1

Utility Ownership of Wind Power:Utility Ownership of Wind Power:Why it makes sense nowWhy it makes sense now

American Wind Energy AssociationAmerican Wind Energy Association

May 17, 2005May 17, 2005

Eric MarkellEric MarkellSenior Vice President Energy ResourcesSenior Vice President Energy Resources

2

Important Notice: Puget Sound Energy, Inc. has prepared the enclosed materials for illustrative purposesonly and solely for the use of the attendees at today’s Power Supplies in the Pacific Northwest conference.Certain statements contained in these materials, particularly those relating to resource acquisition, are"forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.Forward-looking statements are based on the opinions and estimates of management at the time thestatements are made and thus are subject to certain risks and uncertainties. The information set forth inthese materials is based on numerous assumptions, which may or may not be described in the materials. Noassurance can be given as to the accuracy, applicability or completeness of such assumptions or of theplans, recommendations or conclusions set forth in these materials in any particular context. Thesematerials should not be construed as either projections or predictions or as business, legal, tax, financial oraccounting advice and should not be relied upon for any such purpose. Further, and except as required bylaw, PSE undertakes no obligation to update any forward-looking statement contained in these materials.

3

10 Reasons Why IOUs Should Own Wind10 Reasons Why IOUs Should Own Wind

Lowers portfolio volatilityLowers portfolio volatility Moderate integration costsModerate integration costs Excellent energy valueExcellent energy value Modest environmental impactModest environmental impact Tax efficientTax efficient Excellent cash flowExcellent cash flow Earning assetEarning asset Less costly than a PPALess costly than a PPA Potential revenue from GHG credits and RECsPotential revenue from GHG credits and RECs Reliable, warranted technologyReliable, warranted technology FERC preferred interconnectionFERC preferred interconnection

4

Wind lowers Portfolio Volatility Wind lowers Portfolio Volatility

No fuel componentNo fuel component Especially important given current gas marketEspecially important given current gas market

Production variability can be modeled and Production variability can be modeled and managedmanaged

Wind adds fuel diversityWind adds fuel diversity

Portfolio beta reducedPortfolio beta reduced

5

Moderate Integration Costs Moderate Integration Costs

Wind Generation Regulation Operating

Hour-Ahead

Day-Ahead Total

Net Capacity Reserves Costs Costs Costs

(MW) ($/Mwh) ($/Mwh) ($/Mwh) ($/Mwh) ($/Mwh)

25 0.16 0 2.72 0.84 3.7350 0.16 0 2.73 0.84 3.73

100 0.16 0 2.75 0.84 3.75150 0.16 0 2.78 0.84 3.77200 0.16 0 2.81 0.83 3.8250 0.16 0 2.85 0.84 3.85300 0.16 0 2.89 0.83 3.88350 0.16 0 2.93 0.83 3.92400 0.16 0 2.97 0.82 3.96450 0.16 0 3.01 0.89 4.06

6

Wind is an excellent energy valueWind is an excellent energy valueCost Range by Technology Type

35

40

45

50

55

60

65

70

75

80

85

90

Wind Coal AlternateFuel

Natural Gas Hydro

$/M

Wh

(46

- 67

)

(64 - 67)

(45

- 65

)

(60

- 85

)

(44

- 62

)

Notes:Notes:1. Acquisition Screening Model (ASM8) 20-yr Levelized Costs 1. Acquisition Screening Model (ASM8) 20-yr Levelized Costs 2. Transmission solutions are not mature for coal generation resources2. Transmission solutions are not mature for coal generation resources3. All costs are exclusive of credit impacts3. All costs are exclusive of credit impacts4. All delivered to PSE System4. All delivered to PSE System

7

Little Environmental ImpactLittle Environmental Impact

Zero SO2 Zero SO2

Zero NOx Zero NOx

Zero HgZero Hg

Zero CO2Zero CO2

8

Avoided Environmental CostsAvoided Environmental Costs

Zero SO2 ($290-$800/ton)Zero SO2 ($290-$800/ton)

Zero NOx ($2,200/ton)Zero NOx ($2,200/ton)

Zero Hg (Costs TBD)Zero Hg (Costs TBD)

Zero CO2 (Costs TBD)Zero CO2 (Costs TBD)

Source: Natsource

9

Tax EfficientTax Efficient

Accelerated Tax Depreciation

0204060

80100120

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Year After Commercial Operation Date

Pe

rce

nta

ge

of

Va

lue

R

em

ain

ing

Book Value

Tax ValueTax Benefit

10

Excellent Cash Flow / Short Excellent Cash Flow / Short Construction CyclesConstruction Cycles

6 years to recover initial investment6 years to recover initial investment

Lag between ground breaking and Commercial Lag between ground breaking and Commercial Operation Date is typically less than one yearOperation Date is typically less than one year

11

Earning AssetEarning Asset

Rate Base Before Wind Asset Rate Base After Wind Asset

Earnings Earnings

New Wind

Existing Assets Existing Assets

12

Ownership is less costly than a Ownership is less costly than a PPAPPA

Ownership PPA#1 PPA#2 PPA#3 PPA#4

Energy Cost (20-year Levelized)

Ownership

PPA

Results from PSE RFP processResults from PSE RFP processPPAs include imputed debt costsPPAs include imputed debt costs

13

Potential GHG Credits and RECsPotential GHG Credits and RECs

Value of RECs Across the U.S.(It's Supply and Demand!)

$46.00

$35.00

$14.50

$7.50

$1.00$-

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

$45.00

$50.00

MA CT TX PJM WECC

$/M

WH

Source: Natsource RE Trends Weekly 4/25/05

14

V80 – 1.8MWV80 – 1.8MW Optimized for medium and high wind sitesOptimized for medium and high wind sites Proven technologyProven technology 1,021 turbines installed 1,021 turbines installed Hub height:Hub height: 67m (220 ft)67m (220 ft) Rotor diameter:Rotor diameter: 80m (262 ft)80m (262 ft) Average availability (world-wide):Average availability (world-wide):

95% to 98% range95% to 98% range

Reliable and Warranted TechnologyReliable and Warranted Technology Vestas V80 Turbine GeneratorVestas V80 Turbine Generator

15

Reliable Technology:Reliable Technology: Availability: Availability:

As good or better than anything in a utility portfolio.As good or better than anything in a utility portfolio. Availabilities >97% increasingly commonAvailabilities >97% increasingly common Availability warrantyAvailability warranty

Mechanical Warranty: Mechanical Warranty: Stronger warranty protection than comparable sized power plantsStronger warranty protection than comparable sized power plants Warranties from material balance sheet companiesWarranties from material balance sheet companies Five year “bumper-to-bumper” warrantyFive year “bumper-to-bumper” warranty Serial defect warrantySerial defect warranty

Energy Production: Energy Production: More reliable energy production than most utilities believeMore reliable energy production than most utilities believe

Wind volatility on annual basis may be less than Wind volatility on annual basis may be less than hydro volatility or hydro volatility or fuel price volatilityfuel price volatility

Increasingly accurate wind resource assessmentsIncreasingly accurate wind resource assessments Terrain, array, and long-term prediction modelsTerrain, array, and long-term prediction models

Turbine performance curves now well documentedTurbine performance curves now well documented

16

FERC Interconnection Policies FERC Interconnection Policies

Favorable policy statements from FERCFavorable policy statements from FERC

Proposals under consideration to remove Proposals under consideration to remove interconnection barriers for intermittent interconnection barriers for intermittent resourcesresources

Goal to create standard agreements and Goal to create standard agreements and technical requirementstechnical requirements

17

Hopkins Ridge Wind ProjectHopkins Ridge Wind Project

Key Dates:Key Dates: Letter of Intent:Letter of Intent:

Oct 29, 2004Oct 29, 2004 PSE Board Approval:PSE Board Approval: Jan 11, Jan 11,

20052005 Closing / Notice to Proceed:Closing / Notice to Proceed:

Mar 11, 2005Mar 11, 2005 Commercial Operations Date:Commercial Operations Date: Dec 10, Dec 10,

20052005

SeattleSeattle

Project Site Developed by Renewable Developed by Renewable

Energy SystemsEnergy Systems $200 million$200 million 150 MW150 MW 35% capacity factor35% capacity factor

18

Wild HorseWild Horse

13 miles east of 13 miles east of Ellensburg, near Ellensburg, near Whisky Dick MountainWhisky Dick Mountain

230 MW230 MW Zilkha Renewable Zilkha Renewable

Energy - DeveloperEnergy - Developer 8,600 acres – primarily 8,600 acres – primarily

grazing landgrazing land 165-acre project 165-acre project

footprintfootprint

19

Utility Ownership Makes SenseUtility Ownership Makes Sense

Wind is least-cost resourceWind is least-cost resource Utility Ownership Results in lower cost Utility Ownership Results in lower cost

of energy for customersof energy for customers Lower WACC for utility than developerLower WACC for utility than developer Avoids complex ownership/financing Avoids complex ownership/financing

structures that add to interest rates structures that add to interest rates and financing feesand financing fees

Avoids imputed debt associated with Avoids imputed debt associated with power purchase agreementspower purchase agreements

Avoids adverse accounting treatments Avoids adverse accounting treatments related to variable interest entitiesrelated to variable interest entities

Avoids long-term collateral issues and Avoids long-term collateral issues and associated credit-related costsassociated credit-related costs

Stronger Community support as Stronger Community support as compared to unknown ownerscompared to unknown owners