Utility Sector History White Paper Lacks Direct Investigative Leads

Global Utility White Paper CONFIDENTIAL Appendix 2: Global Utility Sector Background e =History To gain a deeper appreciation of why the global utility sector is attractive for long/short investing, it is helpful to briefly survey the history of the sector and describe the utility value chain’s components. The utility industry as we know it began in 1882 when Thomas Edison built the world’s first generating station on Pearl Street in downtown Manhattan. In the early decades the industry evolved along multiple lines but eventually settled into an integrated, fully-regulated model, deemed appropriate as utilities were considered to have monopoly power. During the era of full regulation, utility stocks were often characterized as low-risk “widow and orphan” stocks in the US, and large parts of the global utility industry remained government-owned. During these early days, long/short investing could not have existed at scale, as the ability to find and generate short alpha would have been difficult given the sector’s government ownership and bond-like nature of returns. In the 1980s, Lord David Howell (formerly UK Secretary of State for Energy in the Thatcher government) advocated having then-fully regulated power plants compete to sell their production into a competitive power market (a “power pool”) where the price of electricity would be set at the intersection of supply (power plants) and demand (industrial users and electricity supply companies selling to households). This led to the world’s first competitive power pools being rolled out in the UK in the early 1990s. While based in Asia, Jos Shaver led UBS’ Asian utility industry group and had the privilege of working with Lord Howell when UBS acted as advisor to the State Power Corporation of China on the restructuring of that country’s national power industry. Competitive power pools have since sprung up all over the world, and regulators have pulled apart previously fully-integrated utilities in the name of efficiency and maximizing competition. In addition, governments around the world have begun to privatize their state utility industries and organize bespoke competitive market structures that best meet their needs. These changes have resulted in a hybrid modern industry which continues to evolve. The deregulatory impulse has brought tremendous benefits to national economies, driving down costs and improving efficiency and system reliability, but has also produced unintended consequences, e.g., the high-profile bankruptcies of Enron, British Energy, Dynegy, NRG, PG&E and others. As such, although one can still find low-beta, low-volatility defensive stocks, the global utility sector has not been for “widow and orphan” investors for quite some time due to structural changes in an evolving industry that continue to alter the investment landscape. It is important to note that the modern utility industry is still in its infancy, having begun in the early 1990s, and its continued evolution — structural change — will provide ample long/short opportunities for the foreseeable future. Structural change catalysts are driven by: i) a utility’s various stakeholders, including governments, managements, consumers, et al. which seek to mold the utility to their needs and objectives, or ii) variables outside of stakeholder control such as commodity prices and new technologies. A specialist approach to the global utility sector is essential as each country’s market structure (and often that of regions within countries) can be very different as a result of the varying levels of competition, market concentration, geographic constraints, infrastructure bottlenecks, regulatory constructs, fuel supply availability and so on. 25 Electron Capital Partners, LLC HOUSE_OVERSIGHT_024226