February 28, 2005

CALPINE

SUSTAINABLE ENERGY ROUNDTABLE SERIES:

MULTI-POLLUTANT LEGISLATION

Peggy Duxbury, Calpine Corporation

Multi-Pollutant Legislation

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CALPINE

February 28, 2005

CALPINE OVERVIEW

Power Portfolio Operation 26,500 mw

Construction 5,500 mw

Development 16,000 mw

TOTAL 48,000 mw

Fuel Natural Gas 98%

Geothermal 2%

Multi-Pollutant Legislation

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CALPINE

February 28, 2005

CALPINE POWER PORTFOLIO

In Operation – Gas-Fired (73 plants)In Operation – Geothermal (19 plants)Under Construction (11 plants)

WECC

MAPP

SPP

ERCOT

MAIN ECAR

SERC

FRCC

MAAC

NPCC-NY

NPCC-NENPCC-O

UK

not to scale

MEXICO

Multi-Pollutant Legislation

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CALPINE

February 28, 2005

ENVIRONMENTAL EXCELLENCE

Calpine’s Average Fossil Emissions Compared to US Fossil Average (lb/mw-hr)(1):

Nitrogen Oxides – a major cause of smog 93.8% Less

Sulfur Dioxides – a major cause of acid rain99.9% Less

Carbon Dioxides – the principal greenhouse gas,

a contributor to global warming 49.6% Less

Mercury – a neurotoxin, damaging to the development of the

fetus, infant and young children 100.0% Less

Particulate Matter – Contributor to

respiratory problems 78.2% Less(1) The average emission rates for the U.S. fossil fuel fleet were obtained from U.S. DOE Electric Power Annual, Mercury Study Report to Congress, and The National Air Quality and Emissions

Trends Report.

Multi-Pollutant Legislation

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CALPINE

February 28, 2005

GOALS FOR MARKET-BASED ENVIRONMENTALISM

Protect human health and the environment

Harness tools of economics to achieve cheaper, faster environmental goals.

Allows markets – not regulators – to determine most cost-effective approach to environmental protection

Multi-Pollutant Legislation

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CALPINE

February 28, 2005

KEY ISSUES IN ESTABLISHING A CAP AND TRADE SYSTEM

Targets and Timelines How much to cut? How fast?

Single or Multi Pollutant Should carbon be included? Should mercury be traded?

Allocation Methodology Input? Output? Auctions? Fuel Neutral/Fuel Specific?

Baseline Calculation Periodic updating? Grandfathering?

Multi-Pollutant Legislation

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CALPINE

February 28, 2005

OUTPUT VERSUS INPUT

EXAMPLE 1: Sam & Judy are competitors in a pizza delivery service. Both drivers need ‘exhaust tokens’ to drive. Sam’s car consumes 4 gallons over 40 miles while Judy’s consumers 2 gallons over 40 miles. Sam’s car emits twice the exhaust as Judy’s.

Under input allocation, Sam’s gas guzzler is advantaged over Judy’s fuel efficient car.

Under output allocation, Judy’s investment in fuel conservation and lower emissions is recognized.

Common sense tells us that a market-based program should favor (or at least not penalize) Judy.

Multi-Pollutant Legislation

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CALPINE

February 28, 2005

UPDATING VERSUS GRANDFATHERING

Example Two: Three years later, Tony moves to town because of the growing demand for pizza. He purchases a hybrid car that needs ½ a gallon to drive 40 miles, with comparable savings in emissions.

Under grandfathering, Tony will need to purchase 100% of his tokens in order to drive for decades to come. He pays competitors (Sam and/or Judy) for this ongoing operating cost – even if one of the incumbent cars is retired.

Under periodic updating, Tony will eventually be given equal treatment with Sam and Judy

Competitive, dynamic economies should welcome new entrants, not create life-long entitlements. Periodic updating provides a balanced, phased-in approach between old and new sources.

Multi-Pollutant Legislation

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CALPINE

February 28, 2005

S. 131: The Clear Skies Act of 2005

Uses cap and trade program

Applies to multiple pollutants

Establishes timelines and targets

Replace other aspects of the Clean Air Act

Multi-Pollutant Legislation

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CALPINE

February 28, 2005

S. 131: The Clear Skies Act of 2005 (Cont)

Flaws w/ Clear Skies Allocation Methodology:

Input, not output

No updating for new entrants / new sources

New Source Set Aside far too small

Early action and past good behavior is mostly punished through lower allocation allowances

Multi-Pollutant Legislation

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CALPINE

February 28, 2005

S. 131: Clear Skies Act of 2005 (Cont)

Calpine Fleet Combination of Judy and Tony

Most plants too new to receive ANY allowances

Others will receive few allowance due to low capacity factors, high efficiencies and low emission levels.

No Good Deed Goes Unpunished Low state NOx permits levels lead to even fewer

allowance for cleanest generators (Calpine’s Fleet w/ SCRs = 75% / Industry Average = 13%)

Key states will also face challenges Fast growing states that need more generation (CA) States that have made recent gains in efficiency (TX)

Multi-Pollutant Legislation

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CALPINE

February 28, 2005

Conclusion

Multi-Emissions Policies w/ Output & Updates

Creates strong incentive to invest in efficiency and lower emitting generation

Focuses on results, not inputs

Leaves room for clean coal (IGCC) w/out taxpayer subsidies

Accelerates the upgrading of aging power fleet

Allows many co-benefits – including lower CO2 emissions

February 28, 2005

CALPINE

CALPINE