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					 Transmission Upgrades:
Key to Reliable & Affordable
          Energy
 Rocky Mountain Subregional
   Transmission Planning
      September 26, 2003
    PEABODY ENERGY PROFILE
    Peabody Fuels More Than 9% of U.S. Electricity
             Largest Private-Sector Coal Company in the World

        Powder River Basin                                                   Midwest
        Market Share      #1                                          Market Share    #1
        Sales Volume   107.6                                          Sales Volume 31.4
        Reserves       2,922                                          Reserves     4,077




                                                                 St. Louis




                                                     Southwest                               Appalachia
                                                 Market Share    #1                        Market Share   #6
                                                 Sales Volume 21.0                         Sales Volume 16.7
                                                 Reserves     1,244                        Reserves      690


                       Queensland




1   Reserves & 2002 sales volume in millions of short tons.
    Source: Peabody analysis & industry reports.
    BROAD BASED BUSINESS GROUP OF THE WEST
    Western Business Roundtable

    • Represents 22 businesses from West

       – Accounting                       – Financial services
       – Agricultural products            – High technology

       – Chemicals                        – Manufacturing
                                          – Oil & gas producers
       – Coal and other forms of mining
                                          – Pharmaceuticals
       – Construction and construction
         materials                        – Pipeline

       – Conventional energy production – Renewable energy production
                                        – Telecommunications
       – Engineering services
                                        – Private and Public Utilities


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    ENHANCED US TRANSMISSION SYSTEM
    Significantly Reduced Impact of Last 3 Energy Events

    • Western Energy crisis of 2000 – 01
       – Low cost energy could not reach California
       – Gas prices to move higher than they should have
       – Enabled markets to be abused
    • Natural gas price increases in winter 2002 - 03
       – Extra coal based generation in Middle US could not reach
         markets in East and South to reduce demand for natural gas by
         0.5 – 1.0 TCF
       – Result was higher gas prices for all
    • Blackout in August 2003 likely could have been
      completely mitigated if there were one or at most two
      more high voltage lines in the Cleveland area
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    NEED BASELOAD GENERATION & TRANSMISSION
    Basic Electricity and Energy Infrastructure Needed
    • Load growth of more than 60% in last 20 years
        – Little new baseload resources added
        – HV transmission expanded less than 20%
    • Hydroelectric output reached maximum potential – weather driven
    • Nuclear generation capacity reaching output limit
        – 1990, 66% capacity factor             - 2002, 90% capacity factor
    • Coal generation capacity becoming fully utilized
        – 1990, 59% capacity factor             - 2002, 69% capacity factor
        – Western coal capacity factor at 82%
    • 95% of capacity added since 1990 was gas But, …. 72% of
      increased electric consumption met by coal & nuclear – real prices
      fell
    • Clear Skies-like legislation likely to close 5 - 10% of existing coal
      fleet – small, older, higher cost plants
4
    RESULTS OF US ENERGY POLICY
    U.S. Low-Cost Electricity Comes from Coal and Hydro
        Over 50% of the Electricity in the U.S. Comes from Coal
                             5.9¢                                                                                                                              9.2¢
                             9%                         5.9¢             5.6¢                                                                                  3%
                                                        62%              95%              5.9¢
                           6.6¢                                                                                                                   10.9¢
                                         5.8¢                                             67%           6.2¢
                           8%                                            6.4¢                                                                     19%
                                         0%                                                             69%            7.0¢
                                                          4.7¢           42%
                                                                                                                       57%                 8.0¢
                                                          96%                                6.1¢
                                                                         5.5¢                                                 6.6¢         56%
                                  8.4¢                                                       84%          7.4¢        5.3¢
                                                                         63%                                                  91%     5.1¢
                                  52%            5.3¢                                                                                        6.2¢
                                                                 6.0¢                                     46%         95%
                     11.8¢                       94%                        6.3¢                 6.1¢                                98%
                                                                 78%                                                                         51%
                      2%                                                    75%                  82%                  4.3¢ 94%                 6.7¢

                                                                                                                 5.7¢ 62%                      60%
                                                                                   5.6¢                                                    5.9¢
                                           7.1¢            6.7¢                                  5.8¢                                                     NH    10.5¢   27%
                                                                                   64%                                                     39%            RI     9.2¢    0%
                                           41%             88%                                   49%                   5.7¢      6.3¢
                                                                                                               6.3¢                                       CT     9.7¢   10%
    ¢ = average price per                                                   6.8¢                               36%     58%       66%
                                                                                                                                                          NJ     9.4¢   16%
                                                                                                   6.1¢
    kilowatt hour for 2002                                                                                                                                MA    10.0¢   29%
                                                                            38%                    26%
    % = percent of total                                                                                                                   7.3¢           VT    10.9¢    0%
    generation from coal for             10.4¢                                                                                                            DE     6.8¢   59%
                                                                                                                                             30%
    2002                                  5%                                                                                                              MD     6.5¢   60%
                                                                 13.1¢                                          <7.0¢
                                                                 14%                                            7.0¢ - 9.0¢
                                                                                                                >9¢
                                                                                                                Hydro
5   Source: Energy Information Administration, May 2003.
    FLAWED US ENERGY/ELECTRICITY POLICY
    Enhanced Transmission System Needed
    • De facto national electricity/energy policy of last 15 years
      fundamentally flawed
                   “Natural gas generation at load”


    • Fundamentally flawed in two respects
       – Gas will not be cheap ($2 – 3/mmbtu) and plentiful
       – Transmission far more valuable than generation at load
    • All incremental electricity load in most of US served by
      gas
       – Electric rate increases/fuel adjustment increases coming
    • Home heating and industrial process costs increase 30 –
      50%
6
    FLAWED US ENERGY/ELECTRICITY POLICY
    Natural Gas Will Not Be Cheap and Plentiful
    • US natural gas reserves cannot keep up with demand – decline
      rates
    • Natural gas and therefore electricity prices have and will increase
    • Recession and extreme mild weather only reason US did not have
      high gas prices 3 years in a row
    • LNG is 5 – 7 years away and creates OPEC like dependence
    • Interim, competition between home heating, industrial process and
      electric power generation
        – Industry loses hence exit of petrochemical, fertilizer, aluminum, pulp &
          paper, etc
    • Gas is most efficiently used to heat homes and in industrial process
      (80 – 95%) versus producing electricity (50 – 60%)
    • More disposable consumer spending will go to heating and
      electricity bills versus consumer products, medical or other areas

7
                        COAL IS LESS VOLATILE THAN OTHER FUELS
                        Coal’s Consistent Price Plateau

                                                            Delivered Cost of Fuel for Generation
                       10.00

                        9.00

                        8.00
Delivered $ / MM Btu




                        7.00
                                                                                                  Natural Gas
                        6.00                                                                                                                          NYMEX HH Futures
                        5.00                     NG Annual Avg.
                        4.00

                        3.00

                        2.00                                                           Coal                                                                    Forecasted Coal
                        1.00

                        0.00
                                        Jul-98




                                                            Jul-99




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                                                                                                Jul-01




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                                                                                                                                                                         Jul-05




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                                                                                                                                                                                                             Jul-07
                               Jan-98




                                                   Jan-99




                                                                     Jan-00




                                                                                       Jan-01




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                                                                                                                                                                                  Jan-06




                                                                                                                                                                                                    Jan-07
                        Delivered cost of fossil fuel at steam electric utility plants.
8                       Source: Energy Information Administration, Electric Power Monthly and January 2003 Short
                                Term Energy Outlook. NYMEX HH Futures closing price for July 2003.
     FERC RECENTLY NOTED
     Natural Gas Frequently Sets Regional Electric Price

                                                               .




    Note: Percent of time natural gas or oil is projected to be on the margin in 2003.
    Source: Cambridge Energy Research Associates (CERA), April 30, 2003.
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     Legend:   Coal   Nuclear   Transmission Lines:   345 V   500 V           765 V            Transmission Tie
     FLAWED US ENERGY/ELECTRICITY POLICY
     Transmission More Valuable Than Generation at Load

     • Enables lowest cost generation to serve load, be it
       hydro, nuclear, wind or coal and reduces demand on
       high cost fuels like gas
     • Arbitrages hydro conditions and fuel price volatility
     • Mitigates potential market power abuse (Western Crisis)
     • Insurance against catastrophic events (August Blackout)


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


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     Western Generation Requires Multi-State Transmission

     • Wind in the Front Range and certain Coastal areas


     • Coal in the Rocky Mountain Region


     • Hydro in Pacific Northwest and Canada?


     • Load growth in Southwest and Salt Lake




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     Requirements to Develop New/Enhance Transmission
     • Estimate economic value of enhanced transmission
         – Over range of hydro availability and fuel price scenarios
         – Over a few generation addition scenarios – gas, wind and coal
     • Identify interregional beneficiaries of new transmission
         – Provides state and federal regulators, decision and policy makers with
           much needed support for approval of projects
     • State, regional and federal power agency approval of cost sharing
       and revenue recovery method for enhanced transmission
     • Create mechanism to spread cost of new transmission according to
       beneficiary analysis
     • Siting process for new or enhanced transmission done concurrently
       and coordinated in affected states with similar involvement from
       Dept. of Interior agencies, Dept. of Agriculture agencies and Tribal
       Nations

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     WESTERN GOVERNOR’S STUDY AUGUST 2001
     2010 Western Energy Market – Two Visions

     • 2000 - 2010 electric energy load growth another 20%
     • 2000 - 2010 new transmission miles less than 2%
     • Total Generation Capacity 208,000 MW
                                 Gas Only      Balanced
        Fuel Type                % of Total    % of Total
        • Hydroelectric             31            31
        • Natural Gas               40            29
        • Coal                      18            26
        • Nuclear & Other            8             9
        • Geothermal                 1             2
        • Wind                       2             3


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

      • Cost of new transmission for Gas Only case $2 B
      • Cost of new transmission for Balanced case $8 B – could
        be optimized
      • Average market price savings of Balanced versus Gas
        Only case $7/MWh in 2010.
      • Annual energy consumption in the West in 2010 -
        960,000,000 MWh
      • Market savings from Balanced versus Gas case in 2010 -
        $6.7 B annually
      • Under high gas price scenario, the balanced case could
        pay for all the new transmission in less than a year.

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

      • Without Pacificorp’s dedication of significant staff, there is
        insufficient resources dedicated to execute studies in
        timely fashion
      • Necessary follow-on studies have no resources
      • Lack of authority and unclear responsibilities
      • No formal or legal entity to develop cost sharing
        arrangements for projects which show good consumer
        value
      • Unclear if states will support analysis conducted by SSG-
        WI
      • SSG-WI has no role in the siting process
      • Who has lead authority to get new or enhance
        transmission built?
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     ROCKY MOUNTAIN TRANSMISSION GROUP
     Can Be West’s First Effective Regional Electricity Entity

     • “Natural gas generation at load”, a flawed energy policy
         – Will not lead to affordable electricity and energy
     • New baseload generation needed in the West
         – Wind and coal will come from distance resources
     • Regional electricity entities, like the Rocky Mountain
       Planning Group, needed to facilitate states access to
       low sources of electricity under variety of scenarios
     • Electricity and energy consumers of the West (industry
       and residential consumer) very dependent on the West
       implementing a sustainable energy policy for generation
       and transmission

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