Restructuring Roundtable: Merchant vs Rate-Base

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Restructuring Roundtable Merchant vs Rate-Base

• presented by
• Dan Allegretti

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The Basic Idea

• Merchant Gooood!!!!
• Rate Base Baaaad!!!!

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Benefits of Moving to Merchant Model
Utility-owned power plant
Merchant power plant

• Three Main Benefits
• Competitive forces lead to more efficient
  operation
• Risk of generation plant cost over-runs shifted
  from captive ratepayers to merchant owner
  shareholders
• Provide more efficient reliable power system

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More Efficient Operation

• Improved Generator Performance. Since Wholesale
  Restructuring, plant availability in New England
  has increased by 8, avoiding the construction of
  up to five 400 MW generating facilities.
• Reduced Emission Rates. While electricity
  generation within New England increased 25
  between 1998 and 2004, associated SO2 rates
  decreased by 56, NOX by 57 and CO2 by 22.
• Consumer Savings. Consumers have saved between
  6.5 and 7.6 billion between 1998 and 2005,
  based on projections of where prices would have
  trended in the absence of restructuring.

Source A Review of Electricity Industry
Restructuring in New England, Polestar
Communications and Strategic Analysis (for the
New England Energy Alliance), September 2006.
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Less Ratepayer Risk

• Example Duke Energy

U.S. power company Duke Energy on Thursday
significantly boosted its estimated cost for
building two proposed power plants, citing higher
material expenses and a shortage of skilled
labor. Chief Executive Jim Rogers said at a
press luncheon that the proposed clean-coal power
plant in Indiana may cost 2 billion, up from a
prior estimate of about 1 billion. The cost for
the proposed conventional coal plant in the
Carolinas has been increased to 3 billion from
2 billion, Rogers said.
Source Reuters, November 16, 2006.
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Less Ratepayer Risk

• Example Exelon

In 2003 Exelon Corp. turned over ownership of the
newly re-powered Mystic and Fore River generating
plants to its lenders. According to the Boston
business Journal Exelon had acquired the plants
from Sithe for a 543 million note. None of this
money was recovered from captive ratepayers
through stranded cost recovery charges.
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Efficient Reliable System

• Nearly 40 of installed generation capacity is
  now merchant
• Competitive sector built almost all new
  generation since early 1990s
• Competitive Powers Fuel Diversity
• Coal 36
• Natural Gas 27
• Nuclear 27
• Renewables 5
• Other 5

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How Much More Do You Need To See????

• New England. 6.5 to 7.6 billion since
  restructuring. Polestar Study 2006.
• New York. 14.7 to 17.7 savings for all
  customers. NYPSC Staff 2006.
• PJM NY Combined. 430 million to 1.3
  billion/year. LECG 2006.
• Eastern Interconnect. 15 billion for 1999-2003.
  Global Energy Decisions 2005.
• Whole Nation. 34 billion over 7 years.
  Cambridge Energy Research Associates.
• Economists agree benefits are real. 2006 Open
  Letter.