recently seen along the Gulf Coast. Transmission and distribution utilities in each part of the state work to ensure that the power grid functions as normally as possible. Emergency Preparedness Throughout Texas Each utility maintains emergency preparedness plans to mitigate the most common inclement weather, while maintaining crisis response teams to quickly respond to these emergencies and, if necessary, emergencies in other parts of the state or country. Utilities perform reviews after actual activations of their emergency plans and make revisions based on lessons learned in order to better prepare for future emergency events.

Emergency Operating/Restoration Plans : Utilities Prepare Year-Round The goal of a utility’s emergency plan is to safely restore service to its customers - quickly and efficiently. In addition to linemen and local contractors, an emergency plan typically includes virtually every company employee - even those who do not traditionally work in the field. Through electric utility mutual assistance programs, most utilities have access to thousands of linemen and tree trimmers from around the country. The utilities also work to ensure access to lodging, fuel, food, supplies and equipment.

Basic Priority Restoration Utilities all have Emergency Restoration Plans and are committed to restoring all power as quickly, efficiently and safely as possible. In competitive areas of the state, restoration of power is not affected by customers’ choice of retail electric provider. A typical plan consists of four phases of restoration: Service to facilities vital to safety, health and welfare, such as hospitals, water treatment plans and public service facilities. Service to customers whose power is out due to damage to major power lines, which serve thousands of customers. Service to customers whose power outage was caused by damage to smaller sections of power lines serving hundreds of customers. Service to customers who have outages caused by damage to equipment that typically serves less than ten customers. The timeline for restoration is heavily dependent on the severity of the weather event and the extent of the areas affected. An extremely severe storm can result in outages lasting a number of weeks.

Specific damage to electric system will be different. It is not possible to forecast in advance what the exact damage to the electric system will be, so… It is not possible to give precise outage duration estimates for individual locations in advance. Remember - No Two Storms Are Alike

Hurricane Ike – September 2008 Hurricane Ike made landfall as a very strong Category 2 storm on September 13, 2008, on Galveston Island. It was the third worst hurricane on record Experienced 110 mph winds. Carried a 450-mile-wide wind field. Many AECT members’ service areas were impacted. 2.6 million TX customers lost power. 18 days to complete restoration. Tropical Storm Edouard – August 2008 Tropical Storm Edouard formed in the Gulf of Mexico on August 3, 2008 and made landfall along the upper Texas coast on Tuesday, August 5. While this storm had a minimal impact in terms of infrastructure damage, it did serve to provide an opportunity to the coastal utilities to activate their Emergency Operations Plans in a realistic scenario. Entergy experienced outages affecting approximately 36,000 customers at peak primarily in Galveston, Jefferson and Orange Counties. CenterPoint Energy had outages affecting approximately 25,000 customers at peak. Responses to Recent Texas Disasters

Hurricane Dolly – July 2008 Hurricane Dolly was the first hurricane to hit the Rio Grande Valley in many years. However, after making landfall early on the morning of July 23, the storm slowed to a crawl and brought winds up to 100 miles per hour and torrential rain of between 10 and 15 inches in some areas, particularly South Padre Island and Port Isabel and other parts of the Valley. Some 205,000 electric customers served by AEP Texas were left without power in the Valley area. In all, 212,000 electric customers served by the company lost power as Dolly’s long reach impacted areas as far north as Corpus Christi and as far west as Laredo. More than 1,400 accounts listed as “critical load,” which included hospitals and city services, were among those losing electric service. Service and line crews from AEP Texas and 23 outside companies replaced over 1,000 distribution poles and 55 transmission structures. In all, some 2,000 line and service technicians, tree trimmers, damage assessors and support personnel helped with restoration efforts. By the end of the day on July 30, service had been restored to 99 percent of customers who lost power. The remaining 2,000 customers were returned to service over the next few days. Hurricane Humberto - September 2007 Hurricane Humberto began as a tropical depression off the coast of Freeport, Texas, on Sept. 12, 2007. Within 18 hours, the storm reached hurricane intensity and made landfall near High Island, TX, on Sept. 13. According to the National Hurricane Center, “no tropical cyclone in the historical record has ever reached this intensity at a faster rate near landfall.” Entergy experienced outages to approximately 120,000 customers in Galveston, Jefferson, and Orange Counties. AEP, CenterPoint Energy and Oncor Electric Delivery responded to the storm with employees, contractors, and equipment. Responses to Recent Texas Disasters

Hurricane Rita - September 2005 Hurricane Rita resulted in over 1,481,000 power outages in Texas. AECT member companies worked to offer all available assistance to get power back online in affected areas: CenterPoint Energy announced that power for all of its 700,000 affected customers’ was restored about a week after the storm hit. Within two weeks, Entergy—the hardest hit electric utility—had restored service to more than 90 percent of affected customers. TXU Electric Delivery (now Oncor Electric Delivery) deployed a workforce of 1,400 employees and contractors to restore service. All AECT member companies responded to the storm with employees and equipment, while customers in affected areas also received retail service discounts and other benefits. Hurricane Katrina - August 2005 AECT member companies provided more than 2,900 employees and contractors to assist with restoration to join Entergy’s 10,000 field employees to aid the Gulf Coast’s massive restoration efforts. AECT companies and employees pledged over $3.3 million to the American Red Cross and the Power of Hope Fund—a charity launched by Entergy, which is based in New Orleans. For evacuees in Texas, electric utilities and REPs worked to provide special assistance in setting up electric service, discounted service, waiving of deposits and expedited start-up service. Responses to Recent Texas Disasters

Worst DFW Metroplex Storm in a Century - June 2004 On June 1, 2004, thunderstorms accompanied by hurricane-strength winds struck the Dallas-Fort Worth Metroplex, knocking out power to an estimated 1.4 million customers – the worst storm in terms of service interruptions in Oncor Electric Delivery’s history. Oncor called in 3,700 repair personnel and ultimately repaired 23 substations, replaced 550 power poles, worked 4,000 reports of downed wires, and removed about 40,000 damaged or fallen trees. Quick Response to Hurricane Claudette - July 2003 In July 2003, Hurricane Claudette hit the Gulf Coast and Houston area, affecting millions of Texans and pounding power lines. When the hurricane hit, the electric grid service areas controlled by AEP Texas Central, CenterPoint Energy and Texas-New Mexico Power Co. were buffeted by winds as strong as 100 miles per hour, flash floods and intense squalls. Response plans included supplying additional manpower, trucks and equipment to aid in restoring electric service quickly and safely. South Texas Flood - June 2001 When Tropical Storm Allison rolled in from the Gulf of Mexico in June 2001, its winds were minimal, but rainfall totals topped 36 inches. The Houston area suffered significant damages, estimated at $5 billion. CenterPoint Energy crews returned power to the city's crucial commercial and medical centers, restoring 28 of the 49 lost circuits within 24 hours and the remaining within 3 days. They replaced 170 sets of 3-phase switch gear, 90 underground transformers, and refurbished 289 underground vaults. Responses to Recent Texas Disasters

Glossary in Terms of Restoration Circuits – Main power lines carrying bulk electricity from substations that deliver electricity from one subdivision to the next (usually serve 1,000 or more customers). Laterals – Smaller power lines branching off main circuit feeders to deliver electricity to individual segments of an area (usually serve fewer than 100 customers). Service drops – low voltage lines running from the utility pole to individual homes. Usually made up of two 120-volt lines and a neutral (can be connected to either a main circuit feeder or a branch lateral) Weatherhead – a weatherproof electrical service point for overhead electrical service (customer owns this equipment)

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