Residential Electric Deregulation and the End of Price Freeze Service The Perfect Storm

1
Residential Electric Deregulation and the End of
Price Freeze Service The Perfect Storm

• National Low Income Energy Conference
• June 13, 2006
• Session 2D Deregulation Where are we?
• Sheldon Switzer
• Director, Electric Pricing and Tariffs

2
The Perfect Storm

• Rate Freeze Ends!
• Fuel Prices have Skyrocketed!
• Electric Rates will rise substantially!
• Merger Announcement Constellation and FPL
  Group!
• Its an Election Year!

3
Maryland The UCLA of the East
4
What we dont want! -- Maryland -- The
California of the East

5
Politics is the art of looking for trouble,
finding it whether it exists or not, diagnosing
it incorrectly, and applying the wrong remedy.
Ernest Benn
6
What happened in California?

• Deregulation
• Divestiture of Generation
• Price Freeze Obligations / Spot Market Purchasing
• Price Spikes
• Market Manipulation / ENRON
• Rolling Blackouts
• Utility Bankruptcy
• Uneconomic State Power Purchase Agreements

7
(No Transcript)
8
(No Transcript)
9
The problem with political jokes is they get
elected. Henry Cate VII
10
Whatever happened to the traditional vertically
integrated utility?

• Regulated Vertically Integrated Natural Monopoly
  vs. Competitive Generation Supply
• Some regions Not much at all California
  electricity crisis, ENRON, Northeast Blackout of
  2003
• Other regions Restructuring / Unbundling
• Generation Sold or transferred to an affiliate
• Transmission Controlled by an ISO (Independent
  System Operator or RTO (Regional Transmission
  Organization)
• Distribution Regulated by the State PSCs

11
Industry Restructuring and Competition in Maryland

• July 1, 2000 Effective date of Customer
  Choice and Electric industry Restructuring
• Vertically Integrated Utility No Longer
• A Whole New World
• Unbundled Rates
• Transfer or Sale of Generation Assets
• Rate Caps / Rate Freezes / Rate Reductions
• Standard Offer Service
• Stranded Costs / Competitive Transition Costs
• Consumer Protection
• Supplier Regulation

12
Wholesale Competition v. Retail Customer Choice

• Wholesale Competition An immediate jump start
• Retail Customer Choice Very little activity
  early on
• The reason Fixed, administratively determined,
  below-market prices set for specified length of
  times, plus mandated residential rate reductions
• Not the immediate creation of a competitive
  retail market, but a transition to retail
  competition

13
Standard Offer Service

• Price Freeze Service
• Ended July 2002 for BGEs largest, primary
  voltage service customers and July 2004 for all
  other CI customers
• Will end July 2006 for BGEs residential
  customers
• Market-Priced Service
• Prices reflect bids to obtain supply from the
  wholesale market
• Substantial Price Increases for Generation

14
Market Based Generation Supply

• What happens when the transition period ends
  that is, the end of Price Freeze Service?
• Case No. 8908 the continued provision of retail
  generation supply by the investor-owned
  distribution utilities as a standard offer
  service
• Generation supply structured bidding process
• Utilities collect wholesale power supply costs

15
Why the large increases in retail generation
supply prices under market-based SOS rates?

• Some would say --
• Electric Industry Restructuring is a Failure
• If it wasnt broke, we shouldnt have changed it
• Bring Back the Good Old Days (Re-regulate!)
• Are they correct?????
• Last price change in 1993 for BGE
• Fuel price increases which are largely exogenous
  to the structure of the electric utility industry
• A major component (typically 30 or more) of
  electricity cost is the cost of the fuel to
  generate the electricity (including coal, natural
  gas and oil).

16
How the world changed!

• New way Competitive Wholesale Generation
  Markets
• PJM
• Operates the worlds largest competitive
  wholesale electricity market
• Ensures the reliability of the largest centrally
  dispatched territory in North America
• Multi-state Delaware, Illinois, Indiana,
  Kentucky, Maryland, Michigan, New Jersey, Ohio,
  Pennsylvania, Tennessee, Virginia, West Virginia,
  District of Columbia
• Efficient and competitive generation supply (plus
  price signals and load response initiatives) in
  the PJM wholesale market is the key to long term
  benefits

17
What changed?

• Industry Structure
• Wholesale Competitive Markets
• Open Access Transmission
• Utility Mindset
• No longer a Next Base Rate Case Focus
• Profitability no longer dependent on prudent
  management and a good regulatory environment
• Change in the conduct of business
• Not just generation
• Not just transmission
• BUT distribution as well
• Benchmarking / Cost cutting / Efficiency
  improvements

18
Electric Deregulation is Here

• A number of states - including Maryland - have
  changed the laws and regulations that govern the
  electric industry.
• It means competition and customer choice has
  occurred on the electric supply side of the
  industry.
• Delivery Service (Distribution) and Transmission
  are still fully regulated
• Delivery service (distribution wires) is still
  regulated by the Maryland Public Service
  Commission.
• Transmission is regulated by the Federal Energy
  Regulatory Commission

19
Your Electric Service Consists of Two Parts
20
BGE is also the Provider of Last Resort (POLR)

• Over time, a competitive market will develop and
  you will be able to choose the company you want
  to supply your electricity.
• This has already occurred for large commercial
  and industrial customers, where over 75 have
  chosen an alternate supplier
• BGE, as the Provider of Last Resort (POLR), will
  supply customers that do not choose a supplier,
  or in the event the supplier defaults.

21
What is Price Freeze Service?

• In 1999, the Maryland General Assembly passed the
  Electric Customer Choice and Competition Act.
• For residential customers, electric supply rates
  have been fixed for the last six years - July 1,
  2000 thru June 30, 2006.
• June 30, 2006 marks the end of Price Freeze
  Service (PFS) for BGE residential customers
• Even though energy rates have significantly risen
  worldwide over the last six years
• Electric supply rates for BGE residential
  customers were reduced by 6.5 percent in 2000 and
  then frozen until July 1, 2006.
• The rate reduction for BGE customers was based on
  the last BGE rate case which was in 1993.
• It is estimated that BGEs residential customers
  have saved over 1.8 billion during the rate
  freeze period paying below market rates

22
Nothing is so admirable in politics as a short
memory. John Kenneth Galbraith
23
(No Transcript)
24
The simple truth about the July 1 Rate Increase

• Current rates are below 1993 levels.
• The new market prices represent an annual
  increase of just 3.5 over the 13-year period
  from 1993 through 2006.
• Far less than the annual cost increases for many
  other essential goods and services
• Fuel costs have gone up substantially
• Even with the July 1 increase, BGEs residential
  rates will be on par with other utilities in
  Maryland and below comparable utilities in the
  Mid-Atlantic and Northeast Regions

25
Price and Budget Trends 1993-2005
BGE Residential Electricity1 -6.5
Medical Care Services2 65
Food at Home2 34
Rent Primary Residence2 45
House Prices3 103
Education2 94
Gasoline2 102
Maryland Budget per capita4 64
Sources 1Electricity Price is for Average BGE
Residential Consumer 2Bureau of Labor
Statistics Growth in selected components of the
CPI-Urban Consumers between December 1993 and
December 2005 (seasonally adjusted) 3Office of
Federal Housing Enterprise Oversight House Price
Index 4US Census Bureau, Governments Division,
data through 2004.
26
(No Transcript)
27
What is Price Freeze Service?

• The price freeze was originally intended to
  provide residential consumers with a transition
  to electric competition.
• But instead, the cap insulated customers from
  rising fuel prices.
• We were able to provide price freeze service from
  July 2000 to June 2006 by locking in long-term
  contracts several years ago when wholesale prices
  were low and comparable to the price freeze rates
  negotiated when we began to move to deregulated
  markets.
• Now BGE, like utilities across the U.S., has
  renewed its purchase power contracts at current
  wholesale prices that are much higher because of
  rising fuel costs.

28
BGE Residential Rates will increase 72 in July,
2006 due to higher supply costs

• BGE SOS has been frozen for 6 years, and is now
  catching up
• Fuel Costs have increased significantly over 6
  years, and especially in the past 2 years
• Delivery Service rates remain unchanged.

29
Why electricity prices are rising?

• Fact -- Wholesale energy prices have skyrocketed
  because we are facing a global energy crisis.
  Demand for energy is up around the world.

30
Political Distortions

• Stranded Costs
• Transfer of Generation Assets
• Capping Rates
• Re-Regulation
• Electricity prices have become a politically
  charged issue in an election year!
• Political Blame
• Misinformation
• Unrelated Issues

31
Politics is supposed to be the second oldest
profession. I have come to realize that it bears
a very close resemblance to the first. Ronald
Reagan
32
(No Transcript)
33
Steps BGE has Already Taken

• Increased financial assistance to our low-income
  customers
• Including a 26 million multi-year effort
  announced last fall that includes low-income
  assistance and a media campaign featuring energy
  conservation tips.
• 20 million for various charities and programs,
  including the Fuel Fund of Central Maryland and
  BGE's Community Assistance Fund, administered
  through the Baltimore Community Foundation
• 6 million over a three-year period for energy
  conservation programs to promote the use of
  energy efficient products and other
  cost-effective ways of saving energy
• Weve also been working extremely hard to inform
  the legislature about the impact of rate caps on
  BGE as well as the fundamental market drivers
  that are pushing up the price of electricity
  factors that are beyond our control.

34
BGEsCommunity Outreach Campaign 05-06

• Primary Purpose to plan a sequence of outreach
  activities directed towards senior citizens and
  low-income households
• Seniors Senior Expos, Care Providers Network,
  and Senior Center energy assistance application
  events
• Area Schools and Headstart Programs Targeted
  conservation education workshop and energy
  assistance application opportunities
• Social Outreach Customer relocation assistance,
  energy education, and safety-themed workshops

35
BGEs Limited Income Outreach

• Limited income assistance campaign targeting
  fixed and low-income households
• Communication vehicles include Mass Transit ads,
  community center / church fliers and radio talk
  shows
• Energy EXPOs allow for households to sign-up for
  energy, weatherization services
• Smaller energy intake assistance venues will
  target high poverty / low participation areas in
  Baltimore City
• Outreach activities to multi-language communities
  
• Public leadership awareness Work with Baltimore
  Citys Government to increase awareness of energy
  assistance and weatherization programs
• Dept. of Social Services - Educate social
  workers on energy and weatherization services
  availability
• Web-based commitment benefit system
• Improved process for OHEP and Fuel Fund agencies

36
What Can Customers do to Manage Energy Costs?

• We fully understand and appreciate the
  substantial financial burden these increases
  represent to our customers, and its our job to
  help them through this transition period.
• We encourage customers to
• Look into Budget Billing to smooth out payments.
• Find out about help from the Maryland Office of
  Home Energy.
• EUSP Statewide Electric Universal Service
  Program included as part of the Electric
  Restructuring Legislation
• Use energy wisely.
• Customers can obtain a brochure on energy and
  money saving tips by calling 410-685-0123 or
  visit our web site.

37
The Electric Rate Stabilization Plan

• Transition plan to phase in the 72 increase in
  electricity prices to help smooth the transition
  from Price Freeze Service to market based rates.
• Orders BGE to implement an electric Rate
  Stabilization Plan beginning in July 2006 and
  ending in May 2008 for most residential customers
• This two-year rate mitigation plan (2006 2008)
  allows customers the option of more gradually
  adjusting to market rates over an extended period
  of time.
• Carrying charges at 5
• Deferral period of 8 months July 2006 February
  2007
• Recovery period of 15 months March 2007 May
  2008
• Low income customers will have a 3-year plan
  (i.e. the recovery period for Low-Income
  customers extended through May 2009)

38
The Electric Rate Stabilization Plan (continued)

• Applies to the distribution portion of
  customers bills -- competitively neutral
• Transition credit and surcharge appear as
  separate line items on customers bills
• The stabilization program is the default
  condition for customers they must proactively
  opt-out if they wish not to participate
• As part of the rate stabilization plan the
  initial increases will be limited to 21.
• Customers will receive credits to the
  distribution portion of their bill from July 2006
  to February 2007.
• For the remaining period of the plan customers
  will receive a charge to the distribution portion
  of their bill to recover the deferred amount.
• At the conclusion of the program, a final true-up
  (reconciliation) will occur for program
  participants.

39
(No Transcript)
40
Disclaimer

• The views expressed in this presentation are my
  own and do not represent the opinions of anyone
  else at the Baltimore Gas and Electric Company or
  any of its affiliates.