Massachusetts%20Electric%20Restructuring%20Roundtable%20%20February%2028,%202003%20Bill%20Huss%20

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Massachusetts Electric Restructuring
Roundtable February 28, 2003Bill Huss Senior
Vice PresidentTom Michelman Principal
Consultant

• Summary Results of Recent National Studies on
  Retail Competition and Default Service

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Presentation Summary

• Who is KEMA-XENERGY
• Findings from Retail Restructuring Study
• Findings from POLR Study

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(No Transcript)
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Retail Markets Growing

• Despite California and Enron, competitively
  served load increased from 15,000 MW to 40,000 MW
  in 2002.
• Texas market opens and seems to be a success
• Companies continue to enter the market including
  wholesalers
• Growth also occurs in other states such as
  Massachusetts and New York
• There have also been retailer exits -- but fewer
• The New Power Company (700 million lost!)
• Credit ratings suffer

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Growth in Load Migration

• 2002 saw large gains in migration. XENERGY
  estimates
• 40,000 MW late-2002 vs. 15,000 MW in mid-2001
• 2.1 Million customers late-2002 vs. 1.4 Million
  in mid-2001
• Project 7 to 10 thousand MW additional migration
  in 2003

Estimated Megawatts Switched by State
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MA Switching Over Time
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2002 Changes in Competitive Status
Backing Away from Competition
Supporting Competition
Status Quo
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Retailers Showing Increased Profitability

• At least 15 retailers profitable in 2002
• Reliant reports 25 gross margin
• Favorable wholesale market conditions
• Improved expertise and infrastructure
• Pricing and risk management
• Billing and customer service
• Lower acquisition costs
• Reliant reports 150 to 200 per customer
• Dominion reports 15/customer using direct mail
• Centrica and others focus on door-to-door, not
  mass advertising

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No Single Successful Model

• Full service and niche players
• Regional and national successes
• Pure wholesalers, mass marketers, and energy
  service companies

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Retailer Positions
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Mass Markets Continue to Lag

• Texas plan creates scale for major affiliates.
• TXU -- 2.7 million customers
• Reliant -- 1.8 million
• Centrica -- 1.4 million
• Other retailers with scale
• Green Mountain -- 550,000 customers
• First Energy Solutions -- 250,000
• Dominion Retail -- 238,000
• First Choice Power -- 190,000

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Winter 02/03 Residential Switching
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Non-Residential Customers Lead the Way

• 88 of Texas customers greater than 1 MW switched
  by Sept. 2002
• Major suppliers
• TXU (8-12 GW)
• Reliant (7-10 GW)
• Constellation/New Energy (4.3 GW)
• Strategic Energy (2.6 GW)
• ConEd Solutions, Exelon Energy, First Energy
  Solutions, KeySpan Energy, Select Energy, Sempra
  Energy Solutions all around 1 GW

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Winter 02/03 Nonresidential Switching
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What to Watch in 2003

• New Jersey market heats up
• Default service rates determined by competitive
  bid
• Large customers get hourly market rate
• Reliant considering market entry
• Texas will continue to lead -- 8-12 more
  migration
• Wholesale firms will continue to enter retail
  markets
• New York and the NYSEG unbundling proceeding
• Illinois-- large customer capped rate default
  service phased out
• Residential customers continue to lag as options
  appear as part of regulated service

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Transition periods are expiring

• Generation price caps lifted
• Move to market-based default service pricing
• Customer assignment, etc.

End Dates of Transition Periods
Definitions, rules and rate structures vary
widely by state and service territory some
states have extended transition periods or
others implemented post-transition rate periods.
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Default Service Status Trends

• Definitions
• Default Service. For those who have not chosen a
  supplier or who no longer have a relationship
  with a supplier.
• Includes Standard Offer and Default Service
  in Massachusetts
• POLR Service. Subset of Default Service. For
  emergency or temporary electricity supply.

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Default Service Models Market Effectiveness
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DS Models - Typical Characteristics I
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DS Models - Typical Characteristics II
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DS Price Component Models

• Wholesale
• NJ-BGS, NJ-NYSEG BRO, OH DS
• Retail Adders
• MD-DS, NY-ConEd DS, DC-DS
• Retail
• TX-POLR, TX PTB, UK Deemed Contracts, PA GPU-CDS

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Existing Proposed Models for DS POLR Design
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Trends in DS POLR Design
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Perceived Pros Utility as DS Provider

• High expected reliability
• Familiar regulatory control
• Confidence of continued market participation
• Historically good financial standing
• Established local retail infrastructure
• Perceived experience and wherewithal to procure
  supplies
• Preserves status quo for customers who do not
  choose minimal confusion

• Communications and control tools at the onset of
  market opening
• Best position to handle emergency supply
  situations
• Established benefits from scale and customer
  diversity
• Avoids a transfer or involuntary reassignment of
  customers

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Perceived Cons Utility as DS Provider

• Incumbent advantages will lead to the utility
  being the provider of first resort
• Retail competition changes the regulatory
  compact if no longer granted a supply monopoly,
  then why retain the associated public service
  obligation?
• Increases the need for a POLR because suppliers
  do not enter or will eventually exit the retail
  market
• Customers gain no experience with dealing with
  competitive retailers during the transition
  period

• Price caps result in unacceptable risks and
  inefficiencies with no upside potential
• Incumbent utility may no longer have the
  financial stamina as wires companies to handle
  POLR obligations
• Risks borne by single entity
• Incumbent may want out of the merchant business