Massachusetts Electric Restructuring Roundtable WE MAKE ENERGY WORK
Massachusetts Electric Restructuring Roundtable WE MAKE ENERGY WORK Summary Results of Recent National Studies on Retail Competition and Default Service February 28, 2003 Bill Huss – Senior Vice President Tom Michelman – Principal Consultant
Presentation Summary n Who is KEMA-XENERGY n Findings from Retail Restructuring Study n Findings from POLR Study 2
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Retail Markets Growing n Despite California and Enron, competitively served load increased from 15, 000 MW to 40, 000 MW in 2002. v v v n 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 v 4 v The New Power Company ($700 million lost!) Credit ratings suffer
Growth in Load Migration n 2002 saw large gains in migration. XENERGY estimates: v v v 5 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 Estimated Megawatts Switched by State Project 7 to 10 thousand MW additional migration in 2003
MA Switching Over Time 6
2002 Changes in Competitive Status Backing Away from Competition Supporting Competition 7 Status Quo
Retailers Showing Increased n At least 15 retailers profitable in 2002 Profitability v Reliant reports 25% gross margin Favorable wholesale market conditions n Improved expertise and infrastructure n v v n Lower acquisition costs v v 8 Pricing and risk management Billing and customer service v Reliant reports $150 to $200 per customer Dominion reports $15/customer using direct mail Centrica and others focus on door-todoor, not mass advertising
No Single Successful Model n Full service and niche players n Regional and national successes n Pure wholesalers, mass marketers, and energy service companies 9
Retailer Positions 10
Mass Markets Continue to Lag n Texas plan creates scale for major affiliates. v v v n Other retailers with scale v v 11 TXU -- 2. 7 million customers Reliant -- 1. 8 million Centrica -- 1. 4 million Green Mountain -- 550, 000 customers First Energy Solutions -- 250, 000 Dominion Retail -- 238, 000 First Choice Power -- 190, 000
Winter 02/03 Residential Switching 12
Non-Residential Customers Lead the Way 88% of Texas customers greater than 1 MW switched by Sept. 2002 n Major suppliers n v v v 13 TXU (8 -12 GW) Reliant (7 -10 GW) Constellation/New Energy (4. 3 GW) Strategic Energy (2. 6 GW) Con. Ed Solutions, Exelon Energy, First Energy Solutions, Key. Span Energy, Select Energy, Sempra Energy Solutions all around 1 GW
Winter 02/03 Nonresidential Switching 14
What to Watch in 2003 n n n 15 n New Jersey market heats up v Default service rates determined by competitive bid v Large customers get hourly market rate v 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
Transition periods are expiring · Generation price caps lifted · Move to market-based default service · pricing Customer assignment, etc. End Dates of Transition Periods 16 *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.
Default Service Status & Trends n Definitions v 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 v 17 POLR Service. Subset of Default Service. For emergency or temporary electricity supply.
Default Service Models & Market Effectiveness 18
DS Models - Typical Characteristics I 19
DS Models - Typical Characteristics II 20
DS Price Component Models n Wholesale v NJ-BGS, NJ-NYSEG BRO, OH DS n Retail v Adders MD-DS, NY-Con. Ed DS, DC-DS n Retail v 21 TX-POLR, TX PTB, UK Deemed Contracts, PA GPU-CDS
Existing & Proposed Models for DS & POLR Design 22
Trends in DS & POLR Design 23
Perceived Pros: Utility as DS n Provider High expected reliability n Communications and n n n 24 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 control tools at the onset of market opening n Best position to handle emergency supply situations n Established benefits from scale and customer diversity n Avoids a transfer or involuntary reassignment of customers
Perceived Cons: Utility as DS n Provider Incumbent advantages will n Price caps result in 25 lead to the utility being the unacceptable risks and “provider of first resort” inefficiencies with no upside potential n Retail competition changes the regulatory compact: if no n Incumbent utility may longer granted a supply no longer have the monopoly, then why retain financial stamina as the associated public service “wires companies” to obligation? handle POLR obligations n Increases the need for a POLR because suppliers do n Risks borne by single not enter or will eventually entity exit the retail market n Incumbent may want n Customers gain no out of the merchant experience with dealing with business competitive retailers during
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