Agenda - 07/10/12 Eugene City Council and EWEB Joint Meeting

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production, the mild weather resulted in an end-of-winter gas storage level of almost 2.5 trillion cubic feet (Tcf), which is projected to hit storage capacity limits of 4.1 Tcf by October and has recently sent forward prices below $2/MMBtu. Can prices remain low? It is our view that the current $2 price level does not represent the equilibrium long-term marginal cost of gas production in a balanced market but is a reaction to the current storage, which is probably the most significant driver of current prices. Over time, the market should rebalance to reflect a more appropriate equilibrium gas price around the $4-$5 range. However, production remains high, storage is at record levels and there are limited short-term opportunities for increases in demand, all of which contribute to continuing lower prices as well as lower price forecasts. Further, we think substantial restrictions on fracking via environmental legislation or national policy are unlikely. A more likely scenario would be an excise tax or other financial penalty, or legislation surrounding fracking fluid or wastewater disposal, which would have a limited impact on the marginal cost of production. Predicting when natural gas prices will return to the $4 to $5 range is very difficult given the variables at play – but important to setting rates sufficient to recover our costs. While current prices seem unsustainably low, it is not clear when gas prices will return to higher levels. The price of gas seems determined to stay in the $2-$3 range before approaching $4 in 2014. BPA is monitoring the market closely for any trends in production as we head into the summer months. 3