Ohio Energy Competitiveness

Transcription

1 Ohio Energy Competitiveness This document is prepared for the use of members of the Ohio Business Roundtable. It does not constitute legal, accounting, tax, or similar professional advice normally provided by licensed or certified practitioners. The information provided is preliminary and shall not be fully relied upon as the complete and final product. No part of this document may be circulated, quoted, or reproduced for distribution without prior written approval from the Ohio Business Roundtable. No part of this document may be circulated, quoted, or reproduced externally to the members of the Ohio Business Roundtable, and any requests for additional use or release must be pre-approved by Ohio Business Roundtable Technical fact base September

2 This document can be used to support and provide depth to the findings of the Ohio Energy Competitiveness overview document Purpose conclusions in an extensive fact base Link facts, data, and assertions from the overview directly to their source Provide additional depth on the topics covered in the overview document Communicate insights about important competitiveness not covered in the overview How to use this document The overview contains links to the appendices with supporting facts Links to the appendices reference specific facts cited on the page and additional insights on a given topic The future outlook sections of the appendices explain the methodology for projections made in the overview The future outlook sections also provide deep dives on specific tax and regulatory concerns (e.g., severance tax) 1

3 This technical backup document covers a fact base for two broad topics Oil and gas Power Defining energy competitiveness Ability to extract reserves (oil, gas) Ability to deliver resource to highdemand regions Ability to attract and maintain industrial investments that benefit from reserves Low-cost: Power prices in range of benchmark states Reliable: Able to effectively meet load at all times, including peak demand periods Stable and predictable: Ability to predict power prices within an acceptable range of uncertainty for investments, with acceptable volatility (compared to competitive states) Approach to fact base Analyze four resource types: natural gas, natural gas liquids (NGLs), crude, and condensate Develop historical and future perspective across entire value chain: extraction, transportation and utilization Develop historical and future perspective according to three aspects of power generation: pricing, supply and demand Utilize specific benchmark and competitor states to understand relative performance 2

4 Contents Energy Competitiveness Report Appendix A: Oil and gas Appendix B: Electric power 3

5 Ohio Energy Competitiveness CONFIDENTIAL This document is solely for the use of members of the Ohio Business Roundtable. It does not constitute legal, accounting, tax, or similar professional advice normally provided by licensed or certified practitioners. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from the Ohio Business Roundtable. The information provided is preliminary and shall not be fully relied upon as the complete and final product. No part of this document may be circulated, quoted, or reproduced externally to the members of the Ohio Business Roundtable, and any requests for additional use or release must be pre-approved by Ohio Business Roundtable. Pre-read document for BRT Annual Meeting of December 15, 2015

6 The OBRT energy competitiveness initiative has been a collaborative yearlong effort that has focused on three key objectives OBRT energy project objectives through the present day changing energy landscape Align on themes and recommendations to move Ohio forward CEO Steering Committee Gary Heminger, Chair; Nick Akins, Chuck Jones, Bob Schottenstein, Mike Thaman and Tim Timken Working Team Marathon Petroleum AEP FirstEnergy Duke Energy TimkenSteel Owens Corning M/I Homes NiSource McKinsey & Company 5

7 Guiding principles for the work competitiveness, rather than being solely reliant on federal policies to set the agenda Drive economic benefit for Ohio by fully capturing the fair share of value from energy sources, driving job growth in the state, and supporting an innovative workforce with the necessary skills across the value chain Encourage competition by avoiding measures that discourage energy source investments and ensuring that policies and regulations do not discourage any specific technology or fuel-source Ensure smarter regulation by streamlining the permitting process and establishing investments in energy assets Invest in infrastructure by removing impediments to the alignment of infrastructure investments with future energy production and demand 6

8 Unpacking our three Objective Understand the evolution sector through the present day Key questions the years? What impact is the development of the Utica Shale having on the State? prices evolved compared to competitor states? Use potential future scenarios to changing energy landscape How will the production of gas, oil, and liquids in the Utica Shale advance over the next 15 years? What infrastructure and regulatory structures will facilitate the strong production, transportation, and use of hydrocarbons in the years ahead? between now and 2030? Offer themes and recommendations to make Ohio energy competitive What are the key hurdles that Ohio must overcome to remain energy competitive? and other key stakeholders to move the State forward? 7

9 has featured prominently in public and policy discourse over the past year Cleveland State University shale study maps the opportunities for shale gas development in Ohio The Ohio Clean Energy Initiative has been certified by the ballot board for the November 2016 election The SB 310 study committee renewable energy freeze should continue indefinitely Ohio lawmakers sent severance tax proposal to a study committee to analyze potential impacts Clean Power Plan (CPP) aims to reduce power market emissions 32% below 2005 levels by 2030 The Kasich Energy Plan aims to update fit with the evolving shale gas and electric power landscape 8

10 Purpose of this document Objectives Understand the evolution through the present day Use potential future scenarios changing energy landscape Offer themes and recommendations to make Ohio energy competitive Written for a CEO-level audience, with varying levels of exposure to and experience with the energy space Overview of the major energy trends impacting Ohio and proposal for a path forward, reflecting only the highlights of the analysis Companion document to detailed fact pack 9

11 Executive Summary (1/2) Ohio sits on an immense opportunity to benefit from abundant and low-cost shale gas A huge volume (~24 trillion cubic feet) of inexpensive and accessible wet and dry gas exists in the Utica basin, where ~98% of gas is still to be extracted Extraction costs in the Utica basin are lower than many other basins and projected to drop Increased production and emerging downstream industries are already beginning to capture this value, and new investments in infrastructure and adjustments in regulation are needed to maximize potential annual GDP and sustain nearly 138,000 jobs The electric power landscape is fundamentally shifting in Ohio, driven by trends that are shaping the national power landscape Power demand has declined over the last 5 years, and is expected to remain relatively flat for next years, driven by increased energy efficiency and adoption of distributed resources Ohio is now part of a larger regional power system, PJM, and continues to be a net importer of power as Ohio-based assets retire Mix of power supply for Ohio has been and will continue to shift toward natural gas, renewables and distributed energy resources that could displace coal generation Policy and regulatory landscape continues to be in flux with major outcomes (e.g., SB310, Clean Power Plan) that will eventually have a tangible impact on pace of transition in Ohio This document is solely for the use of members of the Ohio Business Roundtable. It does not constitute legal, accounting, tax, or similar professional advice normally provided by licensed or certified practitioners. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from the Ohio Business Roundtable. The information provided is preliminary and shall not be fully relied upon as the complete and final product. No part of this document may be circulated, quoted, or reproduced externally to the members of the Ohio Business Roundtable, and any requests for additional use or release must be pre-approved by Ohio Business Roundtable. 10

12 Executive Summary (2/2) In order to respond these power and gas dynamics and position the state as an energy leader, Ohio will need to mobilize across 6 priority themes: Meet the evolving needs of the power market for customers and developers Build out energy infrastructure Improve the ease of doing business in energy in Ohio Ensure adoption of renewables and advanced energy technologies are market based Drive economic impact from energy competitiveness This document is solely for the use of members of the Ohio Business Roundtable. It does not constitute legal, accounting, tax, or similar professional advice normally provided by licensed or certified practitioners. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from the Ohio Business Roundtable. The information provided is preliminary and shall not be fully relied upon as the complete and final product. No part of this document may be circulated, quoted, or reproduced externally to the members of the Ohio Business Roundtable, and any requests for additional use or release must be pre-approved by Ohio Business Roundtable. 11

13 Changing power landscape Path forward 12

14 !"#$%&'()*%'+%#,,)+*)%+'-./'0%1'*%$22$/-.+#-3 Ohio is sitting on large natural gas reserves in the Utica and Marcellus Basins ~98% 24 trillion cubic feet of accessible gas remains untapped The Utica and Marcellus Basins are among the lowestcost natural gas extraction zones in the US, and leveraging this resource presents an enormous economic opportunity for the state of Ohio 2015 extraction costs in the Utica are 16% lower than the average of other US basins Natural gas production could sustain up to 138,000 jobs in Ohio and contribute $8B to the GDP New investment in infrastructure and attention to regulation will allow Ohio to capture the full value of the these basins and the related economic benefits Production will outpace pipeline capacity by

15 NATURAL GAS OPPORTUNITY: ECONOMIC VALUE Ohio sits on one of the largest natural gas basins in the country Most productive dry gas plays 1 in the contiguous United States Bakken Low growth Basins High growth Antrim Barnett Woodford Fayetteville Eagle Ford Haynesville- Bossier Marcellus & Utica From , Marcellus and Utica contributed ~50% of the total US dry gas production growth Most of the growth is due to Marcellus; Utica production did not start in earnest until Plays are regions where dry gas is actively extracted Source: Energy Information Administration (EIA), April

16 NATURAL GAS OPPORTUNITY: ECONOMIC VALUE sustain over 130,000 jobs in 2025 $ Billion 10 8 Sector jobs sustained Gas and oil production Manufacturing 1 Services 2 Other sectors 3 $8.3 billion Total GDP gain Includes chemicals, metals, paper and pulp, and rubber and plastics manufacturing. 2 Includes professional services, management, real estate, health care, education, leisure, and hospitality. 3 Includes wholesale and retail trade, construction, transport and warehousing, agriculture, mining, and government. Source: IMPLAN model results 15

17 NATURAL GAS OPPORTUNITY: ECONOMIC VALUE Utica Basin present an enormous economic opportunity Ohio natural gas resources have hardly been tapped to date Ohio production of both dry gas and NGLs is projected to double over the next decade Tcf Production Bcfd 6 natural gas resources are equivalent to an entire year of US gas consumption 98% NGLs Dry Gas 1 0 Reserves Untapped This production growth includes 3 products Dry gas Natural Gas Liquids (NGLs) Light tight oil (LTO) Source: Drillinginfo, RigData, Energy Information Administration (EIA), OBRT working team model 16

18 NATURAL GAS OPPORTUNITY: ECONOMIC VALUE This economic value is driven by production growth of 3 products, with a special emphasis on dry gas and NGLs Largest opportunities, details to follow Dry gas Natural Gas Liquids (NGLs) Light tight oil (LTO) Dry gas well Wet gas well Oil reservoir Value chain Mid-stream processing 1 LTO Dry natural gas Ethylene Propylene etc. Refineries End uses Low-cost supply of gas for Direct burn Power generation potential Low-cost feedstock fuel (e.g., steel, methanol) for industries Plastics Rubbers Insulation Pipes Housewares Carpets Clothing Antifreeze Paper Etc. Substitute for other crude oil, which could increase Net exports of petroleum products Refinery utilization rates Could be used for direct burn 1 Includes fractionators and crackers additional details to follow Source: SRI; TECNON; EIA 17

19 A NATURAL GAS OPPORTUNITY: DRY GAS competitive position in dry gas is expected to strengthen, as gas extraction costs in the Utica basin decline further Break-even price levels across US basins, $/MMBtu Utica OH Utica OH Assumes a 5% severance tax based on recent proposals by Governor Kasich; break-even Utica cost is ~$3.3 at current tax levels Source: Drillinginfo; RigData; working team analysis 18

20 NATURAL GAS OPPORTUNITY: DRY GAS The number of wells in Ohio has quadrupled in the last two years Drilled horizontal wells 1 Horizontal gas wells, Well count Shale gas wells, which use horizontal drilling and hydraulic fracturing, have dramatically increased Permits for drilling in the shale plays were issued starting in Horizontal wells drilled since 2011 Source: Rystad UCube 19

21 NATURAL GAS OPPORTUNITY: DRY GAS Current pipeline capacity is not sufficient to keep up with projected production levels Appalachia natural gas production and pipeline capacity ( ) Bcfd Additional capacity needed Current and planned regional pipeline capacity 2015 production Projected production growth Projected 2030 production Regional pipeline capacity Pipeline capacity is currently constrained at periods of peak demand These capacity constraints during periods of peak demand are associated with the greatest commercial loss, as prices are highest during these periods Source: Energy Information Administration (EIA) 20

22 NATURAL GAS OPPORTUNITY: DRY GAS Pipeline flow reversals have begun to address the capacity issue, but will not be sufficient to cover the future volume of gas Example pipeline flows Tennessee Gas Pipeline Bcfd Jan- 11 Needs met with local supply Jul- 11 Jan- 12 Tennessee Gas Pipeline OH/PA Border (Gulf supplies to Mid-Atlantic) 2 TETCO Ohio (Gulf supplies to Mid-Atlantic) 3 Columbia Gulf Leach KY (Gulf supplies to Mid-Atlantic) Jul- 12 Flow reversals across major Ohio pipelines Initial flow reversal 1% 23% 56% Jan- 13 Jul % -24% -38% Consistently reversed flow Jan- 14 Jul % 34% 16% Capacity utilization Flow reversal As Utica and Marcellus production increased, pipelines which once brought gas into the region were reversed to allow for exports These reversals have begun to address the local supply-demand imbalance, but capacity is constrained even at current production levels 4 REX Ohio (Rockies supplies to Mid- Atlantic) Source: Ventyx, Energy Velocity 38% 21% -8% 21

23 NATURAL GAS OPPORTUNITY: WET GAS Additionally, the Utica Basin is a prime location for wet gas extraction US NGL proved & probable reserves from gas extraction, 2014 Bb Conventional Marcellus Permian Eagle Woodford Utica Barnett Niobrara Bakken Other tight Other shale Other Total Source: Rystad Ucube (May 2015), Energy Information Administration (EIA) 22

24 NATURAL GAS OPPORTUNITY: WET GAS NGLs can be processed into several end-products, presenting Ohio with the opportunity to support new industries Value chain Natural Gas Liquids (NGLs) Wet gas well NGLs Fractionator What is a cracker? A cracker converts natural gas to liquids These liquids can then be converted into a number of end-products, listed below Dry natural gas Cracker 1 Ethylene Recent developments Approvals and design of a PTT Global Chemical ethane cracker are already in motion in Belmont County in Eastern Ohio A significant investment has already been made to test the design of the plant Select endproducts Plastics Rubber Other Packaging Film Housewares Toys Liners / film Tires Footwear Sealants Carpets Insulation Clothing Paper Antifreeze Picture of an ethane cracker Source: PTT Global Chemical 1 Crackers use natural gas liquids to produce petrochemical products (e.g., plastics) Source: SRI; TECNON; AFPM; JobsOhio 23

25 NATURAL GAS OPPORTUNITY: WET GAS Encouraging the entrance of crackers into Ohio would create local demand for NGLs, unlocking the full value of these liquids Ethane production in Appalachia is estimated to be sufficient to supply one or two ethane crackers now and several more by 2030 Ohio could benefit from construction of ethane crackers Ethane Production kb/d Large crackers consume ~ kilobarrels per day (kb/d) of feedstock could supply 3-5 large crackers by 2030 Attracting ethane crackers could provide new jobs in the state and increase demand for Ohio NGLs Ohio must compete with other states for ethane cracker projects Without increased pipeline capacity and/or new crackers, NGL prices may be suppressed and possibly bottleneck wet gas production Source: Drillinginfo; RigData; OBRT working team modeling and analysis 24

26 Changing power landscape Path forward 25

27 Over the past 15 years, Ohio has shifted from a regulated state to a restructured state, allowing customer choice declined by 1.2% from 2008 and is likely to remain flat for next years Ohio is now part of a larger regional energy system, PJM, that operates across multiple states and is evolving Ohio now imports ~10% of its power supply and will continue to be a net importer as assets retire faster than demand declines and will continue to tilt toward natural gas, renewables and distributed energy that could displace coal and nuclear Major policy and regulatory outcomes remain in flux and will eventually have a major impact on the transition in Ohio Critical to manage a stable transition next years as we see flat power demand, power importing, shifting supply mix, and a uncertain regulatory/policy landscape 26

28 CHANGING POWER LANDSCAPE Beyond Total Regulator Oversight Deregulation journey: Wholesale Competition, Retail Competition, PJM established, energy efficiency, Renewables Standards for Ohio WHAT NEXT? Regulated rates <1% gas No legislative mandates Utility state plans Regulated rates to capped rates to market-based rates Changing generation mix: moving from traditional base load (coal, nuclear) to more gas, renewables Increasing mandated energy efficiency requirements Move from meeting reliability needs through utility state plans to PJM driven model Market-based rates ~15% gas 2025 mandates on hold PJM regional model Low contribution Increasing role of demand response, energy efficiency and energy imports from other states to meet our reserve margins High contribution 27

29 CHANGING POWER LANDSCAPE: PRICING retail power rates across continue to be competitive over last 6 years relative to the national average Competition Ohio US average Overall Industrial Commercial Residential CT 166 MA 132 NY 156 CT 188 MI 107 MI 74 CA 142 MI 139 PA 103 PA 74 MI 106 PA year average ( ) in $/MWh US GA OH SC NC TX IL IN WV NY US IN OH NC IL GA WV SC TX US PA GA SC OH IN KY LA IL NC US 121 OH 119 SC 116 IL 115 TX 114 GA 111 NC 108 IN 106 KY 95 LA 77 LA 56 TX 83 WV 95 KY 75 KY 54 WV 82 LA 91 WA 70 WA 42 ID 72 WA 85 Source: Energy Information Administration (EIA) 28

30 CHANGING POWER LANDSCAPE: DEMAND Power demand in Ohio has fallen over the past 6 years, and is expected to remain relatively flat over next 15 years Total retail sales for Ohio TWh Residential Commercial Industrial Transportation % p.a. 1 Multiple scenarios were considered for power demand; even more optimistic scenarios did not lift demand expectations above 2008 levels Source: Energy Information Administration (EIA) % p.a % p.a est. Industrial losses contributed to falling power demand from Residential demand is projected to fall over next 15 years, in part, due to adoption of energy efficient technologies and distributed resource Industrial and commercial demand are projected to increase slightly over next 15 years 29

31 CHANGING POWER LANDSCAPE: DEMAND with many of its peer states Power demand ( , cumulative growth rate) States Overall Industrial Commercial Residential Ohio Texas -1.2% -2.7% 1.6% -0.4% -0.1% -0.5% 3.1 % 1.7% What has happened to power demand from ? Illinois Indiana Kentucky Pennsylvania West Virginia -0.7% -1.2% -0.8% -1.1% -3.1% -6.1% -0.4% -0.3% -0.8% -1,7% -0.4% -0.6% -0.3% -0.8% -0.7% -0.6% -1.1% 0.1% 0.1% -0.4% Flat to negative load growth in the US overall Commercial and residential loads have remained relatively stable Georgia South Carolina North Carolina 0.0% -0.3% 0.1% 0.0% 0.3% -0.1% 0.0% 0.2% 0.0% 0.1% 0.4% 0.4% Industrial load growth has been challenged across the US Michigan -0.5% -1.2% -0.1% -0.4% Louisiana 1.7% 2.7% 1.2% 1.2% US 0.0% -0.7% 0.2% 0.2% SOURCE: Energy Information Administration (EIA) 30

32 CHANGING POWER LANDSCAPE: MARKET CONTEXT Ohio is now part of a larger regional energy system PJM that operates across multiple states, but is still maturing as a power market PJM What is it? Multi- Optimizes for region not Ohio getting its rules right States of many flavors participate Restructured States that allow customer choice Partially restructured States that have (very) limited retail choice Regulated States have traditional regulated rates 31

33 CHANGING POWER LANDSCAPE: SUPPLY Over last 5 years, Ohio has become a bigger importer of power as Ohio- Power Demand and Generation in Ohio TWH TWH Demand Ohio power generation XX Imports as a share of total demand (%) Ohio has become a net importer of power over last 5 years, for several reasons including coal retirement and gas price reduction With significant coal retirements scheduled, net importer status will continue over next years Critical for PJM to function as an efficient market increasing reliance on it Source: Energy Information Administration (EIA) 32

34 CHANGING POWER LANDSCAPE: SUPPLY imports from neighboring PJM states with excess capacity this trend is expected to continue Demand State Generation Ohio Pennsylvania Michigan Pennsylvania West Virginia Indiana Ohio West Virginia Kentucky Kentucky Source: Energy Information Administration (EIA) 33

35 CHANGING POWER LANDSCAPE: GENERATION MIX Consistent with rest of the country, changing energy economics may shift mix away from coal toward gas and renewables Power generation mix in Ohio % Other Renewables Gas Nuclear Coal Working team analysis Source: Energy Information Administration (EIA) est. Low gas prices and coal plant retirements led to a 29% decrease in coal generation and 12-fold increase in gas generation since 2004 Market-based adoption of renewables (i.e., without subsidies) will accelerate as technology costs come down over the coming years 34

36 CHANGING POWER LANDSCAPE: GENERATION MIX Ohio has several natural gas power generation projects in different phases of development, with some uncertainty surrounding completion timelines Gas power-generation facilities in project pipeline # MW capacity Number of plants, Pre-permitting Permitting Under construction 1,860 2,042 1,992 Average gas plant takes 3-4 years to come online following its initial announcement 1,2 existing pipelines and transmission infrastructure could enable development of new gas plants without significant grid expansion Retired coal assets may provide opportunities for brownfield development and gas conversions 2 Development timeline is based on a sample of 12 new plants announced and developed between 1998 and 2012, excluding two plants with timelines of 12+ years Source: Ventyx, Energy Velocity 35

37 CHANGING POWER LANDSCAPE: GENERATION MIX Renewables are projected to be a growing portion of the changing generation mix over the next 15 years, with heavy growth in wind Projected renewables generation mix TWh Hydro Solar Wind capacity and production for renewable power is projected to nearly double More renewable plants are under construction than any other type, though with an overall capacity growth below that in gas Wind likely to remain the dominant renewable technology through 2030 Changes in technology and regulation could accelerate the extent of this growth Source: Energy Information Administration (EIA), BRT Working Team Analysis 36

38 CHANGING POWER LANDSCAPE: FUTURE OUTLOOK Six scenarios were modeled to test the impact of various factors on future power prices in Ohio Scenario Low gas, high mandates Reasonably low gas, low mandates Business as Usual Business as Usual with no mandates Reasonably high gas, high mandates High gas, low mandates Description Unrealistic, lowprobability, state of the world which envisions low gas prices coupled with high mandates. This scenario gave us our left bookend A more realistic state of the world where we have low gas prices coupled with low mandates. This is the case where we exploit Utica resources efficiently and have economic adoption of disruptive energy technologies Our base case where we run the current gas prices and mandates over the next 15 years A slight variation of the base case with 0 Renewable Portfolio Standards (RPS). This allows us to understand the impact of RPS over the next 15 years A scenario where gas prices go up, due to issues with fracking, which leads to higher mandates for energy technologies A low-probability state of the world in which high gas prices are coupled with low mandates. This scenario gave us our right bookend Gas prices Low High Mandates High Low Business as usual None High Low Probability Extremely unlikely Bearish on market Market expected Market expected Bullish on market Extremely unlikely 37

39 CHANGING POWER LANDSCAPE: FUTURE OUTLOOK The scenario planning exercise yielded a few key takeaways Power demand will be relatively flat, regardless of gas price and renewables adoption Power supply generation mix will shift away from coal toward more gas and more renewables Reliability during this transition will not face major challenges if PJM adds new capacity and in-state and interstate transmission infrastructure is effectively built Retail prices on a $/kilowatt hour will likely increase this is largely driven by flat Mandates on energy efficiency and renewable portfolio standards (RPS) consistently lead to higher energy prices Wind is predicted to be the most economic technology of choice among renewables; solar adoption will accelerate via RPS mandates Key uncertainties remain on the horizon: regulatory (e.g., Senate Bill 310, Clean Power Plan), markets (e.g., gas prices, PJM rules) and technology evolution 38

40 CHANGING POWER LANDSCAPE: FUTURE OUTLOOK Retail unit prices increase with high mandates due to energy efficiency impacts, while wholesale prices increase only in the high gas scenario Wholesale energy prices 1 Retail power prices $/MWh 2 High gas price scenario pricing Median price band Low gas price scenario pricing $/MWh 1 Price band with no mandates Price band with high mandates Wholesale price outlook is directly coupled to natural gas price (given that new combinedcycle technology will become the price-setter) wholesale prices increase the most in the high gas scenario with no mandates Retail prices are set on a volumetric basis ($/MWh), and escalation is largely a function of energy efficiency mandates causing demand destruction 1 AEP zone only Real $ Source: Energy Information Administration (EIA), OBRT Working Team Modeling and Analysis 39

41 CHANGING POWER LANDSCAPE: FUTURE OUTLOOK Major regulatory, political and market uncertainties relevant to the Ohio power market Clean Power Plan (CPP) SB 310 Ohio Regulatory Outcomes PJM Market Rules Evolution Federal renewables subsidies State-by-state emission reduction targets (32% by 2030) When will Ohio reach a resolution on CPP? How will this impact the in-state generation mix? Over what time frame? -term? How will Ohio manage the interaction of CPP and SB 310? Specific regulatory issues will emerge in Ohio (e.g., power purchase agreements hearings) What will be the impact of resolution on in-state generation mix over time? PJM market rules will evolve in response to observed market issues How will PJM capacity payment structure incentivize new generation? How will rules for new inter-state transmission facilitate new construction? Current subsidies in place for solar and wind at the federal level What is the future for federal renewable subsidies (i.e., timing for investment tax credit, production tax credit phase-out over time)? Source: NCSL, Press search 40

42 Changing power landscape Path forward 41 42

43 PATH FORWARD 4")/)%5$%6)%1$%&/$,%")/)7 with overall demand for power decreasing and the mix of energy sources shifting away from coal Natural gas production in Ohio has increased 4x since 2011, and the resources of Utica Basin are in the early stages of being accessed As growth continues, it will be important to proactively address potential obstacles and competitive position There are several key action themes to pursue in order to position Ohio has an energy leader and support the energy transition Coordinated efforts from the private and public sectors will allow Ohio to maximize the opportunity of natural gas and manage the transitioning power industry and capture this value for Ohio 42

44 PATH FORWARD: SIX THEMES To address these challenges and make the state sustainably energycompetitive, our Steering Committee recommends six key themes natural gas advantage Meet the evolving needs of the power market Build the required support infrastructure Improve the ease of doing business Ensure adoption of renewables and advanced energy technologies are market based Drive economic impact from energy competitiveness 43

45 PATH FORWARD: SIX THEMES With 98% of Utica gas reserves still untapped and exponential production growth in the Utica and gas production is expected to grow at 6% annually By 2025, production growth could 1 : Contribute $8B annually to GDP Sustain 130,000 jobs Natural gas production in Ohio Billions of cubic feet per day, projected 2 1 IMPLAN model results 2 Drillinginfo; RigData; OBRT working team modeling and analysis 44

46 PATH FORWARD: SIX THEMES Maximize shale gas production potential Nurture production growth in the Utica from 2bcfd to 10+, by resolving emerging transportation bottlenecks from key production areas to key demand areas Build state and regional demand for valuable Utica byproduct liquids (e.g., ethane, condensate) Put in place mitigating measures to avoid health and oil and gas industry Give confidence to investors/producers by establishing certainty in production, regulation, and future tax structure 45

47 PATH FORWARD: SIX THEMES Meet the evolving needs of the power market: Defining the opportunity Ohio has been a net importer of power generation mix may shift to greater gas and renewables Imported power 1 Ohio, % Share of gas & renewable power 2 Ohio, % As an importer, critical for Ohio to strengthen our voice in PJM and ensure it functions well as a market, and incents build-out of new capacity and infrastructure through appropriate incentives This is a major shift especially to more intermittent, weather-dependent generation sources Ohio must proactively and effectively manage this transition smoothly, ensuring a longterm picture is developed for all market participants and stakeholders so they can align around an integrated agenda Recent spikes in pricing volatility are real Price spikes 3 Retail power During the transition, Ohio must pay attention to reliability and volatility trends, reinforcing the importance to strengthen its voice in PJM and to an extent control its reliability destiny through more in-state generation and resources where possible 1 Energy Information Administration (EIA) 2 BRT Working Team Analysis 3 Ventyx, Energy Velocity 46

48 PATH FORWARD: SIX THEMES Meet the evolving needs of the power market: Goals Promote an environment that balances the needs of both customers (cost-effective, predictable and reliable power) and developers (enable continued investment in new and existing assets) overall function of the capacity market and resolve wholesale market uncertainty generation assets, the capacity market, and the transmission and distribution network Encourage the development of cost effective 47

49 PATH FORWARD: SIX THEMES Build the required support infrastructure: Defining the opportunity Natural gas opportunity Natural gas production in Appalachia 1 bcfd, projected Current and planned pipeline capacity Without additional gas pipelines, we project regional gas production will be constrained by pipeline capacity in 2020 with over 32 trillion cubic feet of potential production unable to reach the market Power landscape US transmission and distribution investments USD billions 2 Actuals Forecasted As Ohio continues to rely on imports and a changing generation mix, it must ensure the right T&D infrastructure in place to take power to consumers and reduce the probability of a reliability/volatility events 1 Ventyx, Energy Velocity 2 EIA; EEI; Energy Velocity; SNL; analyst reports; expert interviews 48

50 PATH FORWARD: SIX THEMES Build the required support infrastructure: Goals Develop a state-wide strategy to anticipate energy infrastructure needs and manage the transition Define the solution which accommodates the changing supply/demand profile of the electric grid in a reliable and cost-effective manner Identify and resolve any constraints to enhancing the inter and intra state gas and liquids pipeline network, including capital asset tax Maximize the use of the Ohio river as a critical element of the transportation infrastructure, recognizing the potential future value of commodities produced in-state 49

51 PATH FORWARD: SIX THEMES Improve the ease of doing business: Defining the opportunity Tax structure Conditions for doing business in Ohio are more favorable than perception What we found Comparative tax rates Severance tax increase would render Ohio uncompetitive for gas extraction 1% 10% tax today is lower than other states Utica will remain on low end of the cost curve Increasing the severance tax would not change the competitive position, but wellhead break-even price variability could impact well owner profitability 4 New generation construction Developing power plants is more difficult in Ohio than other states Gas generation turbine construction success rates 74 % Ohio Region Success of gas generation turbines are slightly below the regional average, with no probability difference on a per megawatt level Pre-permitting Permitting Ability to regulate generation PUCO rule allows for regulated generation to be built in specific cases The rule is applicable only after Jan 1, 2009 Has not been enforced yet This rule can only be enforced when there are issues with reliability It appears PUCO could be more transparent with the enforcement criteria for rules and regulations 1 Drillinginfo; RigData; OBRT working team model 2 Ventyx, Energy Velocity 3 PUCO 4 More detailed study needed to fully explore implications 50

52 PATH FORWARD: SIX THEMES Improve the ease of doing business: Goals Implement a regulatory environment that maximizes value and encourages investment ease of doing Streamline review and approval process for energy investments (e.g. new gen, pipelines) to closely match siting and permitting times with construction times Increase transparency and clarity of electric power price-setting Minimize the cost and disruptiveness of implementing the Clean Power Plan Promote favorable conditions in Ohio with public effort to counter myths concerning barriers to doing business 51

53 PATH FORWARD: SIX THEMES Ensure adoption of renewables and advanced energy technologies are market based: Defining the opportunity Renewables are a growing share power generation Wind power growth Capacity growth 3 +73% The growth of renewables and energy efficiency will continue over the next several years, which presents an opportunity to seize a greater market share of renewable development and manufacturing, but there are open questions on the correct timing and pace of growth Forced acceleration in the pace of renewable growth increases prices Ensuring Ohio is competitive on price requires waiting for parity Modeled retail power prices 1 Projected price bands by year With mandates Parity between cost and rate Without mandates Solar power costs Residential rates BRT Working Team Modeling and Analysis 2 Projected rates at national level 3 Cumulative installed wind onshore, GW Retail power prices increased under all scenarios, but this increase is even more dramatic when mandates or measures force the use of renewables before the business case justifies their inclusion As renewable technologies advance, these sources can be included in a cost-effective way in future years as they reach economic parity with other energy sources 52

54 PATH FORWARD: SIX THEMES Ensure adoption of renewables and advanced energy technologies are market based: Goals Ensure adoption of renewables and advanced energy technologies are market based Support adoption of renewables and advanced energy technologies when the business case (and selfcalculated economics) warrant Phase out mandates for renewable technologies and riders for energy efficiency in a gradual and efficient fashion Maximize the production base for energy efficiency and renewable technology in the state by attracting manufacturers to Ohio 53

55 PATH FORWARD: SIX THEMES Drive economic impact from energy competitiveness: Defining the opportunity Scale of economic opportunity GDP gain in 2025 Annual growth, billions 1 Gas and oil production Manufacturing Jobs sustained (000s) Services Other sectors $8.3 billion Total GDP gain Gas and oil production, along with associated industries, such as the petrochemical industry, and the businesses needed to support both, are projected to add more than $8 billion (1.4% growth) and sustain ~137,000 jobs Economic growth in shale states Potential to attract energy intensive industries Texas Louisiana Pennsylvania GDP growth: 2.6% 2 Jobs: ~155,000 Economic impact: Resource extraction created jobs including truck drivers, retail salespeople, and lawyers, and LTOs boosted GDP growth GDP growth: ~1% 3 Jobs: ~90,000 Economic impact: Disposable income increased by $5.7 billion in 2009, a direct result of Haynesville Shale production GDP growth: ~1% 4 Jobs: ~89,000 Economic impact: Cheap gas is provided to nearby dense industrial and residential areas, stimulating regional economic activity Other states with similar shale booms have been able to capture economic benefit beyond the direct gains from gas and oil production, such as bringing in new industries attracted to competitive energy prices 1 IMPLAN model 2 UTSA Institute for Economic Development; large quantities of LTO supplemented Texas GDP growth from shale , Louisiana DNR , US Bureau of Economic Analysis 54

56 PATH FORWARD: SIX THEMES Drive economic impact from energy competitiveness: Goals Leverage energy competitiveness to drive economic development Maximize the economic benefits of being an energy leader by attracting and retaining gas and liquids producers, power generation facilities, and critical energy infrastructure investment in energy intensive manufacturing and other complementary activities 55

57 PATH FORWARD: SIX THEMES To address these challenges and make the state sustainably energycompetitive, our Steering Committee recommends six key themes natural gas advantage Meet the evolving needs of the power market Build the required support infrastructure Improve the ease of doing business Ensure adoption of renewables and advanced energy technologies are market based Drive economic impact from energy competitiveness 56

58 Contents Energy Competitiveness Report Appendix A: Oil and gas Appendix B: Electric power 57

59 Table of contents Appendix A: Oil and gas 1. Historical fact base: Oil and gas reserves a. Background and reserves b. Natural gas c. Natural gas liquids (NGLs) d. Crude and condensate e. Tax and regulatory 2. Future outlook: Oil and gas reserves a. Modeling context b. Outcomes i. Reference ii. High iii. Low iv. Comparison c. Severance tax analysis 58 A1

60 A1. OIL & GAS: HISTORICAL FACT BASE Ohio energy competitiveness: Oil and gas challenges and opportunities Ohio is well situated to benefit from abundant and low cost shale gas produced from the massive Marcellus and the emerging Utica basins; Ohio now has a price advantage compared to the national average and neighboring states While the Utica has potential to be a major supply basin, it has significant competition from other supply basins Expansion of intra-state pipelines will likely be needed to connect producing fields to demand locations Rising Marcellus production and coast markets Growth in wet gas production, which recently started in significant volumes in Ohio, presents new challenges and opportunities for the state; New liquids pipelines and wet gas processing plants are being built and could drive further investment and job creation If not built, limited infrastructure could suppress NGL prices and possibly bottleneck wet gas production Growing NGL production and depressed ethane and propane prices in the region present another opportunity for Ohio to attract new businesses; however, it faces strong competition from neighboring states and the US Gulf region, where most of the petrochemical industry is located Ethane is currently kept in the gas stream and thereby valued at low gas prices rather than converted to higher margin chemicals 59 A2

61 Table of contents Appendix A: Oil and gas 1. Historical fact base: Oil and gas reserves a. Background and reserves b. Natural gas c. Natural gas liquids (NGLs) d. Crude and condensate e. Tax and regulatory 2. Future outlook: Oil and gas reserves a. Modeling context b. Outcomes i. Reference ii. High iii. Low iv. Comparison c. Severance tax analysis 60 A3

62 A1a. OIL & GAS: HISTORICAL FACT BASE BACKGROUND & RESERVES Ohio energy competitiveness: Basin reserves Recent advances in non-conventional drilling techniques have made the recovery of hydrocarbons resources in the Utica Basin economical Utica reserves are primarily comprised of dry gas; However, there are also NGLs, condensate, and crude available, including: ~20 Tcfe of dry gas ~8 Tcfe of NGLs ~4 Tcfe of condensate falling gas production and increasing gas prices in the mid-2000s that incentivized the development of new, non-conventional technologies 61 A4

63 A1a. OIL & GAS: HISTORICAL FACT BASE BACKGROUND & RESERVES US hydrocarbons proved & probable reserves, 2014 Primary Ohio basin Tcfe Gas NGL Condensate Crude oil , Conventional Marcellus Permian Eagleford Bakken Woodford Utica Barnett Upper Devonian Upper Devonian Other tight Other shale Other Total Source: Rystad Ucube, May A5

64 A1a. OIL & GAS: HISTORICAL FACT BASE BACKGROUND & RESERVES resources were fully understood for shale gas US technically recoverable shale gas volumes Shale gas development history Tcf Large shale gas deposits exist in widely dispersed geographic areas, but the gas is locked in semi-impermeable shale rock Despite the huge potential volume of shale gas in the US, only a fraction was assumed to be technically recoverable Pioneering efforts, largely led by independent oil and gas companies helped unlock the value of shale gas 0 NPC (2003) USGS (2006) EIA (2007) EIA (2009) EIA (2012) Production ( ) Cumulative production already exceeds USGS 2003 estimate of total technically recoverable Source: EIA (shown by assessment date), National Petroleum Council (NPC), USGS 63 A6

65 A1a. OIL & GAS: HISTORICAL FACT BASE BACKGROUND & RESERVES The US had historically experienced declining gas production and rising prices Henry Price US Production US gas production and prices Market sought incremental supplies Henry Hub Price $/MMBtu % p.a US Gas Production Bcfd Decades of production and resource depletion of conventional gas supplies led to declining production despite higher expenditures Decline in production and resulting rising prices, led the US gas industry to seek alternative sources to meet anticipated supply gap to meet demand in mid-2000s Alternative energy sources pursued included the following: Shale gas LNG imports Alternative fuels (e.g., synfuels, biogas) Source: EIA 64 A7

66 A1a. OIL & GAS: HISTORICAL FACT BASE BACKGROUND & RESERVES In the mid 2000s, expectations of high prices incentivized search for new gas supplies Gas prices Actual Vs. Nymex futures $/MMBtu Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Nymex futures (5/30/2008) Actual Jan-13 Jan-14 Jan-15 Market sought incremental supplies In the summer of 2008, market expectations, as reflected by Nymex futures prices, were for prolonged period of high prices to support cost of future production and imports Although actual prices fell far below expectations, high expected prices helped incentivize and fund shale gas development Several US LNG import terminals were constructed to meet the anticipated supply gap Capital decisions on long lead-time projects, such as shale gas development and LNG terminal construction, reflect expectations at the time of decisions, rather than prices when projects come on line Source: EIA 65 A8

67 Table of contents Appendix A: Oil and gas 1. Historical fact base: Oil and gas reserves a. Background and reserves b. Natural gas c. Natural gas liquids (NGLs) d. Crude and condensate e. Tax and regulatory 2. Future outlook: Oil and gas reserves a. Modeling context b. Outcomes i. Reference ii. High iii. Low iv. Comparison c. Severance tax analysis 66 A9

68 A1b. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS Return to pg. 16 Ohio energy competitiveness: Gas challenges and opportunities Ohio is well situated to benefit from abundant and low cost shale gas produced from the massive Marcellus and the emerging Utica basins; Ohio now has a price advantage compared to the national average and neighboring states While the Utica has potential to be a major supply basin, it has significant competition from other supply basins Over the past two years, gas production in Ohio has increased by ~150% Ohio gas production is dominated by independents with majors almost non-existent Expansion of intra-state pipelines will likely be needed to connect producing fields to demand locations Rising Marcellus production and east coast markets A10 67

69 A1b. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS The Marcellus and Utica basins have been important drivers of growth in US production since 2009 US gas production Bcfd Total Production Change from Previous Year Rest of US Gas Marcellus/Utica Total +34% Since 2007, Marcellus and Utica have provided over 70% of the total US production growth Most of the growth is due to Marcellus because Utica production started in earnest in 2013 During past three years, total production from other supply basins actually declined by 3.4 Bcfd, but were more than offset by 8.0 Bcfd of growth from Marcellus and Utica Source: EIA A11 68

70 A1b. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS Ohio quarterly gas production Ohio is a late arriver but rapidly catching up Bcfd Q % Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q Development of the Utica shale in Ohio only started in 2013, lagging behind other shale basins such as the Barnett, Haynesville and Marcellus One primary reason for the late development is because the Utica shale layer mostly lies beneath the Marcellus layer, making it less accessible and more costly to drill Source: Ohio Department of Natural Resources A12 69

71 A1b. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS Ohio gas production - Historic Bcfd Start of Utica production well was drilled in 1860 in Ohio With depletion of conventional gas supplies, production declined steadily from mid- 1980s, mirroring similar declines in other North American gas basins Only recently was the decline reversed due to shale gas production Source: EIA A13 70

72 A1b. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS Return to pg. 18 Utica break-even price was middle of the pack in 2014, but is estimated to benefit from a steep learning curve as drilling improves Break-even price levels across US basins, 2014 $/MMBtu Utica OH Tight Shale CBM Utica break-even price is projected to drop by 30% or more (to approximately ~$3.80) in 2015 as drillers gain experience in the basin This will improve position relative to other plays Source: Drillinginfo; RigData; OBRT working team modeling and analysis A14 71

73 A1b. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS For example, Chesapeake has succeeded in driving down cost over time across basins Chesapeake annual drilling costs in representative regional basins Cost/EUR ($/Mcf equivalent) Utica Marcellus North % p.a % p.a Eagle Ford Haynesville % p.a % p.a Source: Chesapeake Energy investor presentation (May 19, 2015) A15 72

74 A1b. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS Ohio gas production is dominated by independents with majors almost non-existent Details of shale gas producers - Ohio Majors Large independents Regional independents Company Artex Oil Everflow Eastern Ohio Valley Energy Atlas Noble NCL Resources Enterprise Value ($B) NA 15.2 NA NA NA NA NA Production (MMcfd) Chesapeake Energy is the largest producer of shale gas in the state Followed early strategy to quickly buy shale basin acreage around the country Smaller regional independents are the next largest producers DNR: 1926 wells permitted, 1497 wells drilled 901 producing Chesapeake owns about half wells Total Ohio (MMcfd) 305 Source: Yahoo Finance (June 2, 2015), company websites, Ohio Department of Natural Resources A16 73

75 A1b. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS In contrast, overall US gas production is led by majors and large independents Details of gas producers - US Company Enterprise Value ($B) Production (Bcfd) ExxonMobil Chesapeake Anadarko Southwestern Energy Devon Energy ConocoPhillips Energy majors, such as ExxonMobil and Shell, tended to focus on massive and complex projects to leverage their capital and expertise Shale gas was thought to be technically risky and uneconomic prior to mid-2000s BP Cabot O&G BHP Billiton Shale gas growth brought Chesapeake and Southwestern Energy to the top 10 for overall gas production 10 Chevron Total US (Bcfd) 19.8 Source: Yahoo Finance (June 2, 2015), company websites, Natural Gas Supply Association (NGSA) A17 74

76 A1b. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS Top US gas players do not lead in shale gas production Top 10 US Gas Producers Top 10 US Shale Gas Producers Major Company 2014 Production, Bcf/d Company 2014 Production, Bcf/d 1 ExxonMobil 3.4 Southwestern Energy Chesapeake 3.0 Chesapeake Anadarko Southwestern Energy Devon 1.7 ConocoPhillips 1.5 BP Cabot Oil and Gas BHP Billiton ExxonMobil Devon Energy EQT Corporation Average Enterprise value for top 10 US gas producers is ~$110B compared to $72B for top 10 shale gas producers 8 Cabot O&G 1.4 Anadarko BHP Billiton 1.3 Antero Resources Chevron 1.3 EOG Resources 0.6 Source: Natural Gas Supply Association (NGSA) A18 75

77 A1b. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS Return to pg. 19 Growth in shale gas production has steadily increased; Prices have stabilized following a significant decline from US gas production and prices Henry Hub Price $/MMBtu Price US Shale Gas Production Bcfd Production Price falls but production continues to climb Even after prices after 2008, shale gas production, benefitting from cost-reducing technologies, continued to climb and now comprise over half of all domestic gas production Source: Bloomberg A19 76

78 A1b. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS As Marcellus/Utica production has grown, Ohio prices have fallen below those of neighboring states Gas production Marcellus/Utica & rest of US Comparison of citygate prices Production Bcfd Marcellus/Utica Rest of US Gas Citygate price $/MMBtu Ohio Illinois Pennsylvania US Average Rest of US Gas Indiana Ohio gas prices used to be significantly higher than neighboring states to the west, reflecting transportation costs and pipeline constraints Marcellus/Utica As gas flows reversed, Ohio prices fell below neighboring states 0 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan Source: EIA A20 77

79 A1b. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS Comparatively, Ohio production is lagging behind other shale states in the Appalachia region, but is on a similar path since first permit Ohio Pennsylvania West Virginia Number of wells since first permit 1,500 1,000 Production volume (Bcfd) Year 1 Year 2 Year 3 Year 4 Year 5 Year 1 Year 2 Year 3 Year 4 Year 5 First permits issued year Ohio 2011 Pennsylvania 2006 West Virginia 2008 Drivers of differences Resource economics Utica lies beneath the Marcellus and therefore was drilled later deeper depth results in higher drilling costs Market factors E&P companies invested in the Marcellus when oil and gas prices were more favorable Source: Pennsylvania Department of Environmental Protection; Ohio Dept Natural Resources A21 78

80 A1b. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS The number of shale gas wells have increased and are concentrated in eastern part of the state Horizontal gas wells, Well count Drilled horizontal wells Shale gas wells, which use horizontal drilling and hydraulic fracturing, have dramatically increased Permits for drilling in the shale plays were issued starting 2011 Current intra-state pipeline system is configured to primarily connect to inter-state pipelines and transport to demand centers Horizontal wells drilled since 2011 Source: Rystad UCube A22 79

81 A1b. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS Historically, gas flowed from the Gulf, Midcontinent and Rockies supply regions to the eastern markets through Ohio Direction of gas flows before 2005 Source: American Petroleum Institute A23 80

82 A1b. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS Recent changes in North American natural gas flows have occurred as Marcellus and Utica production volumes increased Major US shale gas and liquids resources and gas flow in 2014 Increasing gas volumes Decreasing gas volumes Producing (Tcf resources) Developing Exploration Horn River Shale (40) Mancos Montney (152) Hilliard- Baxter- Mancos Hermosa Cody Lewis Mowry Gammon Woodford (42) Barnett (118) Excello- Mulky Granite Wash Fayetteville (20) Pierre Bend Woodford/ Caney Haynesville/ Bossier (251) Antrim Utica Devonian Chattanooga Conasauga Floyd-Neal Marcellus (256) Marcellus gas production is displacing inflows to the Mid-Atlantic and Northeast markets and now flows are reversing Imports from Canada into the US have been declining Eagle Ford/Pearsall (>100) Source: Wood Mackenzie A24 81

83 A1b. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS Return to pg. 20, 21 As Utica and Marcellus production increased, pipeline flows from other supplies into the region were displaced or reversed Capacity utilization Flow reversal Location of points in Ohio Flows at key points, Bcfd 1 Tennessee Gas Pipeline OH/PA Border (Gulf supplies to Mid-Atlantic) 4 2 1% -12% -24% TETCO Ohio (Gulf supplies to Mid-Atlantic) 23% -38% -77% Columbia Gulf Leach KY (Gulf supplies to Mid-Atlantic) 56% 34% 16% REX Ohio (Rockies supplies to Mid-Atlantic) % 21% -8% 0-1 Jan- 11 Jul- 11 Jan- 12 Jul- 12 Jan- 13 Jul- 13 Jan- 14 Jul- 14 Source: Ventyx Energy Velocity A25 82

84 A1b. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS In line with this broader trend, Ohio gas flows have been dramatically altered due to growth in shale gas production (1/2) Sources of gas flow into Ohio Bcfd From W Virginia From Pennsylvania From Kentucky Bcfd From Indiana Ohio Production Ohio Demand +1.7 Bcfd Gas from Gulf, Midcontinent, and Rockies supplies used to enter Ohio and flow to eastern markets, as well as supply Ohio demand However, flows to Ohio have fallen sharply as Marcellus gas displaced much of the inbound flows Flows from Ohio to West Virginia and Pennsylvania started to reverse in Source: EIA A26 83

85 A1b. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS In line with this broader trend, Ohio gas flows have been dramatically altered due to growth in shale gas production (2/2) Destination of gas flow out of Ohio Bcfd To Michigan To West Virginia To Pennsylvania % Since 2010, gas flows through Ohio to other states have fallen 60% With growth in Marcellus production, flows to Pennsylvania and West Virginia stopped and even reversed in 2013 Gas flows are increasing headed north to Michigan to meet state demand or continue to Canada Source: EIA A27 84

86 A1b. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS As Ohio production increases, it is important to understand location of highest price market destinations Ohio quarterly gas production Prices in gas markets Bcfd % Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q Algonquin (Northeast) Transco NY (Mid-Atlantic) Average Gas Prices in 2014 $/MMBTU Chicago 5.45 Opal 4.42 Henry Hub Most attractive based on price Source: Ohio Department of Natural Resources A28 85

87 A1b. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS However, current pipeline capacity to eastern markets is constrained during peak demand periods Mid-Atlantic Demand Bcfd Jan-2014 Mar-2014 May-2014 Jul-2014 Sep-2014 Nov-2014 Jan-2015 Mar-2015 Northeast Demand Bcfd Demand 11.0 Pipeline capacity 3.3 Pipeline capacity Key implications Already pipeline capacities constrain flows to premium markets during peak periods With growth in Marcellus production and demand growth in the region, more pipeline capacity will be required Marcellus gas, which can now satisfy regional demand during most periods, wants to move westward to Midwest markets. Existing pipeline capacities are inadequate so some pipelines, such as REX, are reversing flows Jan-2014 Mar-2014 May-2014 Jul-2014 Sep-2014 Nov-2014 Jan-2015 Mar-2015 Source: EIA A29 86

88 A1b. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS Ohio gas prices have fallen more rapidly than those in other states Citygate prices Ohio & other states $/MMBtu Ohio price disadvantage Ohio Illinois Indiana Pennsylvania US Average Ohio price advantage Ohio gas prices Ohio used to be downstream of gas flows so its prices reflected pipeline transportation cost and occasional pipeline bottlenecks relative to states upstream in gas flow As flows reversed, Ohio prices fell relative to Illinois and Indiana Pennsylvania prices are higher than Ohio because its prices are buoyed by connection to high prices Northeast markets during peak demand periods Source: US EIA A30 87

89 A1b. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS Price advantage from shale gas extraction is being passed on to all end-users $/MMBtu Industrial Rate Electricity Rate Residential Rate -7% p.a % p.a All Ohio gas consumers are enjoying lower prices Gas retail rates have fallen for all user types, but the rate of decline varies by sector Residential prices have fallen the least because they include a large distribution charge that is not affected by supply cost Ohio now has a price advantage to competing Rust Belt states -4% p.a Source: EIA; two missing years were computed based on citygate prices and average difference by sector A31 88

90 A1b. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS Since 2009, gas usage has increased, driven primarily by gas-fired generation Ohio gas consumption by sector (Bcfd) Bcfd % p.a % p.a Vehicle Residential Electric power generation Commercial Industrial Gas demand fell by 2% per annum from 2000 to 2009 However, gas demand rebounded starting 2010 as gas burned for electric power generation grew sharply with low gas prices and coal plants retirements (3 GW of retirements from 2010 to 2014) Source: EIA A32 89

91 Table of contents Appendix A: Oil and gas 1. Historical fact base: Oil and gas reserves a. Background and reserves b. Natural gas c. Natural gas liquids (NGLs) d. Crude and condensate e. Tax and regulatory 2. Future outlook: Oil and gas reserves a. Modeling context b. Outcomes i. Reference ii. High iii. Low iv. Comparison c. Severance tax analysis A33 90

92 A1c. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS LIQUIDS Ohio energy competitiveness: Oil and gas challenges and opportunities Approximately 4% of US NGL resources are located in basin; Since initial permits were issues in 2011, production has increased by 1000%+ Ohio processing capacity has doubled in the last two years; Ohio fractionation capacity has quadrupled in the last year Growth in wet gas production, which recently started in significant volumes in Ohio, presents new challenges and opportunities for the state; New liquids pipelines and wet gas processing plants could drive further investment and job creation If not built, limited infrastructure could suppress NGL prices and possibly bottleneck wet gas production Growing NGL production and depressed ethane and propane prices in the region present another opportunity for Ohio to attract new businesses; however, it faces strong competition from neighboring states and the US Gulf region, where most of the petro-chemical industry is located A34 91

93 A1c. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS LIQUIDS Return to pg. 23 Natural gas liquids, associated with the production of wet gas, provide feedstock for petrochemical products Current focus Value chain - Natural gas, crude oil and associated liquids Dry gas well Gas processor Methane Dry natural gas Wet gas well Gas processor Methane Mixed Natural Gas Liquids (NGLs) Fractionator Purity hydrocarbons Ethane, propane & butanes Oil well Crude oil Refinery Liquid Petroleum Gases (LPG) & Naphtha Cracker Ethylene Propylene etc. Other products Source: SRI; TECNON A35 92

94 A1c. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS LIQUIDS Return to pg. 22 Approximately 4% of US NGL resources are located in Primary Ohio basin US NGL proved & probable reserves from gas extraction, 2014 Bb Conventional Marcellus Permian Eagle Woodford Utica Barnett Niobrara Bakken Other tight Other shale Other Total Source: Rystad Ucube, May 2015 A36 93

95 A1c. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS LIQUIDS Majority of NGL reserves in Ohio are located in Utica basin with production ramping up since the first permits were issued in 2011 Proved & probable NGL reserves in Ohio MMb 1, ,174 Ohio NGL production MMb +1059% p.a Utica Conventional Marcellus Devonian Total Source: Rystad Ucube (May 2015), EIA A37 94

96 A1c. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS LIQUIDS However, as of 2013, Ohio NGL production volumes accounted only for 0.1% of national output US NGL production from natural gas processing (2013) MMb Could production share grow beyond 0.1% level? TX OK NM WY CO PA WV KY OH Others Total US Source: EIA A38 95

97 A1c. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS LIQUIDS Ohio processing capacity has doubled in the last two years Processing capacity growth - Ohio National processing capacity 2014 Bcfe/d +533% p.a Bcfe/d TX LA WV OK XX% Proportion of national capacity ~70% of processing capacity is on the Gulf Coast but Appalachia especially Ohio & West Virginia are fast catching up CO 2.8 OH 2.0 WY 1.5 ND 1.2 PA Within Appalachia, there is a higher concentration of capacity within West Virginia and Ohio compared to Pennsylvania Others Source: Bentek NGL Facilities databank A39 96

98 A1c. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS LIQUIDS Appalachia regional gas processing plants have been developed in recent years to support production from Marcellus & Utica Fractionation Location Location of processing plants - Appalachia Details of existing plants 1 Name Owner Capacity Mcf/d Year State Ohio West Virginia 7,8,9 11,13,14,15 12, 16 Pennsylvania Kensington I,II, III Seneca I-III Cadiz I & II Berne Hickory Bend Houston Blueston I & II Penn Cryo Ohio Pennsylvania 17 9 Renfrew Appalachia processing has been bottlenecked since 2012, especially more so in the winter, due to increased natural gas demand Processing plants are pre-manufactured and require a lead time of 24 months for set up Many of the new big processing plants are in Ohio Sherwood I-V Majorsville I-V Mobley I-IV Fort Beeler Natrium I & II Oak Grove Hastings Kenova West Virginia 1 Only processing plants with capacity > 100Mcf/d included Source: Bentek NGL facilities databank A40 97

99 A1c. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS LIQUIDS Ohio fractionation capacity has quadrupled in the last year Fractionation capacity growth - Ohio National fractionation capacity 2014 BBL/d BBL/d XX% Proportion of national capacity TX % p.a LA KS OH OK ~70% of fractionation capacity is on the Gulf Coast but Appalachia, especially Ohio & West Virginia, are quickly catching up WV PA Others Source: Bentek NGL Facilities databank A41 98

100 A1c. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS LIQUIDS As a result, some of the mixed NGLs extracted from Ohio are currently fractionated in Appalachia to satisfy regional demand Fractionation Location Location of fractionation plants - Appalachia Existing plants 1 Name Owner Capacity Mb/d Start year State 1 Hopedale I, II & III OH 1, 2, 3 5 Pennsylvania 2 Harrison I, II & III Cadiz OH OH Ohio 6,7, Houston Keystone PA PA West Virginia 9 6 Majorsville 40 7 Natrium WV WV 8 Moundsville I & II 43 WV 9 Holden 15 WV 10 Hastings WV 1 Excludes fractionators with capacity < 1Mb/d Source: Bentek NGL facilities databank A42 99

101 A1c. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS LIQUIDS Return to pg. 23 There has been significant growth in NGL pipeline infrastructure, especially within Appalachia (1/2) Intrastate Interstate New/Expansion Pipeline growth in Ohio Miles by players, 2013 # miles CAGR % Name Miles CAGR ( ) % p.a Interstate Intrastate Source: Ohio Department Of Transportation database 100 A43

102 A1c. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS LIQUIDS There has been significant growth in NGL pipeline infrastructure, especially within Appalachia (2/2) NGL pipeline map Ohio, Pennsylvania & West Virginia Details of pipelines Name Owner Product Start of operations Origin Cadiz-Harrison Y-Grade Harrison, OH OH Pennant Midstream Y-Grade 2015 Mahoning, OH Seneca- Harrison Y-Grade 2015 Noble, OH Mobley- Majorsville Y-grade 2012 Wetzel, WV Sherwood- Mobley Y-Grade 2013 Doddridge, WV Majorsville- Hopedale Y-Grade 2013 Marshall, WV Majorsville- Houston Y-Grade/ Ethane Marshall, WV NGL Pipeline UEO NGL Pipeline UEO Ethane Pipeline UEO Propane Pipeline AGS Centerline SGG Centerline BRM Purity NGL Pipeline BRM NGL in Service BRM NGL Proposed BRM Ethane Pipeline Pennant NGL Pipeline Williams NGL Pipeline Williams Ethane Pipeline Sunoco Logistics Pipelines Mariner East Mariner East Phase II Mariner West Mariner West Sunoco Refined Products Pipeline ATEX Mark West NGL Mark West Ethane Pipelines TEPPCO Ohio Valley Ethane Pipeline Butler-Houston Enterprise TE Products Ethane Y-Grade Propane Marshall, WV Butler, PA Greensburg, PA 1 Y-Grade - Mixed NGLs containing ethane, propane, butane and natural gasolines Source: Bentek NGL facilities databank; JobsOhio 101 A44

103 A1c. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS LIQUIDS Additionally, long-haul pipeline growth continues, connecting Appalachia to the Gulf Coast, Sarnia and Marcus Hook NGL hubs XX (XX) Current (Expandable) capacity Long haul NGL pipelines from Marcellus & Utica Details of pipelines Announced In-service Name Owner Product Capacity Mb/d Origin Start of operations Destination Operational Sarnia Ontario Mariner West Mariner East II Marcus Hook Mariner East I ATEX express Mariner West Ethane 125 (265) 2014 Houston, PA Ethane 50 (65) 2013 Houston, PA Mt. Belvieu, TX Sarnia, ON ATEX Mariner East I Ethane/ propane Houston, PA Marcus Hook, PA UMTP Proposed Mont Belvieu Mariner East II Utica Marcellus Texas pipeline Propane/ Butane Scio, OH Marcus Hook, PA Y-grade 150 (400) 2018 Mercer, PA Mt. Belvieu, TX Source: Bentek NGL facilities databank 102 A45

104 A1c. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS LIQUIDS Increased flow of liquids from Midwest to Gulf has required water and rail, as well as pipeline, transportation Crude oil and petroleum product movement from Midwest to Gulf (PADD 2 to PADD 3) is growing over time Pipelines are the most common mode, but waterborne and rail transportation increasingly used Movement Million barrels 500 Rail Waterborne Pipeline Growth in wet gas and oil production in the Marcellus and other eastern supply basins, movement of crude and petroleum products from the Midwest (PADD 2) to the Gulf (PADD 3) have increased over time With pipeline capacity constraints limiting flows from Appalachian supplies to Gulf petrochemical plants, higher cost, alternative means are used With the start-up of ATEX pipe-line in 2014, more volumes were sent by pipeline, displacing some volumes sent by rail or water Source: EIA 103 A46

105 A1c. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS LIQUIDS Waterborne movement on tankers and barges, typically the next most efficient alternative after pipelines, has grown with Appalachian production Waterborne movement from Midwest has coincided with growth in Appalachian production Appalachian Production Bcfd Waterborne 1 10 Waterborne Movement Million Barrels Marcellus/Utica Pipelines are the most common mode, but waterborne and rail transportation increasingly used Increasingly, tankers and barges flowing down the Mississippi River have allowed more product from the Midwest to reach Gulf facilities Waterborne transportation is roughly 30% less costly than rail for transporting petroleum products Mont Belvieu Source: EIA, Reuters (Analysis: As Mississippi oil barge arbitrage window shuts, another opens) 104 A47

106 A1c. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS LIQUIDS Rail, the last major transportation alternative, has grown in past several years to meet surge in Appalachian production Extensive freight railroad system in the US enabled petroleum product movement from the Midwest to Gulf in recent years Rail Movement Million barrels Rail movement is a high cost alternative, but railroads provide additional capacity and flexibility Rail was only used after pipeline and waterborne capacities were used Although rail is more costly than pipeline or water movement for petroleum products, rail has some advantages: Rail facilities can almost always be built or expanded much more quickly than pipelines Railroads offer market participants enormous flexibility to shift product quickly to different places in response to market needs and price opportunities Unit trains with sometimes more than 100 cars consisting of a single commodity to carry up to 85,000 barrels of oil which can be loaded or unloaded in 24 hours Over the past few years, railroads have invested hundreds of millions of dollars on tracks, locomotives, terminals, and more to enhance their ability to transport crude oil. Source: Moving Crude Oil by Rail ( Association of American Railroads) 105 A48

107 A1c. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS LIQUIDS Export from Ohio is primarily by rail or combination of rail and water Most of petroleum product movement from Ohio was by rail Although Ohio has access to rivers, rail is the primary mode for moving petroleum product to the Gulf region Estimated petroleum product exports (2015) Million Barrels Ohio has good access to the two largest Class I railroads in the eastern U.S. (CSX and NS) Some liquids are transported using multiple modes; product is loaded on rail cars at a processing plant and sent to a barge terminal for shipment to Gulf plants Rail Multiple modes Other Total Source: Center for Transportation Analysis in the Oak Ridge National Laboratory 106 A49

108 A1c. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS LIQUIDS US ethane demand has struggled to keep pace with supply leading to Total supply US ethane demand supply balance Supply-demand difference Rejection Exports Steam crackers MMb/d CAGR % Source: Bentek NGL supply-demand data 107 A50

109 A1c. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS LIQUIDS and fallen in step with that of natural gas US crude, ethane and natural gas prices $/MMBtu Wide spread in 2008 driven by crude oil price spike (supply/ demand imbalance) while ethane: Oil link was still strong Ethane price begins to delink WTI crude Ethane Natural gas linked to natural gas prices Source: EIA; Platts; Bloomberg 108 A51

110 A1c. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS LIQUIDS In the Midwest, falling ethane prices have negatively impacted supply transfer to the Gulf Coast while increasing rejection in the region Total supply Supply-demand difference Petrochemicals Rejection Exports to Gulf Coast Ethane fractionation spread from Midwest to Mt. Belvieu $/MMBtu Midwest 1 ethane supply-demand balance MMb/d Fall in supply driven by fall in imports from other PADDs CAGR % Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, South Dakota, Ohio, Oklahoma, Tennessee, and Wisconsin Source: Bentek NGL supply-demand data 109 A52

111 A1c. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS LIQUIDS Return to pg. 24 Announced cracker projects in Ohio and surrounding Appalachia could increase regional demand for ethane in the future Player Description/ Plant type Ethylene complex Monaca, PA Ethylene Capacity, MT Stage of development 1.5 MT Permit obtained, FEED Projected start year of operation 2018 Factors that make Ohio attractive for future projects Ethylene complex Parkersburg, WV 1.5 MT Feasibility study >2019 Cheap ethane Site availability Ethylene complex Belmont County, OH 1.0 MT Feasibility study 2021 Attractive tax structure Source: ICIS Magazine, American Chemistry Council, JobsOhio discussion 110 A53

112 A1c. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS LIQUIDS Increasing exports and petrochemicals have helped balance propane supply and demand, but prices have fallen sharply in recent times US propane demand by end-user group MMb/d supply-demand difference Steam cracker CAGR % Petrochemicals Exports Residential & commercial Total supply 1 US propane price $/b Includes imports Source: Bentek NGL supply-demand data 111 A54

113 A1c. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS LIQUIDS Propane exports out of US from the Midwest have increased significantly in line with national trends Total supply Steam crackers 2 Exports (out of US) Exports to Gulf Coast Supply-demand difference Residential & Commercial Exports to North East Midwest 1 supply-demand balance MMb/d CAGR % Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, South Dakota, Ohio, Oklahoma, Tennessee, and Wisconsin 2 Drop in demand in 2014 due to debottlenecking of Westlake cracker at Calvert City, KY (conversion from propane to ethane) Source: Bentek NGL supply-demand data 112 A55

114 A1c. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS LIQUIDS Several propane dehydrogenation projects have been announced in the Gulf Coast to increase petrochemical demand for propane Company State Capacity MMlbs/y NGL Demand Mb/d Williams AB 1, Sunoco Logistics PA TBD Dow Chemical TX 1, Start up year Propane Dehydrogenation plants C3 Petrochemicals Enterprise Products TX 2, TX 1, Formosa Plastics TX 1, REXtac TX Source: Bentek NGL facilities databank 113 A56

115 A1c. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS LIQUIDS Announced plans for increase in LPG export terminal capacity will help handle increasing export demand for propane LPG Export terminals Company Name of project State Current Sunoco Logistics Marcus Hook Expansion I PA Sunoco Logistics Marcus Hook PA Enterprise Enterprise Expansion I TX Targa Galena Park Expansion Phase I TX Enterprise Enterprise Expansion II TX Sunoco Logistics Mariner South TX Enterprise Enterprise TX Targa Galena Park TX DCP Midstream Chesapeake VA Petrogas Ferndale WA Expansion Sunoco Logistics Marcus Hook Expansion II PA Targa Galena Park Expansion Phase II (a) TX Targa Galena Park Expansion Phase II (b) TX Enterprise Enterprise Expansion III TX New build EnLink Midstream EnLink LA Pembina Pipeline Portland Propane Terminal OR Occidental Chemical Ingleside TX Export Capacity Mb/d Start up year Source: Bentek NGL Facilities databank 114 A57

116 Table of contents Appendix A: Oil and gas 1. Historical fact base: Oil and gas reserves a. Background and reserves b. Natural gas c. Natural gas liquids (NGLs) d. Crude and condensate e. Tax and regulatory 2. Future outlook: Oil and gas reserves a. Modeling context b. Outcomes i. Reference ii. High iii. Low iv. Comparison c. Severance tax analysis 115 A58

117 A1d. OIL & GAS: HISTORICAL FACT BASE CRUDE & CONDENSATE Ohio energy competitiveness: Oil and gas challenges and opportunities The US has a significant crude oil resource base across shale and conventional sources; however, Ohio accounts for less than 1% of current crude oil reserves Utica Shale reserves contain a large proportion of Gas, NGLs and condensates compared to crude oil, greater than a 10:1 ration Ohio has seen production in crude oil & condensate increase dramatically as dry gas extraction has grown, although absolute volumes remain comparatively low to other states crude and condensate extraction market is fragmented and is dominated by small to mid-sized independents who have continued to increase acreage positions 116 A59

118 A1d. OIL & GAS: HISTORICAL FACT BASE CRUDE & CONDENSATE The US has significant crude oil resource base, both shale and conventional, with Ohio accounting for < 1% Primary Ohio basin US crude oil proved & probable reserves, 2014 Bb Conventional Permian Bakken Eagle Niobrara Woodford Utica Barnett Other tight Other shale Other Total Source: Rystad Ucube (May 2015) 117 A60

119 A1d. OIL & GAS: HISTORICAL FACT BASE CRUDE & CONDENSATE Utica Shale reserves contain a large proportion of condensates with little oil Utica reserves composition and size relative to US MMboe % of US reserves 1, ,904 Utica Shale is rich in NGLs and condensates 3,507 Oil makes up only 6% of the total Utica reserves Gas NGLs Condensates Oil Total Non-gas hydrocarbons make up 41% of the Utica reserves Source: Rystad Ucube, May A61

120 A1d. OIL & GAS: HISTORICAL FACT BASE CRUDE & CONDENSATE Ohio has seen production in crude oil & condensate increase dramatically, although absolute volumes remain comparatively low to other states Oil and condensate production by state Texas Oklahoma Mb/d 1,169 1, % p.a. 1,984 2,532 3,164 Mb/d % p.a Pennsylvania West Virginia Mb/d % p.a Mb/d % p.a Louisiana Ohio Mb/d 0% p.a. Mb/d % p.a Source: US Energy Information Administration 119 A62

121 A1d. OIL & GAS: HISTORICAL FACT BASE CRUDE & CONDENSATE Extraction market is fragmented and is dominated by small to mid-sized independents who have continued to increase acreage positions Major Ohio drillers Company Annual oil production (Mb) Acreage PDC Energy Beldon and Blake Corporation Total ,000 1,000,000 NA 67, , ,167 NA NA NA NA NA Source: Press Search 120 A63

122 A1d. OIL & GAS: HISTORICAL FACT BASE CRUDE & CONDENSATE Ohio has seven pipelines capable of carrying 1144 Mb/d of crude to the four refineries in state Map of existing crude oil pipelines into Ohio, 2014 Details of pipelines Michigan Detroit Stockbridge Toledo 6 Ohio Canton Illinois 4 3 Lima Guernsey Freedom Junction 5 Patoka Player Pipeline Capacity Mbd 1 Enbridge Line Enbridge Line Marathon Line Marathon Line Sunoco Mid Valley 1 6 Sunoco Mid Valley 2 7 Sunoco Eastern Pipeline Refinery connected BP-Husky Toledo N/A Husky Lima Marathon Canton Husky Lima BP-Husky and PBF refineries BP-Husky and PBF refineries Longview, TX Total 1144 Source: Press Search 121 A64

123 A1d. OIL & GAS: HISTORICAL FACT BASE CRUDE & CONDENSATE Announced pipelines will increase transmission capacity for condensates Player Pipeline Origin Destination Marathon Cornerstone Pipeline Capacity kbd Refinery connected Status Cadiz, OH Canton, OH 25 Marathon 2016 Canton Enlink Midstream Partners ORV Condens ate Pipeline Guernsey, OH Washington county, OH 50 N/A 2015 Source: Press Search 122 A65

124 A1d. OIL & GAS: HISTORICAL FACT BASE CRUDE & CONDENSATE Ohio has very little refinery presence compared to states such as Texas & Louisiana in the US Gulf Coast US refinery capacity by state, 2014 Ohio refineries, 2014 State # refineries Capacity, Mb/d Player Location Capacity Mb/d Type of Plant TX 26 5,500 PBF Toledo 175 Refinery LA 19 3,400 Husky Lima 170 Refinery PA OH BP - Husky Toledo 160 Refinery OK WV Marathon Canton 88 Refinery Source: Press Search 123 A66

125 Table of contents Appendix A: Oil and gas 1. Historical fact base: Oil and gas reserves a. Background and reserves b. Natural gas c. Natural gas liquids (NGLs) d. Crude and condensate e. Tax and regulatory 2. Future outlook: Oil and gas reserves a. Modeling context b. Outcomes i. Reference ii. High iii. Low iv. Comparison c. Severance tax analysis 124 A67

126 A1e. OIL & GAS: HISTORICAL FACT BASE TAX & REGULATORY -conventional dry gas production is in line with other major gas producing states Regulations More stringent Ohio Pennsylvania West Virginia New York Texas Wyoming Site preparation Building setback limits (feet from building) Water setback limits (feet from water source) None 50 Well establishment Depth regulations (feet from surface) Cement quality restrictions Specified Specified Specified Specified Specified None Cement surface requirement Yes Yes Yes Yes Yes Yes Fracturing regs Water withdrawal permission Permit & Recordkeeping Permit Permit & Recordkeeping Permit & Recordkeeping Permit Frack fluid disclosure required Yes Yes Yes Proposed Yes Yes Permit Frack fluids require sealed tanks All fluids Some fluids Some fluids Some fluids Some fluids Some fluids Wastewater treatment Freeboard requirements Yes Yes Yes Yes No No No, but Wastewater transport permits Recordkeeping Recordkeeping Authorized Permit & Recordkeeping Permit & Recordkeeping Permit Gas dispersion Venting banned Restriction on flaring during production Restricted Restricted Discretionary Discretionary Restricted Restricted Banned Discretionary Discretionary Restricted Restricted None Source: DOE Office of Fossil Energy; American Petroleum Institute, RFF Report 125 A68

127 A1e. OIL & GAS: HISTORICAL FACT BASE TAX & REGULATORY Overview of existing regulations for shale gas production Regulation over the exploration and production of shale gas in the United States is conducted by state authorities In recent years, states with shale oil and gas have created specific rules and guidelines to maintain safety standards and environmental protection Each state defines the minimum safe distance between wells and water sources, buildings, urban areas and other features of the state Casing and cementing is highly variable, in most cases casing and cementing is required near water sources. Rules over the type of cement also apply Despite being controversial, regulation over fracturing fluid disclosure is still heterogeneous. Several states require detailed information on the utilized fluids, while others allow companies to maintain the confidentiality of their operations Several regulations apply to both conventional and unconventional wells States regulate water withdrawal through general state laws, which apply to all industries, and not just oil and gas Open pits and storage tanks must follow safety guidelines to prevent contamination of nearby water sources. Generally, regulation focuses on freeboards and pit liners Wastewater transportation is tracked, but disposal options vary among states Flaring is allowed in all states, while venting is more regulated. In both cases, states try to minimize the amount and effect on the environment 126 A69

128 A1e. OIL & GAS: HISTORICAL FACT BASE TAX & REGULATORY Setback restrictions: Most states, including Ohio, have setback restrictions between wells, buildings and water sources States with the largest number of gas wells in the US New York Ohio Tennessee 200 Texas Maryland 200 Michigan 300 Wyoming North Dakota Pennsylvania West Virginia US Average Setback restrictions from buildings, Feet ,000 Setback restrictions from water sources, Feet No restrictions No restrictions 1,000 1,000 1,000 2,000 Overview The American Petroleum Institute (API) best practices encourage separating well activity from both buildings and water. However, each state has individual perspectives on the required distance Building setback regulations may vary based on local conditions. In Ohio and Colorado, high density or urbanized areas tend to have larger setbacks Many states provide reductions or exemptions from their setback restrictions, often contingent upon signatures from the affected landowners Most states have setback restrictions for water sources to avoid water pollution The Environmental Protection Agency has yet to find evidence on water pollution caused by shale production; however, the agency is conducting new studies on the subject Source: Office of Fossil Energy; RFF Report 127 A70

129 A1e. OIL & GAS: HISTORICAL FACT BASE TAX & REGULATORY Well testing: Several states, including Ohio, require predrilling water well testing to evaluate the potential impact of an incident Use Specifications Examples Predrilling water well testing establishes the baseline water quality for an area prior to drilling activity In case groundwater is found to be polluted after drilling, the baseline results are important evidence for determining whether contamination is related to drilling activity Although the radius for testing varies greatly from 0.09 miles (Virginia) to 1 mile (North Dakota, Nebraska and Oklahoma), the average radius is 0.44 miles for testing Although the majority of states do not require predrilling testing, seven states 1 do require testing before drilling activity takes place Ohio regulation requires operators to test water wells within 300 feet of a proposed gas well in urbanized areas, while in other areas sampling must occur within 1,500 feet of a proposed horizontal well In addition, Ohio has mapped the entire ground-water system, as an additional risk management measure, to ensure ground-water is protected In early 2014, the Environmental Protection Agency was unable to find considerable Duke University conducted a parallel study, and found considerable amounts of the substance. Residents have blamed operators, instead of conducting defining independent studies 1 Colorado, Nebraska, Illinois, Ohio, West Virginia, Virginia and New York Source: Bloomberg; Factiva; RFF Report 128 A71

130 A1e. OIL & GAS: HISTORICAL FACT BASE TAX & REGULATORY Cementing: Regulations vary greatly between states, and may differ among fields in each state Overview The American Petroleum Institute best practice is that selected cements, additives and mixing fluid should be laboratory tested in advance to ensure they meet the requirements of the well design Ohio has adopted both the API and ASTM standards for cementing The most commonly-used cement in the US is Portland Class A cement Cement type varies by ` well and operator. It depends on the geological formation and other conditions Cement is classified based on the following characteristics Compression resistance Cement type Cement circulation around the casing Ohio has seen <1% correction of cementing works -- need fixing or additional work due to deficiencies in the application of cement -- compared to a 1-5% median. States with casing type regulations Not considered in map ` Regulated cement type Source: RFF Report; Midwest Energy News 129 A72

131 A1e. OIL & GAS: HISTORICAL FACT BASE TAX & REGULATORY Cement casing: Circulation is highly regulated in the United States, and applies to both vertical and horizontal wells Regulation relevant to vertical and horizontal wells Surface Most states require surface casing, the outermost layer of casing, to be cemented all the way to the surface, along with an outer conductor casing ` (or conductor pipe) All states that do require such cementing do so explicitly in their statutes or regulations Intermediate Production Cementing in this zone is usually not mandatory, but may be required through permitting process Several states 1, specify a distance above the shoe to which intermediate casing must be cemented. The distance ranges from 200 to 600 feet above ` the shoe 500 feet for Ohio Eight states regulate intermediate casing cementing depth via their permitting processes Alabama and Ohio use a performance standard: operators are required to isolate and protect groundwater of hydrocarbon zones Arkansas and New York require production casing to be cemented to the surface which inserts some risk for cement cracking with a potential for reduced leak control API states that ` best practice is to cement production casing to at least 500 feet above the highest formation for vertical wells (and 1000 feet for horizontal) above where fracturing performed Casing zones and cement programs in shale gas wells ` Source: US Energy Department of Energy; RFF Report; Propublica 1 Colorado, Oklahoma and Texas 130 A73

132 A1e. OIL & GAS: HISTORICAL FACT BASE TAX & REGULATORY Water: Consumption regulated through local water withdrawal laws, and not under industry-specific rules Overview Several states have discussed drafting rules specific to the shale industry about water withdrawal, but few have passed such regulation. Water withdrawal is regulated under general regulations In Ohio, different withdrawl levels drive different regulations. Additionally, Ohio does have permitting withdrawls Most states require general permits for surface and/or underwater withdrawals, many of them only require them after a specified threshold Consistent with best practices, Ohio requires interface with appropriate water management agencies, who work with companies to shift location of water source Water withdrawal regulations % of states Permit, registration & reporting over threshold Regristration & reporting over threshold 40% 8% 10% 42% Not considered Permit required over threshold 1 Main shale gas production areas and the water resources used for their production Mancos Cody Hilliard-Baxter- Mancos Horn River Shale (40) Montney (152) Hermosa Lewis Mowry Niobrara Gammon Avalon Production Exploration Bakken Barnett (118) Eagle Ford/ Pearsall (> 100) Under development New Albany Fayetteville (20) Woodford/ Caney Haynesville/ Bossier (251) Antrim Excello- Mulky Pierre Woodford Granite (42) Wash Bend Floyd- Neal Orange: States with the largest amount of liquids Utica Devonian Chattanoog a Conasauga Marcellus (256) 1 California, Montana, Wyoming, Utah, Colorado, New Mexico, Texas, Oklahoma, Kansas, Nebraska, South Dakota, North Dakota, Arkansas, Mississippi, Georgia, Virginia, Pennsylvania, New York, Michigan and Maryland Source: Energy Information Administration; RFF Report; National Petroleum Council; Environmental Protection Agency 131 A74

133 A1e. OIL & GAS: HISTORICAL FACT BASE TAX & REGULATORY Water: Fracturing fluid disclosure has become a controversial issue with environmental groups, legislators and operators Regulation overview The Safe Drinking Water Act authorizes state regulation of underground fluid injection under EPA guidance. In 2005, Congress amended the SDWA to exclude fracturing fluids other than diesel fuel, making it a controversial issue Ohio still regulates these fluids, with Class1 Wells by Ohio EPA and Class2 Wells by ODNR Fifteen states 1, including Ohio, require some form of fracturing fluid disclosure. Although reporting differs greatly among states, Ohio requires good amount of detail while still protecting confidential information Many states rely on FracFocus, which was developed with the US Department of Energy funding, in which operators can provide fluid disclosure. Over 200 companies in 30,000 wells have shared their information through this tool. Eight states use this tool to receive operator reports on fluid disclosure In addition to FracFocus, Ohio DNR requires specific reporting and fluid disclosure States with requiring fracturing fluid disclosure Not considered in map Disclosure required 1 Montana, Wyoming, Utah, Colorado, New Mexico, Texas, Oklahoma, Arkansas, Louisiana, Michigan, Ohio, West Virginia, Pennsylvania, Maryland Source: Energy Information Administration; RFF Report; US Department of Energy 132 A75

134 A1e. OIL & GAS: HISTORICAL FACT BASE TAX & REGULATORY Water: Wastewater storage and disposal varies greatly among states and within each state depending on the type and composition of wastewater General overview Fluids are most commonly stored in open pits or closed tanks. Some state regulations mention storage of waste water in ponds, sumps, containers, impoundments and ditches, but all these can be considered subtypes of pits or tanks States vary in how they define and regulate each type of pit. Each type is approved to accept certain types of fluids, and regulation changes widely from state to state and by field in several cases. Ohio regulates pit storage through permitting of each type. Fluid storage options States in RFF Report Pits allowed & regulated for all fluids (incl. Ohio) Sealed tanks required for some fluids Permit required for all pits/tanks No regulation Open pits Several states have freeboard regulation, requiring from one to three feet of freeboard, the difference between the top of a pit and its maximum fluid level Freeboard is important for preventing overflow of fluids, particularly during and after intense rain Rules may differ depending on the nature of the pit. Temporary pits usually require one feet freeboard, while large capacity pits may require up to three feet Pit liners Pit liner regulation requires operators to have a minimum lining in their storage facilities to avoid fluids from seeping into the ground and potentially polluting groundwater Liner thickness ranges between millimeters, averaging at 22.4 millimeters in the US Most states require a minimum thickness. However, some states require thickness specifications case-by-case Source: RFF Report 133 A76

135 A1e. OIL & GAS: HISTORICAL FACT BASE TAX & REGULATORY Wastewater treatment: Underground injections of waste fluids is allowed in several states, however regulation applies to most states Overview Underground injections of waste fluids is allowed in 30 states 1 with restrictions on fluids and pollutant levels Three states recently issued limited or local moratoria because of increased seismic activity linked to shale gas fluid disposal Ohio introduced an injection well fee of 5 cents per barrel of each substance that is delivered to a well to be injected in the well. Colorado charges $50,000 for each facility Examples Montana Requires underground injections of all fluids more than 15,000 ppm total dissolved solids (TDS) Arkansas Moratorium on deep injection in a 600 mi 2 area of the state where a fault may activate Ohio Requires brine to be disposed of by injection into an underground formation unless the board of the community permits surface application Fort Worth, Texas Ban on deep injection wells North Carolina Expressly prohibits underground injection of fluids produced in the extraction of oil and gas 1 California, Montana, Wyoming, Utah, Colorado, New Mexico, Texas, Oklahoma, Kansas, Nebraska, South Dakota, North Dakota, Arkansas, Mississippi, Georgia, Virginia, Pennsylvania, New York, Michigan, Maryland, Illinois, Louisiana, Alabama, Vermont, New Jersey, West Virginia, Tennessee, Kentucky, Ohio and Indiana Source: US Office OF Fossil Energy; RFF Report 134 A77

136 A1e. OIL & GAS: HISTORICAL FACT BASE TAX & REGULATORY Pipeline property taxes in Ohio are higher than comparison states Actual taxes paid by a pipeline operator as a percentage of net book value 1, % Pipeline asset tax rates Assessment rate Pipeline asset tax rate No data 0.102% 1.140% Ohio 88% % Kentucky N/A 0.45% 3 Pennsylvania N/A N/A OH KY PA 2 WV West Virginia 60% % Several factors drive the high tax rate assessed on pipeline operators in Ohio Depreciation is calculated according to a regular schedule that allows ~3% p.a. for 30 years, resulting in less depreciation realized early in the life of the asset No allowance for obsolescence or negotiation of asset value without a formal Tax Commission hearing Relatively high assessment and pipeline tax rates 1 Includes property taxes on buildings and other facilities in support of pipeline operations and 41-43% depreciation of pipeline assets 2 Pennsylvania does not have a pipeline tax, only a real property tax of %, depending on county 3 Assessed on fair value of real and tangible assets Source: Data received from Columbia Pipeline Group, State Governments of Ohio, Kentucky, West Virginia, and Pennsylvania 135 A78

137 A1e. OIL & GAS: HISTORICAL FACT BASE TAX & REGULATORY severance/extraction and income taxes rank 5 of 6, respectively Severance /extraction tax 1, ($/MCF) State corporate income tax, (% of income, % of revenue) Texas % of revenue Louisiana % of income Oklahoma % of income Ohio % of revenue Pennsylvania ~10% of income West Virginia % of income 1 Assumes wellhead price of $3.00/McF; Texas, Oklahoma, and West Virginia use a flat percentage formula; Louisiana uses a basis of $.07 multiplied by an annual multiplier; Pennsylvania uses a well fee paid over first three years of production; Ohio employs a flat rate per McF Source: National Conference of State Legislatures; EIA; State Government of Ohio; State Government of Louisiana, State Government of West Virginia, State Government of Pennsylvania; State Government of Oklahoma; 136 A79

138 A1e. OIL & GAS: HISTORICAL FACT BASE TAX & REGULATORY Unlike several large energy producing states, Ohio uses oil and gas severance taxes to support the general fund Breakdown of state expenditures of severance revenues (2014) % General Fund Infrastructure 5% 95% 100% 10% 40% 30% 100% 43% 12% 60% 25% 75% 90% Education Rainy Day Fund Counties State agencies $M 2014 State Severance Revenues 45% 40% 20% 10% Arkansas Michigan North Dakota Ohio 3 Oklahoma Pennsylvania Texas West Virginia Estimated gas 3 Ohio GRF allocated to DNR following GRF allocation, with 10% for orphaned wells Source: National Conference of State Legislatures; EIA; State Government of Ohio; State Government of Louisiana, State Government of West Virginia, State Government of Pennsylvania; State Government of Oklahoma; State Government of Texas 137 A80

139 Table of contents Appendix A: Oil and gas 1. Historical fact base: Oil and gas reserves a. Background and reserves b. Natural gas c. Natural gas liquids (NGLs) d. Crude and condensate e. Tax and regulatory 2. Future outlook: Oil and gas reserves a. Modeling context b. Outcomes i. Reference ii. High iii. Low iv. Comparison c. Severance tax analysis 138 A81

140 A2a. OIL & GAS: FUTURE OUTLOOK MODELING CONTEXT Production of both dry gas and natural gas liquids are important energy future Value chain Natural gas, crude oil and associated liquids Dry gas well Wet gas well Gas processor Gas processor Mixed Natural Gas Liquids (NGLs) Methane Methane Fractionator Purity hydrocarbons Ethane, propane & butanes Dry natural gas Oil well Crude oil Refinery Liquid Petroleum Gases (LPG) & Naphtha Cracker Ethylene Propylene etc. Other products Source: SRI; TECNON 139 A82

141 A2a. OIL & GAS: FUTURE OUTLOOK MODELING CONTEXT We projected production by basin and economic impacts for Ohio We will make use of IMPLAN and other energy models along with best available data Modeling approach will analyze Ohio production and economic implications Resource Drilling activity Data Well completions Capex/ Opex Market Using best available data, our energy model assesses the competitiveness of each basin in North America to project future production Supply model and infrastructure analysis Given the production volumes, we analyze infrastructure requirements to bring the gas to market Gas/Liquids Production Revenue IMPLAN Model Infrastructure Capex The projected production sales revenue and infrastructure capital expenditures are feed into the IMPLAN, a model of economic interactions across sectors within a particular region, to project impact on GDP and employment GDP Impact Employment Source: Drillinginfo; RigData; OBRT working team modeling and analysis 140 A83

142 A2a. OIL & GAS: FUTURE OUTLOOK MODELING CONTEXT Since there is much uncertainty, we analyzed multiple scenarios for Utica production Although Ohio has little or no control over geologic and drilling economic factors, it is important to test how alternative assumptions might affect its energy future and efficacy of different policy options We developed three scenarios for Utica production by modifying key uncertainties in resource size and rate of extraction Scenarios Uncertainty High Production Base Low Production Technically recoverable resource (TRR) High TRR (530 Tcf) Moderate (265 Tcf) Moderate (265 Tcf) Drilling activity (maximum number of rigs in a play) High drilling activity (100%) Moderate drilling activity (50%) Low drilling activity (15%) Ramp up rate High ramp up rate (100%) High ramp up rate (100%) Low ramp up rate (20%) Source: Drillinginfo; RigData; OBRT working team modeling and analysis 141 A84

143 A2a. OIL & GAS: FUTURE OUTLOOK MODELING CONTEXT To assess the scale of the gas opportunity, we analyzed potential supply scenarios and their implications for Ohio Project production by scenario Test controllable actions Midstream infrastructure Run base case Develop high and low cases based on uncertainties in above ground and below ground factors Analyze severance tax (e.g., 1%, 5%) Analyze regulatory scenarios (e.g., enhanced cement casing) Analyze capacity requirements given production scenario Determine Downstream opportunities Determine incremental industrial demand and opportunities for attraction 5 State impacts Industry sales and capital expenditures Assess overall state-level GDP impact of various production scenarios Create picture of overall jobs impact of various production scenarios Source: Drillinginfo; RigData; OBRT working team modeling and analysis 142 A85

144 A2a. OIL & GAS: FUTURE OUTLOOK MODELING CONTEXT Oil price fluctuations have a series of small, nuanced effects on the natural gas market Oil prices have experienced tremendous volatility in the past 10 years USD per barrel Model price ($60) 5-year historical average While oil prices have fluctuated significantly, overall demand for natural gas is not affected by oil prices The outputs in future modeling around the natural gas opportunity are based on a go-forward oil price of $60 per barrel Decreases in oil prices have nuanced effects on the natural gas market... Lower servicing costs driven by lower rig usage; would improve wellhead economics Possible increase in rate of conversion from coal fired to gas fired generation, as resulting lower gas prices improve gas vs. coal economics Decrease in value of NGLs and LTOs may drive activity away from these wells in favor of wells with greater dry gas content Could marginally delay Utica play development Source: Energy Information Administration (EIA) 143 A86

145 A2a. OIL & GAS: FUTURE OUTLOOK MODELING CONTEXT In aggregate, these effects have little to no impact on the magnitude of the natural gas opportunity in Ohio Decreases in oil prices could yield a small shift from wet gas to dry gas production Breakdown of wet and dry gas Wet gas Wet gas 30 Dry gas 2030 projected Illustrative mix with lower oil prices Dry gas A decrease in oil prices changes well economics to make wet gas extraction slightly less favorable This could potentially move extraction activity further east toward the Marcellus basin, where more dry gas exists This could potentially move some economic activity outside of Ohio, although this effect is expected to be very small These shifts would cause little to no effect on the overall GDP impact of natural gas activity USD per barrel Gas and oil production Supporting industries $ Wet gas Total GDP gain Dry gas All else being equal, these shifts in the mix of natural gas production would yield a minimal effect on the overall GDP impact of the natural gas opportunity Overall demand is driven by the export markets, and is therefore largely untouched by oil prices 144 A87

146 Table of contents Appendix A: Oil and gas 1. Historical fact base: Oil and gas reserves a. Background and reserves b. Natural gas c. Natural gas liquids (NGLs) d. Crude and condensate e. Tax and regulatory 2. Future outlook: Oil and gas reserves a. Modeling context b. Outcomes i. Reference ii. High iii. Low iv. Comparison c. Severance tax analysis 145 A88

147 A2b. OIL & GAS: FUTURE OUTLOOK OUTCOMES Return to pg In the Reference case, Utica production grows sharply but is overshadowed by the continued growth of the Marcellus OHIO GAS FUTURE: REFERENCE CASE Production volumes in Ohio and the Appalachian region are projected to grow rapidly Gas Production Bcfd Marcellus (Non-Ohio) Utica (Non-Ohio) Ohio Ohio will benefit from state and regional production Ohio production is projected to double over next 15 years, but the larger market trend is set by continued production growth in the Marcellus Production growth in the Marcellus and Utica basins have depressed prices in the region, caused gas flow reversals, and resulted in a number of proposals for pipeline projects to export gas and liquids out of the region 2015 actual production as exceeded the modeling reference case, but is still case scenario modeling Source: Drillinginfo; RigData; OBRT working team modeling and analysis 146 A89

148 A2b. OIL & GAS: FUTURE OUTLOOK OUTCOMES 1 Utica production will be primarily dry gas, but there will be significant volume of NGL production OHIO GAS FUTURE: REFERENCE CASE Ohio production of both dry gas and NGLs are projected to double over the next decade Production Bcfd NGLs Dry Gas NGLs are a new opportunity for Ohio Ohio has a long history of dry gas production, but wet gas production of NGLs are relatively new to the state Ohio will require infrastructure expansion to fully accommodate and capture value of NGL production 2015 actual production as exceeded the modeling reference case, but is still case scenario modeling Source: Drillinginfo; RigData; OBRT working team modeling and analysis 147 A90

149 A2b. OIL & GAS: FUTURE OUTLOOK OUTCOMES 2 To understand impact of controllable actions, we analyze wellhead productivity by county OHIO GAS FUTURE: REFERENCE CASE Drilling productivity per well varies widely by county in Ohio There appears to be two distinct groups based well productivity Average Initial production (4Q2014-1Q2015) Mcfe/day 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Monroe Noble Belmont Harrison Guernsey Gas Columbiana Oil Carroll Total Drilling activity in 2014 showed three counties with high productivity while the rest showed much lower productivity Carroll county has fairly low productivity; however, it is the leading county in terms of total gas production Based on initial production (IP), decline curves, and drilling costs data, we can compute breakeven prices, which represent the Henry Hub price necessary to provide the average well within a basin a 10% rate of return on a 15-year discounted cash flow basis Source: Ohio Department of Natural Resources 148 A91

150 A2b. OIL & GAS: FUTURE OUTLOOK OUTCOMES 2 After computing breakeven prices from well productivity data, we compare basins to show relative competitiveness Return to pg. 18 OHIO GAS FUTURE: REFERENCE CASE Estimated breakeven prices by basin in 2015, $/MMBtu Utica is expected to be advantaged Ohio-Monroe Ohio-Noble Ohio-Belmont Ohio-Harrison Ohio-Guernsey Ohio-Carroll Devonian OH Ohio-Other $3.70 Nymex On average, the Utica is estimated to be among the lowest cost supply basins However, examination by county reveals that the four top counties (Monroe, Noble, Belmont, and Harrison) are highly competitive, but the others are not economic at current price expectations, as reflected by Nymex futures prices The Utica is still an emerging basin and its unit production cost is expected to decline more rapidly than average Oil is assumed to be $60/bbl in the gas breakeven price calculations 1 Average NYMEX futures prices from Jan 2016 to June 2024 (July 24, 2015) Source: DrillingInfo; Ohio Department of Natural Resources 149 A92

151 A2b. OIL & GAS: FUTURE OUTLOOK OUTCOMES 2 Drilling activity appears to validate the computed breakeven prices OHIO GAS FUTURE: REFERENCE CASE Counties with rapidly increasing production are those computed to have the lowest breakeven prices With the exception of Carroll county, focus of initial shale gas drilling in Ohio, still leads in new wells, but emerging counties are catching up Total Production MMcfe/day Q Q Q Q Q Q Q Q 2015 Carroll Belmont Harrison Monroe Noble Guernsey Other Number of New Wells (4Q14-1Q15) Carroll Guernsey Belmont 36 Noble 35 Harrison 26 Monroe 21 Others Source: Ohio Department of Natural Resources 150 A93

152 A2b. OIL & GAS: FUTURE OUTLOOK OUTCOMES 2 Considered severance tax and drilling regulations are estimated to have minimal impact on breakeven price OHIO GAS FUTURE: REFERENCE CASE Recoverable volume Impact relative to base case % change to breakeven price Low Base case High Calculation of a breakeven price is dominated by the recoverable volume By varying key uncertainties by their range of values, we can gauge the impact on the breakeven price for a well Drilling cost Completion cost The largest determinant of breakeven price is total recoverable volume of a well, followed by capital (drilling and completion) and operating costs O&M costs Enhance casing Severance tax Controllable actions, such as requiring enhanced cement casing or imposing a moderately higher severance tax, have minimal impacts on breakeven price but could sway production decisions in marginal areas Source: Variability in recoverable volumes given by IP rates for the top (Monroe) and lower tier (Carroll) counties; costs were assumed to vary + 25%; enhanced cases is assumed to add $87k/well and severance tax is assumed to increase from 1% to 5% 151 A94

153 A2b. OIL & GAS: FUTURE OUTLOOK OUTCOMES 4 Growth in ethane production will be sufficient to potentially supply multiple ethane crackers OHIO GAS FUTURE: REFERENCE CASE Projected ethane production in Appalachia is estimated to be sufficient to supply more than six world-scale ethane cracker 1 in the future Ethane Production kb/d cracker crackers crackers Margin for three additional world scale crackers with projected ethane production Ethane feedstock Ohio could benefit from construction of ethane crackers in the State Ohio production is projected to be able to feed up to six crackers, but additional ethane can also be imported from other states Once liquids are separated from the gas stream and fractionated into a purity product, ethane can be fed into an ethane cracker to produce ethylene, an important intermediate product in the petrochemical industry However, Ohio must compete with other states for ethane cracker projects, as well as export of ethane to the Gulf and international destinations 1 World-scale ethane cracker is estimated to consume about 100 kb/d Source: Drillinginfo; RigData; OBRT working team modeling and analysis 152 A95

154 A2b. OIL & GAS: FUTURE OUTLOOK OUTCOMES 5 GDP by $8.3 billion and sustain over 130,000 jobs in 2025 OHIO GAS FUTURE: REFERENCE CASE $ Billion Gas and oil production Manufacturing 1 Services 2 Other sectors 3 Total GDP gain Sector jobs Includes chemicals, metals, paper and pulp, and rubber and plastics manufacturing. 2 Includes professional services, management, real estate, health care, education, leisure, and hospitality. 3 Includes wholesale and retail trade, construction, transport and warehousing, agriculture, mining, and government. Source: IMPLAN model results 153 A96

155 A2b. OIL & GAS: FUTURE OUTLOOK OUTCOMES 5 Shale gas production in Ohio is projected to significantly OHIO GAS FUTURE: REFERENCE CASE With growth in shale gas production, the O&G extraction sector is projected to grow in importance Shale gas production could Impact in 2025 % GDP Services 0.3 Manufacturing 0.4 % GDP Other O&G extraction % GDP % Utilities 0.2% O&G Extraction Share of Ohio GDP (2012) 1.9% Motor Vehicles Sources IMPLAN model results; US Dept of Commerce Bureau of Economic Analysis; US Bureau of Labor Statistics The projected valued added from shale gas production represents a 1.4% increase 2014 GDP of $583 billion The projected values represent a strong growth over the 0.2% share that oil and gas extraction captured in 2012 and are comparable to the shares captured by utilities and motor vehicles Even though the Utica is still an emerging basin, it is already one of the top 6 shale gas producing basins in the US and has potential to grow much higher 154 A97

156 Table of contents Appendix A: Oil and gas 1. Historical fact base: Oil and gas reserves a. Background and reserves b. Natural gas c. Natural gas liquids (NGLs) d. Crude and condensate e. Tax and regulatory 2. Future outlook: Oil and gas reserves a. Modeling context b. Outcomes i. Reference ii. High iii. Low iv. Comparison c. Severance tax analysis 155 A98

157 A2b. OIL & GAS: FUTURE OUTLOOK OUTCOMES 5 Shale gas production in Ohio is projected to significantly OHIO GAS FUTURE: SENSITIVITY CASES With growth in shale gas production, the O&G extraction sector is projected to grow in importance Shale gas production could % GDP % % 1.2% % GDP % % 1.5 Utilities 1.0 Motor Vehicles % O&G Extraction The projected valued added represents 1.2%-2.1% increase $583 billion The projected values represent a strong growth over the 0.2% share that oil and gas extraction captured in 2012 and are comparable to the shares captured by utilities and motor vehicles Even though the Utica is still an emerging basin, it is already one of the top 6 shale gas producing basins in the US and has potential to grow much higher 0 GDP % Impact (2025) 0 Share of Ohio GDP (2012) Source: IMPLAN model results; US Dept of Commerce Bureau of Economic Analysis; US Bureau of Labor Statistics 156 A99

158 A2b. OIL & GAS: FUTURE OUTLOOK OUTCOMES 5 Uncertainty in production implies high upside potential, but limited downside OHIO GAS FUTURE: SENSITIVITY CASES With potential for much higher production volumes, the economic impact on Ohio could be much higher $ Billion Value Added (2025) Reference case $ Billion 149 High case 230 Cumulative Value Added ( ) Low case 122 Shale gas production could By 2025 when the basin is projected gas production could add $ Cumulative impact of shale gas production from 2015 to 2030 ranges from $ GDP The impacts measure: Direct impacts arising from wages and expenditures within the O&G sector Indirect impacts arising throughout the O&G supply chain Induced impact arising from household spending from income earning either directly or indirectly from the O&G sector Sources IMPLAN model results; US Dept of Commerce Bureau of Economic Analysis; US Bureau of Labor Statistics 157 A100

159 A2b. OIL & GAS: FUTURE OUTLOOK OUTCOMES 5 Shale gas production and concomitant infrastructure expansion are projected to support a large number of jobs OHIO GAS FUTURE: SENSITIVITY CASES Direct and indirect employment impacts due to shale gas span multiple sectors Impact of Utica on employment could be much larger than present Employment Impact (2025) Number of Jobs (Thousands) Base High Other Services Manufacturing O&G extraction Low Number of jobs attributable to shale gas production in Ohio is projected to range from 108 to 225 thousand with an average of 137 thousand by 2025 when Utica production is expected to reach full maturity The jobs represents % impact relative to the 2015 Ohio civilian labor force of 5,739 thousand By comparison, there were 23 thousand jobs in O&G extraction in 2013 Source: IMPLAN model results; US Bureau of Labor Statistics; US Bureau of Economic Analysis; Ohio Development Service Agency 158 A101

160 Table of contents Appendix A: Oil and gas 1. Historical fact base: Oil and gas reserves a. Background and reserves b. Natural gas c. Natural gas liquids (NGLs) d. Crude and condensate e. Tax and regulatory 2. Future outlook: Oil and gas reserves a. Modeling context b. Outcomes i. Reference ii. High iii. Low iv. Comparison c. Severance tax analysis 159 A102

161 A2c. OIL & GAS: FUTURE OUTLOOK SEVERANCE TAX Executive summary: Severance tax The average effective tax rate of shale gas producing states is 8.3%, ranging from 6.3% to 11.3% The cost to extract gas from the Utica basin is competitive with other states and projected to fall further as more wells are established The Utica basin has the 5 th lowest break-even price out of 16 U.S. basins The break-even price fell by 38% between 2014 and 2015 to $3.30 per MMBtu An increased severance tax is not projected to significantly alter the difference between the break-even price and the average NYMEX future price A 5% severance tax is projected to increase the break-even price of gas extraction by 2% At the break-even price, the average well is projected to pay a total of $650k in severance tax (not discounted) Revenues from a severance tax can be targeted fund, which feeds into ODNR Other states allocate tax revenue to infrastructure, counties, rainy day funds, and state agencies 160 A103

162 A2c. OIL & GAS: FUTURE OUTLOOK SEVERANCE TAX Among major shale gas producing states in the rate on horizontal wells producing natural gas ranks last Effective tax rate (ETR) on horizontal wells producing natural gas, natural gas liquids and oil 7.6% 9.5% 7.6% 8.1% 8.0% 1.5% 11.3% 6.3% Ohio has the smallest severance tax of all comparison states The average ETR of all other states is 8.3% ETR is 85% below the average rate for all other states Low High Source: Ernst & Young report on severance taxes conducted for the Ohio Business Roundtable, A104

163 A2c. OIL & GAS: FUTURE OUTLOOK SEVERANCE TAX The cost to extract gas from the Utica basin is lower than many basins in Break-even price levels across US basins, $/MMBtu All other basins Utica (current 1% severance tax) 2015 (5% severance tax) Source: DrillingInfo, Ohio Dept. of Natural Resources; Tax rate is the only variance in the column 162 A105

164 A2c. OIL & GAS: FUTURE OUTLOOK SEVERANCE TAX An increased severance tax is not projected to have a significant effect on well profitability Capital and variable costs drive profitability of a well with given resource volume Taxes are minor factors determining profitability Percent of total present value % -26.7% 100% -20.0% Total Value Drilling cost Completion cost Royalties -25.0% O&M costs 11% Gross Margin -0.3% -3.3% Severance tax -7% Profit To illustrate economic drivers, we examine a well with 3.7 Bcf of recoverable gas volume An increased severance tax of 5% determines ~3.3% of a compared to ~1% at the current severance tax rate Except for supplies at the margin, a small change in breakeven price is likely to have minimal or no impact on production decisions At the break-even price, the average well pays $650k in severance tax (total, not discounted) 1 Present values calculated with a 10% discount rate. Estimated for an average Utica Rich Gas well with an EUR of 3.7 Bcf Source: Drillinginfo; RigData; OBRT working team modeling and analysis 163 A106

165 A2c. OIL & GAS: FUTURE OUTLOOK SEVERANCE TAX Some other large energy producing states have used oil and gas severance taxes for specific funds, such as infrastructure and education Breakdown of state expenditures of severance revenues (2014) % 5% 95% Arkansas 100% Michigan 10% 40% 30% 20% North Dakota 100% Ohio 3 43% 12% 45% Oklahoma 60% 40% Pennsylvania 25% 75% Texas 90% 10% West Virginia General Fund Infrastructure Education Rainy Day Fund Counties State agencies $M 2014 State Severance Revenues Estimated gas 3 Ohio GRF allocated to DNR following GRF allocation, with 10% for orphaned wells Source: National Conference of State Legislatures; EIA; State Government of Ohio; State Government of Louisiana, State Government of West Virginia, State Government of Pennsylvania; State Government of Oklahoma; State Government of Texas 164 A107

166 A2c. OIL & GAS: FUTURE OUTLOOK SEVERANCE TAX A deeper look at the current proposal to increase severance tax Implications of tax increase Governor Kasich proposed a 6.5% tax on oil and gas at the fracking well head and a 4.5% tax on natural gas and natural gas liquids obtained downstream The tax was expected to raise $270 M in annual revenue 80% of revenue would fund tax cuts 20% of revenue would go to counties with wells Ohio General Assembly delayed proposal and decided conduct more research where the proposal later stalled BRT The position Ohio Business as stated Roundtable on April is 21, pleased 2014to release an independent analysis click The Ohio Business Roundtable is pleased to release an independent analysis click here conducted by Ernst & Young of the severance tax provisions of - an update to a similar analysis the firm conducted two years ago for the Roundtable and, therefore, reflects the changes the Governor made from his original severance tax proposals to the General Assembly in In brief, Ernst & Young, both in this report and in the report we released two years ago, with which Ohio competes for capital investment, including Michigan, shale-rich states of Arkansas, North Dakota, Oklahoma and Texas. Ernst & Young concludes that even after the proposed severance tax would be competitor states, and by a wide margin. Moreover, given our effective tax rate reason to believe that it will prevent or slow development of the oil and gas tax policy that recognizes the bounty of our natural resources and will keep our state growing. We hope this continued fact-based analysis commissioned by the Roundtable will be useful to lawmakers in their deliberations and, -biennium budget review. Source: Ohio Business Roundtable 165 A108

167 Contents Energy Competitiveness Report Appendix A: Oil and gas Appendix B: Electric power 166

168 Table of contents Appendix B: Electric power 1. Historical fact base: Electric power a. Pricing b. Demand c. Supply d. Tax and regulatory 2. Future outlook: Electric power a. Modeling context b. Summary of modeling results c. Detailed modeling results d. Infrastructure investment analysis 167 B1

169 B1. ELECTRIC POWER: HISTORICAL FACT BASE Timeframe: Competitive states neighboring states and states competing for industrial demand: Regional Illinois Indiana West Virginia Kentucky Pennsylvania Michigan Economic Georgia North Carolina South Carolina Texas Louisiana : Low-cost: Power prices in line with or less than key competitors Reliable: Able to effectively meet load at all times, including peak demand periods Predictable: Able to forecast power prices with a good degree of accuracy 168 B2

170 B1. ELECTRIC POWER: HISTORICAL FACT BASE Section summary: Power Prices Retail Prices have been competitive with the peer states for the last 15 years and 7% lower than the US overall average during the last 6 years Wholesale prices have been competitive with peer regions; wholesale volatility has spiked recently due to weather impacts (Polar Vortex) and transmission/congestion impacts A well-functioning SSO auction should shield customers from exposure to wholesale volatility Demand overall power demand has declined 1.2%, led by 3.0% decrease in industrial demand Industrial power demand at both the state and national level has fallen despite rising industrial GDP Increased shale gas operations in Eastern Ohio has led to a growth in power demand Supply Continued power supply-demand split in Ohio is occurring along-side additional generation asset retirements Coal plant retirements continue, outpacing new capacity build-out; although gas-fired generation asset in the construction pipeline are growing Accelerated asset retirements in Ohio are expected to increase reliance on imports, leading to potentially large investment in transmission infrastructure not only in Ohio but across the nation Distribution reliability in Ohio has remained relatively constant over the last 5 years 169 B3

171 Table of contents Appendix B: Electric power 1. Historical fact base: Electric power a. Pricing b. Demand c. Supply d. Tax and regulatory 2. Future outlook: Electric power a. Modeling context b. Summary of modeling results c. Detailed modeling results d. Infrastructure investment analysis 170 B4

172 B1a. ELECTRIC POWER: HISTORICAL FACT BASE PRICING Return to pg. 28 Over last 6 years, Ohio retail rates have been 7% lower than the US overall average, however many peer state averages are even lower Competition Ohio US average Overall Industrial Commercial Residential CT 166 MA 132 NY 156 CT 188 MI 107 MI 74 CA 142 MI 139 PA 103 PA 74 MI 106 PA year average ( ) in $/MWh US GA OH SC NC TX IL IN WV NY US IN OH NC IL GA WV SC TX US PA GA SC OH IN KY LA IL NC US 121 OH 119 SC 116 IL 115 TX 114 GA 111 NC 108 IN 106 KY 95 LA 77 LA 56 TX 83 WV 95 KY 75 KY 54 WV 82 LA 91 WA 70 WA 42 ID 72 WA 85 Source: Energy Information Administration (EIA) 171 B5

173 B1a. ELECTRIC POWER: HISTORICAL FACT BASE PRICING benchmark large industrial states in the last 15 years IN OH GA SC TX MI KY WV NC PA LA IL Industrial Retail Rates $/MWh CAGR % State MI PA IN OH GA NC IL SC TX LA WV KY Source: Energy Information Administration (EIA) 172 B6

174 B1a. ELECTRIC POWER: HISTORICAL FACT BASE PRICING Commercial prices in Ohio have also increased in the last 15 years, but remain high relative to benchmark states IN OH GA SC TX MI KY WV NC PA LA IL Commercial Retail Rates $/MWh CAGR % State MI PA IN OH GA NC IL SC TX LA WV KY Source: Energy Information Administration (EIA) 173 B7

175 B1a. ELECTRIC POWER: HISTORICAL FACT BASE PRICING Similarly, residential prices in Ohio have continued to increase, and remain relatively higher than benchmark states GA IN LA NC PA TX IL KY MI OH SC WV Residential Retail Rates $/MWh CAGR % State MI PA IN OH GA 2.4 NC 1.8 IL 3.7 SC TX LA WV KY Source: Energy Information Administration (EIA) 174 B8

176 B1a. ELECTRIC POWER: HISTORICAL FACT BASE PRICING Industrial rates for utilities ( ) AmerenIP Duke Energy Ohio Indianapolis Power & Light PECO Energy Co Commonwealth Edison Co Duke Energy Progress Kentucky Utilities Co PPL Electric Utilities Corp Consumers Energy Co Entergy Louisiana Inc Louisville Gas & Electric Co South Carolina Electric & Gas Co DTE Electric Co Entergy Texas Inc Monongahela Power Co Southwestern Electric Power Co Duke Energy Carolinas Georgia Power Co Ohio Edison Co Southwestern Public Service Co Duke Energy Indiana Indiana Michigan Power Co Ohio Power Co Industrial Retail Rates $/MWh CAGR % 3.6 Entity Regional 2.6 Economic 3.6 Ohio Power 0.1 Ohio Edison 6.0 Duke Ohio Source: Ventyx, Energy Velocity (Energy Information Administration (EIA) 861 Data) 175 B9

177 B1a. ELECTRIC POWER: HISTORICAL FACT BASE PRICING Commercial rates for utilities ( ) AmerenIP Duke Energy Ohio Indianapolis Power & Light PECO Energy Co Commonwealth Edison Co Duke Energy Progress Kentucky Utilities Co PPL Electric Utilities Corp Consumers Energy Co Entergy Louisiana Inc Louisville Gas & Electric Co South Carolina Electric & Gas Co DTE Electric Co Entergy Texas Inc Monongahela Power Co Southwestern Electric Power Co Duke Energy Carolinas Georgia Power Co Ohio Edison Co Southwestern Public Service Co Duke Energy Indiana Indiana Michigan Power Co Ohio Power Co Commercial Retail Rates $/MWh CAGR % 3.2 Entity Regional 2.5 Economic 6.7 Ohio Power 1.5 Ohio Edison 3.7 Duke Ohio Source: Ventyx, Energy Velocity (Energy Information Administration (EIA) 861 Data) 176 B10

178 B1a. ELECTRIC POWER: HISTORICAL FACT BASE PRICING Residential rates for utilities ( ) AmerenIP Duke Energy Ohio Indianapolis Power & Light PECO Energy Co Commonwealth Edison Co Duke Energy Progress Kentucky Utilities Co PPL Electric Utilities Corp Consumers Energy Co Entergy Louisiana Inc Louisville Gas & Electric Co South Carolina Electric & Gas Co DTE Electric Co Entergy Texas Inc Monongahela Power Co Southwestern Electric Power Co Duke Energy Carolinas Georgia Power Co Ohio Edison Co Southwestern Public Service Co Duke Energy Indiana Indiana Michigan Power Co Ohio Power Co Residential Retail Rates $/MWh CAGR % 3.4 Entity Regional 2.8 Economic 5.6 Ohio Power 0.7 Ohio Edison 2.8 Duke Ohio Source: Ventyx, Energy Velocity (Energy Information Administration (EIA) 861 Data) 177 B11

179 B1a. ELECTRIC POWER: HISTORICAL FACT BASE PRICING Comparison of retail and wholesale prices in Ohio and neighboring states XX% CAGR Industrial Wholesale energy Commercial Residential Ohio $/MWh Indiana $/MWh Pennsylvania $/MWh West Virginia $/MWh AEP Hub AEP Hub PENELEC Hub AP Hub A few key factors are driving the spread Wholesale price adders T&D investments Changes in the industrial load factor Other charges, riders and subsidies Source: Energy Information Administration (EIA) 178 B12

180 B1a. ELECTRIC POWER: HISTORICAL FACT BASE PRICING In PJM, increases in specific adders have accounted for some of the spread between wholesale energy and retail rates Wholesale energy price Explanation Price paid for wholesale electricity procured from the grid 2014 data 1 $/MWh data 1 $/MWh 39 Wholesale capacity adder Price paid for capacity charges, to make up for the PJM capacity prices Usually a fraction of the wholesale energy price 9 7 Other wholesale adders Other operational costs for PJM, including those because of transmission upgrades, are split equally among the zones Transmission service charges are the largest expense in this category 10 8 Retail T&D charges Distribution utilities add charges for transmission and distribution for service Account for about a quarter of the total retail price of electricity Varies based on territory Varies based on territory Taxes Local taxes are applied on the retail price of electricity Varies based on state Varies based on state 1 PJM-wide average Source: PJM Annual Report 179 B13

181 B1a. ELECTRIC POWER: HISTORICAL FACT BASE PRICING In a year with low gas prices, PJM utilizes coal assets for ~10% of the total hours; imports from MISO could replace retired coal generation PJM cost curve MISO cost curve Other Hydro Oil Coal Imports Renewable Nuclear Gas Renewable Nuclear Gas Other Hydro Oil Coal Dispatch cost 1 ($/MWh) ,000 50,000 75,000 Load duration % of hours , , , ,000 Dispatch cost 1 ($/MWh) Load duration % of hours 0 50, , , , Capacity or load, MW Capacity or load, MW Key takeaways PJM relies on hydro, nuclear and CCGT for more than 90% of the hours in a year with a gas price of $3/MMBtu Lack of adequate economics in the energy market and additional costs for emission controls will push more coal plants into retirement, including plants Cheap imports from MISO can help fill in the gap, in addition to new CCGTs As more coal assets are retired and replaced by imports in Ohio, transmission capacity will become a bigger concern numbers. Assuming a $3/MMBtu gas price Source: Ventyx, Energy Velocity 180 B14

182 B1a. ELECTRIC POWER: HISTORICAL FACT BASE PRICING Return to pg. 34 Day ahead energy prices for Ohio zones have mirrored the broader PJM trends but with lower peaks and troughs PJM Zonal Day Ahead Power Prices $/MWh PJM East Zones Ohio Zones Other PJM West Zones Key takeaways Day ahead power prices in PJM have gone through cycles of peaks and troughs in the last decade PJM East zones sees a pronounced fluctuation of power prices due to congestion in transmission capacity in their zones PJM West zones, including Ohio zones, related price spikes to the same extent as PJM East With more coal, possibly nuclear, being retired from PJM West zones and replaced by imports from MISO, congestion might become an issue Source: Ventyx, Energy Velocity 181 B15

183 B1a. ELECTRIC POWER: HISTORICAL FACT BASE PRICING Volatility in PJM energy markets has been low except for two specific periods AEP ATSI PJM-RTO ZONE Volatility 1 in Day Ahead markets % volatility spike caused by polar vortex Volatility 1 in Real Time markets % spike caused by local transmission constraints Volatility trends Volatility spiked in 2014 due to polar vortex but seems to be unchanged over the years ATSI zone had a spike in volatility in 2013 due to local transmission constraints, which was a localized event 1 Standard Deviation/Mean Source: Ventyx, Energy Velocity 182 B16

184 B1a. ELECTRIC POWER: HISTORICAL FACT BASE PRICING 2013 ATSI congestion was caused by a small difference in load forecast during a high temperature period, coupled with several unplanned outages 16,000 15,000 14,000 13,000 12,000 11,000 10,000 9,000 8,000 7,000 6,000 ATSI load with Emergency DR ATSI hourly MW load (preliminary) ATSI tie line MW ATSI zonal LMP Transmission line capacity reached Emergency DR used to meet load 1,8001,803 5, , , , , Hour ending 1,512 Emergency DR priced at $1,800/MWh Dispatch cost 1 ($/MWh) 2,400 2,200 2,000 1,800 1,600 1,400 1,200 1,000 Key takeaways July, 2013 was a really hot month in the PJM region and warnings were issued regarding higher than usual load forecasts Some power plants in ATSI zone were on unforeseen outages so power imports had to be used to meet load Demand prediction was higher than predicted 1 in the late afternoon hours This forced grid operators to use Emergency DR in the region as import capacity was maxed out and local generators were on outages Since Emergency DR is priced at $1,800/MWh, relying on them caused prices, and volatility, to spike 1 Load forecast was off by 2.5% on the days of July 15, 16 and 18 Source: PJM Operations and Markets Report 183 B17

185 Table of contents Appendix B: Electric power 1. Historical fact base: Electric power a. Pricing b. Demand c. Supply d. Tax and regulatory 2. Future outlook: Electric power a. Modeling context b. Summary of modeling results c. Detailed modeling results d. Infrastructure investment analysis 184 B18

186 B1b. ELECTRIC POWER: HISTORICAL FACT BASE DEMAND Return to pg. 29, % decrease in industrial demand Growth rate (y-o-y, ) States Overall Industrial Ohio -1.2% -2.7% Texas 1.6% -0.4% Illinois -0.7% -1.2% Indiana -0.8% -1.1% Kentucky -3.1% -6.1% Pennsylvania -0.4% -0.3% West Virginia -0.8% -1,7% Georgia 0.0% -0.3% South Carolina 0.1% 0.0% North Carolina 0.3% -0.1% Michigan -0.5% -1.2% Louisiana 1.7% 2.7% US 0.0% -0.7% Commercial Residential -0.1% -0.5% 3.1 % 1.7% -0.4% -0.6% -0.3% -0.8% -0.7% -0.6% -1.1% 0.1% 0.1% -0.4% 0.0% 0.2% 0.0% 0.1% 0.4% 0.4% -0.1% -0.4% 1.2% 1.2% 0.2% 0.2% What has happened to power demand from ? Flat to negative load growth in the US overall Commercial and residential loads have remained relatively stable Industrial load growth has been challenged across the US Source: Energy Information Administration (EIA) 185 B19

187 B1b. ELECTRIC POWER: HISTORICAL FACT BASE DEMAND Ohio experienced severe industrial load loss during the recession that has not recovered, while commercial and residential loads have remained flat Financial crisis Residential Commercial Total retail sales for US Total retail sales for Ohio TWh TWh -0.03% p.a % p.a. 3,725 3,589 3,742 3,740 1,380 1,364 1,451 1,427 1,336 1,307 1,329 1,329 1, ,687 3,684 3,719 3,717 1,375 1,391 1,404 1,400 1,327 1,338 1,356 1, Industrial Total retail sales for Indiana TWh -0.78% p.a. Total retail sales for Illinois TWh -0.71% p.a Source: Energy Information Administration (EIA) 186 B20

188 B1b. ELECTRIC POWER: HISTORICAL FACT BASE DEMAND All states lost power demand during the recession, mostly driven by loss in industrial power demand Total retail sales for Pennsylvania TWh % p.a Financial crisis Total retail sales for Texas TWh Residential % p.a Commercial Industrial Total retail sales for Kentucky Total retail sales for West Virgina TWh % p.a TWh % p.a Source: Energy Information Administration (EIA) 187 B21

189 B1b. ELECTRIC POWER: HISTORICAL FACT BASE DEMAND Industrial power demand at both the state and national level has fallen despite rising industrial GDP Ohio, Industrial Takeaways GDP, $ Trillions +3% p.a US, Industrial GDP, $ Trillions +4% p.a Power demand, TWh -2% p.a Power demand, TWh -1% p.a. 1,069 1,018 1, Industrial demand for power has dropped in Ohio and nationally in the last 15 years Industrial GDP, on the other hand, has grown in the same period Given these movements, fall in industrial demand can be explained by one of the following Improvement in industrial energy efficiency Higher price per unit of production that keeps GDP high despite production falling Source: Energy Information Administration (EIA) 188 B22

190 B1b. ELECTRIC POWER: HISTORICAL FACT BASE DEMAND However, regional demand near the Utica Basin in Eastern Ohio has increased by ~17% since 2011 Shale gas Shale oil Tight gas Conventional Gross production volume by gas source, Ohio Bcf +67% p.a Power sales in Utica and Marcellus counties 1 TWh +17% p.a Key Insights Gas operations have had an exponential growth in the last 3 years in Ohio This has led to a corresponding increase in power sales in Ohio in the Utica/Marcellus regions AEP has seen a corresponding 17% increase in power sales in its territory, more in the last 3 years AEP territory only Source: Energy Information Administration (EIA) 189 B23

191 Table of contents Appendix B: Electric power 1. Historical fact base: Electric power a. Pricing b. Demand c. Supply d. Tax and regulatory 2. Future outlook: Electric power a. Modeling context b. Summary of modeling results c. Detailed modeling results d. Infrastructure investment analysis 190 B24

192 B1c. ELECTRIC POWER: HISTORICAL FACT BASE SUPPLY Return to pg. 32, 33 Ohio generation supply has declined faster than demand in recent years, increasing reliance on out-of-state generation Demand and Generation in Ohio XX Imports as a share of total demand 1 (%) Demand State Generation TWH Key takeaways Share of imports has gone up in Ohio Imports peaked, as a share of demand in 2015 due in part to coal retirements With low gas prices to start 2016, imports could rise as a share of demand going forward Assuming all in-state generation is used in Ohio. The actual number will be higher than those shown on this chart Source: Energy Information Administration (EIA) 191 B25

193 B1c. ELECTRIC POWER: HISTORICAL FACT BASE SUPPLY Ohio generation supply has declined faster than demand in recent years, increasing reliance on out-of-state generation Demand State Generation Demand and Generation in PA TWh Demand and Generation in WV TWh Demand and Generation in IL TWh Demand and Generation in KY TWh Key takeaways Other large, industrial states around Ohio have generation in excess of demand This is true for deregulated states like PA or IL and for regulated ones like WV and KY Source: Energy Information Administration (EIA) 192 B26

194 B1c. ELECTRIC POWER: HISTORICAL FACT BASE SUPPLY Return to pg. 35 since 2004 due to retirements Power generation capacity GW Oil Renewables Gas Nuclear Coal Coal plant retirements have decreased coal plant capacity by 35% since 2004 Little change in capacity for other types of generation Layered in the announced retirements on the existing capacity in April, 2015 Source: Energy Information Administration (EIA) 193 B27

195 B1c. ELECTRIC POWER: HISTORICAL FACT BASE SUPPLY Gas has increased output has come down by ~44% since 2004 Power generation mix TWh Other Renewables Gas Nuclear Coal Coal plant retirements and low gas prices led to a 44% decrease in coal generation and 16-fold increase in gas generation since 2004 Renewables are a minor generation mix 1 Layered in the announced retirements on the existing capacity in April, 2015 Source: Energy Information Administration (EIA) 194 B28

196 B1c. ELECTRIC POWER: HISTORICAL FACT BASE SUPPLY Many peer states are seeing an increase in gas and a reduction in coal in their overall generation mix Change in generation mix by fuel source, (%) States Coal Gas Ohio -27% 23% Texas -12% 4% Illinois -11% 4% Indiana -21% 16% Kentucky -7% 7% Pennsylvania -24% 23% West Virginia -3% 1% Georgia -34% 34% South Carolina -17% 13% North Carolina -28% 26% Michigan -11% 7% Shift to gas reflects falling gas prices and increased cost of coal generated power Georgia, North Carolina, Pennsylvania and Ohio lead competitor states in pivot to gas generation Louisiana -8% 14% Source: Energy Information Administration (EIA) 195 B29

197 B1c. ELECTRIC POWER: HISTORICAL FACT BASE SUPPLY since 2005 due to retirements Power generation capacity, PJM GW Oil Renewables Gas Nuclear Coal Coal plant retirements have decreased coal plant capacity by 14% since 2005 This has aligned with a 14% increase in gas capacity in the same period Source: Energy Information Administration (EIA) 196 B30

198 B1c. ELECTRIC POWER: HISTORICAL FACT BASE SUPPLY output has come down by ~34% since 2005 Power generation mix, PJM TWh Other Renewables Gas Nuclear Coal % Coal plant retirements and low gas prices led to 34% decrease in coal generation and 3-fold increase in gas generation since 2005 Renewables are ~3% of total generation in PJM 1 Layered in the announced retirements on the existing capacity in April, 2015 Source: Energy Information Administration (EIA) 197 B31

199 B1c. ELECTRIC POWER: HISTORICAL FACT BASE SUPPLY Return to pg. 36 Replacing lost capacity requires an extensive process New capacity pipeline for Ohio, 2015 MW Row Labels Coal Gas Nuclear Other Renew Water Grand Total Feasibility Proposed App Pending Permitted Under const ,060 2,042 1,992 1, , , ,045 1,710 2,302 2,332 Source: Ventyx, Energy Velocity New plant pipeline for Ohio # of units Row Labels Coal Gas Nuclear Other Renew Water Grand Total Feasibility Proposed App Pending Permitted 3 6 Under const B32

200 B1c. ELECTRIC POWER: HISTORICAL FACT BASE SUPPLY Sample case studies: Generation construction projects Under construction Permitting Pre-permitting 1 2 South Field Energy Facility Oregon Source: Press 3 Energy Search Center (#2) Project Lordstown Energy Center Rolling Hills Conversion Oregon Energy Center (#1) Carroll County Middletown Energy Center Project size Announced Location Latest status Reason for latest status 1,100 MW, $1.1B 2015 Columbiana County, OH 800 MW 2015 Lordstown, OH 1,414 MW 2011 Wilkesville, OH 800 MW, $850M 700 MW, $900M 500 MW, $645M 2012 Oregon, OH 2013 Carroll County, OH 2014 Middletown, OH Feasibility Proposed, to come online by 2018 Construction pending, to come online in 2018 Construction in progress, to come online in 2017 Construction in progress, to come online in 2017 Under construction, to come online in 2018 The project is completing environmental studies before applying for permits Plant received approval from the state and construction on the plant is pending 800 MW 2013 Oregon, OH Pre-permitting Proposal to double the size of Oregon Energy Center under construction The project is waiting on several permits and approvals Construction began in December 2014 after the project secured financing The project has all the approvals, is currently in full construction stage Construction began after NTE Energy secured financing in October 2015 Source: Ventyx, Energy Velocity, Press Search 199 B33

201 B1c. ELECTRIC POWER: HISTORICAL FACT BASE SUPPLY Distribution reliability in Ohio has stayed constant in the last 5 years AEP Ohio 1 Ohio Power Ohio Edison Duke Energy Ohio Columbus Southern Cleveland Electric Toledo Edison Dayton Power and Light Customer Average Interruption Duration Index Minutes/outage System Average Interruption Frequency Index # of outages/customer Definition of outages Minimum outage length included is 5 minutes Transmission related outages are excluded Major storms are excluded 1 Ohio Power and Columbus Southern combined into AEP Ohio in 2013 Source: Ventyx, Energy Velocity 200 B34

202 B1c. ELECTRIC POWER: HISTORICAL FACT BASE SUPPLY However, large investments in T&D are expected across the country in the next 5 years Historical US IOU transmission construction expenditure , and EEI estimation for investment USD billion Actuals Forecast (EEI) Expected range for annual spend Expected market of $20bn p.a. range through to Source: EIA; EEI; Energy Velocity; SNL; analyst reports; expert interviews 201 B35

203 Table of contents Appendix B: Electric power 1. Historical fact base: Electric power a. Pricing b. Demand c. Supply d. Tax and regulatory 2. Future outlook: Electric power a. Modeling context b. Summary of modeling results c. Detailed modeling results d. Infrastructure investment analysis 202 B36

204 B1d. ELECTRIC POWER: HISTORICAL FACT BASE TAX & REGULATORY Return to pg. 41 PJM has proposed changes to its capacity market mechanism to address concerns about the performance of capacity resources Capacity Product Compliance hours Penalties for underperformance Demand response/ee Previously Obligation to be available Based on average availability 500 hours per year (about 340 during summer and 160 during winter) LMP-based Penalties not enforced if EFOR during compliance hours less than 5 year average or if deemed out of management control Treated as a supply resource Proposed Obligation to deliver energy, if scheduled and dispatched by PJM, during Compliance Hours Based on delivery during specific hours The hours during the delivery year when PJM implements any emergency procedure event requiring implementation of Demand Response or the loading of emergency capacity Capacity multiplied by net CONE multiplied by days in delivery year divided by number of compliance hours Annually capped at 1.5 x MW x net CONE x days in year Penalties for underperformance are used to reward over-performance at other units Only annual DR treated as a supply resource If court rules against FERC, alternate proposal to treat DR as a demand reduction Source: PJM 203 B37

205 B1d. ELECTRIC POWER: HISTORICAL FACT BASE TAX & REGULATORY Expected EPA regulations will add costs of power generated from coal Cross State Air Pollution Rule (CSAPR) Overview Finalized by U.S. EPA in 2011 Designed to reduce the interstate transport of NOx and SO2 emissions across the eastern half of the United States Implementation 2015: Phase I NOx and SO2 reductions 2017: Phase II NOx and SO2 reductions Mercury and Air Toxics Rule (MATS) Finalized by U.S. EPA in 2011 Designed to reduce mercury, acid gas, and other hazardous air pollutant emissions from new and existing coal- and oil-fired electric utility units 04/16/15: Requirements became effective National Ambient Air Quality Standards (NAAQS) Greenhouse Gas (GHG ) Rules Clean Air Act requires U.S. EPA to periodically review NAAQS Recent NAAQS revisions include those for SO2 (2010), NOx (2010), fine particulate matter (2012) and ozone (proposed in 2014) Revisions could drive NOx and SO2 emission reductions U.S. EPA proposed Clean Air Act Section 111(d) GHG guidelines for existing fossil fuel-fired electric generating units in 2014 U.S. EPA proposed Clean Air Act Section 111(b) GHG standards for new fossil fuel-fired electric generating units in 2014 Scope and timing of requirements to implement revised NAAQS is uncertain Final 111(b) & 111(d) rules expected in 2015 Scope and timing of requirements to implement revised NAAQS is uncertain Clean Water Act 316(b) Rule Finalized by U.S. EPA in 2014 Designed to address potential impacts to aquatic species due to impingement and entrainment by cooling water systems Implementation ongoing in parallel with existing permit renewal processes Effluent Limitation Guidelines (ELG) Clean Water Act requires U.S. EPA to review and update ELG that regulate water discharge from steam-electric units) U.S. EPA proposed updated ELG in 2013 Final ELG Rule expected by Sept 30, 2015 Coal Combustions Residuals Rule (CCR) Finalized by U.S. EPA in 2014 Regulates the disposal and use of coal combustion byproducts 10/17/15: Requirements become effective Source: EPA; NERC; Trade press, regulator interviews 204 B38

206 B1d. ELECTRIC POWER: HISTORICAL FACT BASE TAX & REGULATORY Ohio electric power consumer charges comparison Average electric bill for an industrial customer with a 50,000 kw demand and 25,000,000 kwh load factor by selected state ($/month) Ohio Pennsylvania Virginia Generation Transmission Delivery 1,592,720 88% 211,951 12% 96,616 1% 2,196,428 90% 107,417 4% 192,507 8% 1,521,623 90% 158,125 9% 26,710 2% Variability of charges Ohio and Virginia have similar generation fees, so the difference in total rates stems from greater delivery and transmission charges Pennsylvania charges significantly more for generation and delivery Total avg. rate 1,810,451 2,443,353 1,698,437 Source: Edison Electric Institute 205 B39

207 Table of contents Appendix B: Electric power 1. Historical fact base: Electric power a. Pricing b. Demand c. Supply d. Tax and regulatory 2. Future outlook: Electric power a. Modeling context b. Summary of modeling results c. Detailed modeling results d. Infrastructure investment analysis 206 B40

208 B2. ELECTRIC POWER: FUTURE OUTLOOK modeled the key drivers and uncertainties What we are trying to do Understand key uncertainties affecting competitiveness Build a FACT BASE showing sensitivity of outcomes to various uncertainties relative to a base case Highlight those sensitivities for Ohio to consider going forward How we are doing it Use analytics, including standalone models, that capture the essence of the market and impact of key variables Gas model Power model controllable determinants Use best available data Be transparent with approach, data, and assumptions so that participants can offer alternatives if available What we are not trying to do Analyze prospects for specific companies Analyze specific investments or opportunities Forecast prices or new builds 207 B41

209 Table of contents Appendix B: Electric power 1. Historical fact base: Electric power a. Pricing b. Demand c. Supply d. Tax and regulatory 2. Future outlook: Electric power a. Modeling context b. Summary of modeling results c. Detailed modeling results d. Infrastructure investment analysis 208 B42

210 B2a. ELECTRIC POWER: FUTURE OUTLOOK MODELING CONTEXT bookend cases with sensitivity around the base case Return to pg. 38 Our base case Probabilities Extremely unlikely Bearish on market Market expected Market expected Bullish on market Extremely unlikely Scenario 1: Low gas, high mandates Scenario 2: Reasonable low gas, low mandates Scenario 3: Business as Usual Scenario 3+: Business as Usual with no RPS Scenario 4: Reasonable high gas, high mandates Scenario 5: High gas, low mandates Scenario attributes HH gas price: Low ($3/MMBtu 1 ) Policy: High RPS + Federal ITC for solar extended Technology: High uptake of Energy Efficiency and Distributed Generation technologies HH gas price: Reasonably low ($3.0/MMBtu 1 ) Policy: BAU RPS + Federal ITC for solar not extended Technology: Low uptake of Energy Efficiency and Distributed Generation technologies HH gas price: BAU ($4/MMBtu 1 ) Policy: BAU RPS + Federal ITC for solar not extended Technology: BAU uptake of Energy Efficiency and Distributed Generation technologies HH gas price: BAU ($4/MMBtu 1 ) Policy: No RPS + Federal ITC for solar not extended Technology: BAU uptake of Energy Efficiency and Distributed Generation technologies HH gas price: Reasonably high ($4.5/MMBtu 1 ) Policy: High RPS + Federal ITC for solar extended Technology: High uptake of Energy Efficiency and Distributed Generation technologies HH gas price: High ($6/MMBtu 1 ) Policy: BAU RPS + Federal ITC for solar not extended Technology: Low uptake of Energy Efficiency and Distributed Generation technologies Real $ Source: BRT Working Team Analysis 209 B43

211 Table of contents Appendix B: Electric power 1. Historical fact base: Electric power a. Pricing b. Demand c. Supply d. Tax and regulatory 2. Future outlook: Electric power a. Modeling context b. Summary of modeling results c. Detailed modeling results d. Infrastructure investment analysis 210 B44

212 B2b. ELECTRIC POWER: FUTURE OUTLOOK RESULTS SUMMARY Return to pg. 39 High level summary notes Prices: High renewable penetration leads to lower wholesale prices Scenarios 1 and 2 have the same gas prices but renewables force prices down in 1 Scenario 4, despite having a higher gas price, converges with Scenario 2 on pricing Demand contraction leads to really high retail prices High adoption of EE/DG technologies leads to significant reduction in demand Total costs to serve load are spread across a lower total MWh, leading to higher prices Low gas price coupled with lower mandates lead to the most favorable retail prices Demand: Residential demand forecasted to contract across all scenarios significant departure from the past Largely due to the adoption of Behavioral EE Commercial demand likely to contract as well, also a departure from the historical Larger impact of DG adoption for commercial; EE opportunity not as high as residential Industrial demand largely expected to grow also a huge departure from the past Increased gas operations in Ohio could increase demand even further Supply: Diversification with more gas and renewables seen across all scenarios Growth in utility scale renewables is dominated by wind in unconstrained cases High RPS forces increased solar penetration Share of coal generation expected to drop from 68%; can go down as low as 18% Source: BRT Working Team Analysis 211 B45

213 Table of contents Appendix B: Electric power 1. Historical fact base: Electric power a. Pricing b. Demand c. Supply d. Tax and regulatory 2. Future outlook: Electric power a. Modeling context b. Summary of modeling results c. Detailed modeling results d. Infrastructure investment analysis 212 B46

214 B2c. ELECTRIC POWER: FUTURE OUTLOOK DETAILED RESULTS Our wholesale power model solves Eastern Interconnect simultaneously Footprint modeled How we are doing it Montana Idaho Wyoming Utah Colorado Arizona New Mexico MRO Canada North Dakota South Dakota Nebraska Ontario Minnesota Wisconsin Iowa Michigan NPCC RFC Ohio Illinois Indiana West Virginia Kansas Missouri Virginia SPP North Carolina Tennessee Oklahoma Arkansas South Carolina SERC Northwest Territories Nunavut Newfoundland Alberta Saskatchewan Manitoba Quebec Yucon Territory British Columbia Washington Oregon Nevada California Mississippi Alabama Georgia Texas Louisiana Florida New York Pennsylvania Maine New Hampshire Massachusetts Rhode Island Connecticut New Jersey Delaware Washington, DC Maryland FRCC Model solves the Eastern Interconnect simultaneously This includes a geographical footprint as wide as Quebec in the North to Florida in the South and Saskatchewan/ Oklahoma in the West Ohio is covered by its constituent utility regions: AEP, FE and Duke territories The model has basis differentials across 26 gas pricing hubs to convert Henry Hub prices into local hub prices Source: BRT Working Team Analysis 213 B47

215 B2c. ELECTRIC POWER: FUTURE OUTLOOK DETAILED RESULTS Details on important aspects across the three models Topics Demand Wholesale Geographical Ohio only 47 transmission areas from Western Canada to Florida footprint of AEP, ATSI and DEOK regions modeled in Ohio modeling AEP region consist of the following utility territories: AEP, Dayton and DUQ DEOK region consists of Duke and EKPC Retail Ohio only Transmission footprint Not considered Regional footprint across the transmission areas No load flow analysis performed unconstrained capacity Historical investment data included Henry Hub (HH) price taken as scenario inputs Basis differential forecasts used to get prices at 26 gas price hubs in this geography Gas prices Not considered Not considered Renewables Adoption of new, disruptive technologies, both Mandated Economic Mandated through RPS targets Modeled a hybrid Eastern Interconnect wide RPS target, given unlimited trading is allowed Inputs from Demand and Wholesale model Capacity Prices Not considered Do not model PJM capacity prices Auction process much of a black box Not considered Source: BRT Working Team Analysis 214 B48

216 B2c. ELECTRIC POWER: FUTURE OUTLOOK DETAILED RESULTS We see demand growth rates ranging from -1.0% to 0.9% across our scenarios Residential Commercial Industrial Transportation Ohio retail sales load forecast % of 2013 actual retail sales baseline demand Change in Residential demand 1 Change in Commercial demand 1 Change in Industrial demand Change in transportation (EV) demand Scenario 3 Scenario 1 Scenario 2 Scenario 4 Scenario 5 Effective CAGR %, ~0% -1.0% 0.6% -0.5% 0.9% 1 Includes distributed generation Source: BRT Working Team Analysis 215 B49

217 B2c. ELECTRIC POWER: FUTURE OUTLOOK DETAILED RESULTS Change in peak demand is driven primarily by the commercial sector Residential Commercial Industrial Transportation Ohio peak demand forecast % of 2013 peak (July) - 2pm 2013 vs 6pm baseline peak demand Change in Residential peak demand 1 Change in Commercial peak demand 1 Change in Industrial peak demand Change in Transportation (EV) demand 2030 peak demand 1 Includes distributed generation Source: BRT Working Team Analysis 216 B50

218 B2c. ELECTRIC POWER: FUTURE OUTLOOK DETAILED RESULTS Solar adoption in Ohio has been forecasted based upon expected learning curve of DG installations Return to pg. 37 We forecast the expected learning curve for solar installations Residential cost of installation (learning curve), Ohio (indexed 1 ) Commercial cost of installation (learning curve), Ohio (indexed 1 ) Layered on incentives and system lifetime Base case assumptions Federal ITC expires as expected in 2017 Net metering remains in place System lifetime of 20 years; 8% discount rate High adoption assumption modifications Federal ITC extended And obtain the expected LCoE for comparison to retail rates Leveled cost of electricity, Residential installs, Ohio (indexed 1 ) Leveled cost of electricity, Commercial installs, Ohio (indexed 1 ) Installation costs (left side) and electricity costs (right side) indexed separately Source: BRT Working Team Analysis 217 B51

219 Table of contents Appendix B: Electric power 1. Historical fact base: Electric power a. Pricing b. Demand c. Supply d. Tax and regulatory 2. Future outlook: Electric power a. Modeling context b. Summary of modeling results c. Detailed modeling results d. Infrastructure investment analysis 218 B52

220 B2d. ELECTRIC POWER: FUTURE OUTLOOK INFRASTRUCTURE INVESTMENT Executive summary: Infrastructure investment Gas capacity grows slowly while gas generation has dramatically increased 48% Seven gas generation projects in the pipeline that are projected to add ~5 capacity Five of the seven gas generation projects are either permitted or under construction, while two projects await permits developing new gas generating capacity is consistent with that of other states The probability of success in Ohio for proposed gas generating capacity is similar to that of other states in the region Taxes and regulations faced by power plant owners in Ohio do not differ significantly from regional counterparts Ohio can continue to encourage the development of gas generating capacity by improving transparency and continuing to look for ways to streamline the development process 219 B53

221 B2d. ELECTRIC POWER: FUTURE OUTLOOK INFRASTRUCTURE INVESTMENT As coal generating assets are retired, gas generating capacity remains fixed despite increased gas generation Power generation capacity (OH) GW 1 Oil Gas Coal % Renewables Nuclear Power generation mix (OH) Other Renewables 1 Gas Nuclear Coal Source: Energy Information Administration (EIA) 220 B54

222 B2d. ELECTRIC POWER: FUTURE OUTLOOK INFRASTRUCTURE INVESTMENT The share of power imports increases as coal assets are retired XX Imports as a share of total demand 1 (%) Demand and Generation in Ohio TWH Demand State Generation Key takeaways Share of imports has gone up in Ohio With significant coal retirements scheduled for 2015, imports would rise as a share of demand going forward Imports peaked, as a share of demand, in 2012 when gas prices were at a record low 1 Assuming all in-state generation is used in Ohio. The actual number will be higher than those shown on this chart Source: Energy Information Administration (EIA) 221 B55