AECT Electricity 101

The Electric Industry in Texas:

Electricity 101

Legislative advertising paid for by: John W. Fainter, Jr. • President and CEO Association of Electric Companies of Texas, Inc. 1005 Congress, Suite 600 • Austin, TX 78701 • phone 512-474-6725 • fax 512-474-9670 • www.aect.net

2

AECT Principles

• AECT is an advocacy group composed of member companies committed to:

- Ensuring a modern, reliable infrastructure for the supply & delivery of electricity.

- Supporting efficient competitive markets that are fair to customers and market participants.

- Supporting consistent and predictable oversight and regulation that will promote investment and ensure the stability of Texas’ electric industry.

- Promoting an economically strong and environmentally healthy future for Texas, including conservation and efficient use of available resources.

• AECT member companies remain dedicated to providing Texas customers with reliable service and are committed to the highest standards of integrity. The Association of Electric Companies of Texas, Inc. (AECT) is a trade organization of investor-owned electric companies in Texas. Organized in 1978, AECT provides a forum for member company representatives to exchange information about public policy, and to communicate with government officials and the public. For more information, visit www.aect.net.

3

U.S. Divided into Eight Reliability Regions

•  Electric systems in Texas are located within four separate reliability regions: - Texas Reliability Entity (TRE), which oversees participants in the Electric Reliability Council of Texas (ERCOT); - SERC Reliability Corporation; - Southwest Power Pool (SPP); and - Western Electricity Coordinating Council (WECC).

•  The eight reliability regions in the continental U.S. are subject to the oversight and enforcement authority of the North American Electric Reliability Corporation (NERC), which is subject to the Federal Energy Regulatory Commission’s (FERC) oversight. NERC is responsible for developing standards to ensure and improve reliability for delivery of electricity on the bulk power system.

FERC

NERC

(ERCOT)

4

AECT Companies Within ERCOT

Transmission and Distribution Utilities

Retail Electric Providers

Generation Companies Total ERCOT Capacity:

>74,000 MW

5

AECT Companies Outside of ERCOT

Western Electricity Coordinating Council (WECC)

Southwest Power Pool (SPP)

Midcontinent Independent System Operator (MISO)

Total ERCOT Capacity:

>74,000 MW

6

Slide 7: Electric Market Structures in Texas

Slide 12: Texas’ Wholesale Electric Market

Slide 24: Emissions and the Environment

Slide 32: Water Use by Electric Generators

Slide 42: Transmission and Distribution Utilities

Slide 51: Energy Efficiency

Slide 57: Competitive Retail Electric Market in ERCOT

APPENDICES

Slide 67: Appendix A: History of Electric Regulation in ERCOT

Slide 76: Appendix B: AECT Member Companies

Contents

7

Electric Market Structures in Texas

8

ERCOT: Separate companies provide retail, transmission & distribution and generation services

•  In competitive markets, consumers have multiple retail electric providers (REPs) and service plans to choose from.

•  Wholesale and retail prices are set by competitive market forces, while the PUC sets transmission and distribution rates.

Power Flow Financial Flow

Regulated

9

ERCOT: Separate companies provide retail, transmission & distribution and generation services

•  Because wholesale electric prices are set by the competitive market, the risks associated with the cost of construction, operations and maintenance of a generation plant are borne entirely by the generator and its investors, not by end-use customers.


Regulated

10

Outside ERCOT: A single company provides retail, transmission & distribution and generation services in each area

•  In fully regulated markets, the PUC sets retail rates charged to end-use customers.

•  Each of these service areas is part of multi-state electric grids, with differing regulations. In many cases, vertically integrated utilities purchase wholesale power from certain unregulated entities.


Regulated

11

•  New power plants in these regions can be built by both regulated entities and certain unregulated entities or qualifying facilities.

•  Regulated utility power plants, however, must be approved by the PUC after a rigorous review of need and siting.

Outside ERCOT: A single company provides retail, transmission & distribution and generation services in each area


Regulated

12

Texas’ Wholesale Electric Market

13

The Competitive Wholesale Market: A Success Story

Competition has brought greater efficiency to the wholesale market

–  Generators shoulder the risk of building new power plants, bringing efficient, cost-effective generation to consumers.

–  New power plants produce more electricity per unit of fuel.

–  New power plants include modern environmental emissions controls.

The competitive market is in the public interest –  Operational efficiency of a competitive market helps push wholesale prices

downward.

–  No market structure is more effective at ensuring efficient operations than a competitive one.

Policy decisions should be focused on maintaining vibrant competition

–  Texas leaders should support policies that maintain the competitive market.

–  The competitive market will bring forward the right mix of technology and fuel type based on environmental choices by policymakers.

14

Permitted and Operating Electric Generating Units in Texas

15

ERCOT Generation Mix

•  The generation technology mix is an outcome of a robust competitive wholesale market and environmental policy decisions.

•  In addition to the price of fuels and the cost of technology, environmental and siting issues impact choices made by generation developers.

•  Coal, including lignite, is an important fuel in the ERCOT electric generation mix.

–  Coal is the most abundant fossil fuel in the United States, with an estimated 200 year supply remaining (per the Energy Information Administration (EIA)).

–  Electricity produced from Texas lignite exceeds the entire generation of 28 states individually.

•  Texas lignite accounts for about 45% of the coal used in the state for electricity. •  Texas’ lignite mining industry is a key part of the state economy, providing over 33,000

permanent jobs and contributing about $10.5 billion in annual Total Expenditures.

Sources: EIA, National Mining Association, The Perryman Group, PUC

16

ERCOT Generation Mix Compared to U.S. Average

Note: Oil-fired generation is negligible in ERCOT, accounting for less than 0.1% of ERCOT capacity and load; numbers may not add up to 100% due to rounding.

Sources: ERCOT (2013 data for energy; 2014 data for capacity); EIA (2013 data for energy, 2012 data for capacity)

Capa

city

(MW

) En

ergy

(MW

h)

ERCOT U.S. Average

Nuclear

Natural Gas

Coal

Non-Hydro Renewables (Mostly Wind)

Hydro

27%

39%

19%

7% 1%

Coal

Nuclear

Natural Gas

Other

41%

37%

12%

1%

Coal

Natural Gas

Nuclear

Wind

56% 23%

6%

13% 1%

Other

Wind

10% Other (Mostly Petroleum)

6%

Nuclear Natural Gas

Coal

Non-Hydro Renewables (Mostly Wind)

42%

29%

9%

7% 5%

Other (Mostly Petroleum)

7%

Hydro

17

Gas on the Margin in ERCOT Nearly Year-Round

Demand Curve - Summer Scenario

0

10000

20000

30000

40000

50000

60000

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

Hour

MW

Lo

ad

Nuclear Coal Wind Natural Gas

Examples are purely illustrative

Demand Curve - Winter Scenario

0

10000

20000

30000

40000

50000

60000

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

Hour

MW

Lo

ad

Nuclear Coal Wind Natural Gas

•  There are multiple types of power plants with different operations in ERCOT that are operated on different schedules.

–  Because of their lower marginal costs, nuclear and coal-fired power plants in ERCOT operate approximately 90 percent of the time.

–  In contrast, natural gas-fired power plants are ramped on and off, depending upon demand. –  Wind-generated electricity is only intermittently available, depending on wind conditions.

•  Some natural gas-fired generation is required to operate at all times in the ERCOT region to meet demand.

–  Natural gas-fired generation sets the market price of wholesale electricity in ERCOT. –  Natural gas-fired units that are used to meet peak demand tend to be older units that cost more to operate.

18

Texas Has the Most Installed Wind Energy Capacity

Source: American Wind Energy Association, Through Q1 2014

12354

5829 5177

3568 3153 3134 3035 2967 2808

2332

0

2000

4000

6000

8000

10000

12000

TX CA IA IL OR OK MN KS WA CO

States With Most Installed Wind Capacity (MW)

20% of the nation’s installed wind generation capacity is located in Texas.

19

ERCOT Wholesale Market Management

•  System Reliability

–  ERCOT oversees system reliability. –  ERCOT is part of national reliability council.

–  ERCOT protocols, approved by PUC, mandate system reliability standards that all market participants must follow.

•  Statute and Rules Address “Market Power” and Generation Merger Issues –  Independent Market Monitor oversees wholesale market operations.

–  Generating capacity owned and controlled by a Power Generation Company limited to 20% of installed generating capacity capable of delivering power to a power region.

–  Administrative penalties for market power abuse were reviewed and updated during the 79th Regular Session.

–  Mergers of Power Generation Companies subject to PUC review.

•  Market Design –  ERCOT transitioned to a Nodal Market in 2009 as a result of PUC rulemaking.

–  The change is expected to bring cost-savings and additional efficiency to the market by enhancing market transparency and allocating costs more accurately to market participants.

20

Wholesale Market Management Outside ERCOT

•  System Reliability

–  Larger, multi-state Councils (SERC, SPP, WECC) oversee system reliability. –  Each is part of national reliability council.

–  Protocols, approved by the Federal Energy Regulatory Commission (FERC), mandate system reliability standards that all market participants must follow.

•  Wholesale market operations overseen by FERC

21

1980 1990 2000 2010 2020 2030 2040

Increased Population Drives Future Electric Consumption

Sources: U.S. Census, Texas State Data Center 0.5 scenario

Texas’ Projected Population Growth (millions) 1980-2040

28.9 million

25.1 million

37.0 million

32.9 million

20.9 million

17.0 million 14.2 million

To meet increases in electric load created

by Texas’ rapid population and

economic growth, Texas will require additional power,

transmission and distribution, customer demand response and energy efficiency.

22

ERCOT Reports Sufficient Power Expected For Summer 2014

•  ERCOT released its Seasonal Assessment of Resource Adequacy (SARA) on May 1.

•  ERCOT found that ERCOT does not expect periods of limited capacity.

–  However, ERCOT notes in the SARA that “If an extreme system peak occurs…[conditions] could result in an Energy Emergency Alert (EEA), with corresponding public appeals for conservation. Depending on the severity of the situation and the amount of generation available during periods of highest demand, ERCOT could take other progressive steps necessary to protect overall system.”

•  According to ERCOT’s meteorologist, most of the state should not expect temperatures hotter than last summer.

–  While not as hot as last summer, temperatures are likely to be above the long-term historical average in Texas.

–  July is expected to be hottest, especially affecting Austin, San Antonio and the Valley.

23

Longer-Term Outlook for ERCOT Shows Generation Investment Still Needed

Source: ERCOT, 2015 Report on the Capacity, Demand and Reserves in the ERCOT Region, May 2014

65000$

70000$

75000$

80000$

85000$

2015% 2016% 2017% 2018% 2019% 2020% 2021% 2022% 2023% 2024%

MW%

ERCOT%Summer%Resources%and%Firm%Load%Forecast:%2015C2024%

Resources%

Load%Forecast%

Reserve%Margin%14.3%%

14.1%%13.8%%

12.3%% 9.8%%8.4%%

3.5%%

6.1%%7.4%%

4.8%%

24

Emissions and the Environment

25

Texas is Among Nationwide Leaders in Low Emissions Rates

States With NOx, SO2 and CO2 Emissions Rates Below the National Average for Electric Generation

Source: EPA Air Markets Program Data (2013, Preliminary Data)

26

13 Northeast States & DC Texas

Sources: CO2, NOx, SO2: EPA Air Markets Program Data (2013, Preliminary Data); Land Area: US Census Bureau, 2010

Land Area 247,175 mi2 261,232 mi2

Tons of CO2 427,123,780 259,789,897 Tons of SO2 722,257 365,350 Tons of NOx 367,109 133,966

Comparison of Electric Utility Generation Emissions: Texas vs. the Northeast

27

Texas’ Electric Generating Plants Remain Among Cleanest NOx Emitters in the Nation


28

Area

2013 NOx Emission Rate Averages (lbs/

mmBtu) National 0.139 Texas 0.086

0.340 NM

0.086 TX

0.179 OK 0.174

AR

0.109 LA

Texas electric generators have the lowest rate of NOx emissions in the region

Texas is Already Leading the Way in Clean Power Plants Regionally


29

Texas’ Electric Generating Plants Below National Average SO2 Emissions Rates


30

Texas’ Electric Generating Plants Also Below Average CO2 Emissions Rates


31

Selected Environmental Programs and Fees

•  The electric industry is among the most heavily regulated in the nation, complying with hundreds of regulations and paying millions of dollars in fees annually.

Selected Current Environmental Programs - Compliance with National Ambient Air Quality Standards -  State Implementation Plan -  NOx reductions for electric generating units -  Clean Air Interstate/Clean Air Mercury Rules -  New Source Review (NSR) Prevention of Significant Deterioration -  Non-attainment NSR, including offset -  State Minor NSR -  Title V and Acid rain permits -  Compliance Assurance Monitoring -  Continuous Emissions Monitoring Systems -  Toxic Release Inventory -  Monitoring cooling water -  Mass Emission Cap and Trade Program

Selected Current Environmental Fees - Title V federal operating permit fees - Air inspection fees - Air quality permit fees - Air quality permit renewal fees - Wastewater inspection fees - Wastewater permit application fees - Water quality fees - Potable water fees - Water use permit application fees - Hazardous waste generation fees - Non-hazardous waste fees

-  Low level radioactive waste fee -  Injection well fee

32

Water Use by Electric Generators

33

•  AECT member companies represent the largest private owners, builders, and operators of private reservoirs in Texas.

•  Dependable water supplies are essential to the reliable generation of electricity.

–  Water supply is generally obtained in the form of water contracts/rights, prior to the construction of an electric generation station.

–  Water contracts/rights are secured at a level to ensure a reliable water source during future drought periods.

–  It is important to note that most of this water is not consumed: water consumed for electric generation is currently 4% of total Texas water demand.

•  The reliable generation of electricity is necessary for pumping water to cities and farms, and for water treatment and sewage treatment – among other necessities.

•  Moreover, a reliable Texas electricity industry is necessary for the state to meet the

needs of our growing population and the new and growing businesses that fuel our state’s economy.

Overview of Water Use by Electric Generators in Texas

34

•  The graphic above is a simplified example of a power plant’s use of water for steam generation. •  Most power plants heat water in a closed system until it becomes steam, then pressurize that

steam to turn a generating turbine. •  The steam is then routed to a condenser, where the water is condensed and reused in the steam

cycle.

How Texas’ Steam Power Plants Use Water

Turbine Generator Transformer Pump

Combustion

Water

Steam

Cooling Water

Condenser

Fuel

Controls Stack

Electricity Flow of Power

Flow of H2O

Flow of H2O

35

•  Many electric generating facilities in Texas obtain TCEQ permits for use of fresh surface water or surface saltwater as well as groundwater conservation district permits for well water withdrawals.

•  Electric generating facilities in Texas are required to obtain TCEQ permits for their wastewater discharge.

–  AECT member companies have an outstanding record of compliance with state and federal water quality standards and requirements, which includes rigorous monitoring of the wastewater discharge

•  In addition to complying with state and federal water quality regulations, AECT member companies are committed to practicing sound water conservation. We:

–  Reuse water whenever possible –  Capture storm water runoff –  Restore, enhance and create aquatic habitats –  Preserve ecosystems –  Enhance and create valuable wetlands

•  Many reservoirs created by electric generating companies are used for recreational

purposes, including camping, boating, fishing and swimming.

Management and Use of Water at Texas’ Power Plants

36

Drought Update and Available Water Resources For Power Plants

•  Most electric generators require the use of water for system cooling. •  The vast majority of this water is returned to its source – typically a

reservoir built by the power plant owner. •  Drought conditions remain in much of Texas, but the electricity system

has remained reliable.

Source: United States Drought Monitor – April 29, 2014

37

Water Usage In the Average Household

•  About 3 percent of water use in the average household is for electric production.

Source: Viability and Impacts of Implementing Various Power Plant Cooling Technologies in Texas, prepared for EPRI by Texas A&M University, July 2012

38

•  The typical American household consumes 300 gallons of water each day. Producing the electricity consumed by that household requires only about 9½ gallons.

•  Only about 3% of an average resident’s total daily consumption of electricity is needed to take care of all of daily water needs.

–  This includes pumping the raw water from the ground or lake, pumping it to a treatment plant and treating it, delivering the treated water to the resident and treating the resulting wastewater.

•  EPRI’s Water Conservation & Technology Center report supports once-through cooling used on the majority of fossil fuel-fired power plants today, finding that “Mandating one cooling technology may result in job losses and have unintended consequences,” due to the costs and potential impact on the broader state economy.

Recent Key Findings On Water Use in Texas

Source: Viability and Impacts of Implementing Various Power Plant Cooling Technologies in Texas, prepared for EPRI by Texas A&M University, July 2012

39

•  Generators are taking many actions to help ensure water supplies allow for reliable operation. Examples include:

–  Implementing water conservation measures –  Reusing water whenever possible –  Using treated municipal sewage effluent for cooling –  Upgrading power plant processes to minimize or eliminate use of water for non-

cooling purposes –  Capturing, treating and using storm runoff from the plant site –  Procuring additional water rights –  Building pipelines to remote water sources –  Adding pumping capability –  Using advanced water treatment systems to treat and use surface water that

naturally contains high levels of minerals or dissolved solids, thus avoiding use of higher quality surface water

Mitigating Drought Effects

40

•  Zebra mussels clog cooling water intake valves, as well as impacting water supply. The mussels have multiplied so quickly in Lake Texoma that the North Texas Municipal Water District is no longer able to pump water.

•  Hydrilla, a non-native invasive aquatic plant, is found in over 100 bodies of water in Texas. In great quantities, it can affect water supplies and operations of power plants.

Additional Water Challenges: Invasive Species

41

•  Water consumption for electric generation is currently 4% of total Texas water demand.

–  The Texas Water Development Board projects this to grow to 7.4% by 2060. It is noteworthy that this increase in water usage is sufficient to provide electricity for a population projected to grow over the same time frame by 82%.

•  AECT member companies have made substantial investments to secure water contracts/rights and groundwater resources and build and maintain reservoirs in advance of actual use.

•  All of these water contracts/rights and groundwater resources have been or are held for substantial periods of time for future generating units and also during drought periods for existing power plants.

•  AECT member companies are working hard to ensure adequate water supply for reliable electric generation, including building pipelines to remote water sources, seeking additional water rights, adding pumping capability, and use of effluent for cooling, and implementing water conservation measures.

Generation and Water Usage: Summary

42

Transmission and Distribution Utilities

43

•  Transmission and Distribution Utilities: –  Provide reliable delivery of electricity on a 24-7 basis. –  Invest in and build infrastructure (e.g., transmission lines, Smart Grid) to support the

needs of Texas’ growing economy. –  Manage their transmission networks under the direction of ERCOT; coordinating with

ERCOT on transmission planning activities. –  Respond to outages (e.g., storms, natural disasters) that affect the grid and restore

service as quickly as safely possible. –  Provide key market information, such as premise information and metering services to

facilitate successful operation of the ERCOT deregulated market. –  Provide regulated transmission and distribution services to facilitate operations of

wholesale and retail business entities.

–  Charge regulated delivery rates to REPs !  Rates based on a historical cost of service including a PUC-established return on capital

investment

!  Allocation of ERCOT-wide transmission costs

!  Non-bypassable charges include the cost to deliver electricity, System Benefit Fund, recovery of true-up costs and nuclear decommissioning expenses for existing nuclear facilities

TDUs’ Role in the Competitive ERCOT Market

44

•  ERCOT Transmission –  1995 amendments to the Public Utilities Regulatory Act (PURA) required PUC to ensure

open access to transmission grid, allowing new independent generators to utilize transmission network.

–  TX76RSB 7 adopted “postage stamp” transmission pricing structure and eliminated impact of location on transmission rates.

–  Transmission Cost of Service (TCOS) ratemaking structure implemented and billed to distribution service providers (DSP).

–  DSPs recover TCOS through the TDSP delivery rate and transmission cost recovery factor (TCRF), approved by PUC.

–  New transmission investment is coordinated through the ERCOT regional transmission planning process and requires PUC facility certification.

Transmission & Distribution Market Design: ERCOT

45

Continued Transmission and Distribution Investment Needed Throughout Texas

•  According to the Texas State Data Center, 5 million new residents are expected in Texas by 2020.

•  New generation must be delivered effectively and efficiently to population centers of the state.

•  Texas must provide regulatory certainty and fair rates of return to ensure appropriate capital investment.

•  Though not shown here, areas of Texas located outside the ERCOT grid are also growing, both in terms of population and economic development.

Source: ERCOT, “Report on Existing and Potential Electric System Constraints and Needs,” January 2012 (most recent update)

46

•  While certain types of generation can be constructed quickly -- often as short as 12-18 months -- transmission lines typically take between three and five years. Generation can be brought into the market more rapidly if the siting takes advantage of the existing transmission infrastructure.

•  Building long transmission lines can affect many landowners, often requiring a lengthy and extensive easement acquisition effort.

•  The transmission line siting process must take into account the impact of those lines on environmentally sensitive and historically significant lands.

•  Utility is not typically allowed to begin recovering costs until year 5 or 6.

Challenges of Transmission Line Construction

Example of Transmission Construction Process in ERCOT

47

Distribution Investment Also Needed

•  The need to replace an aging distribution infrastructure to meet population and demand growth will require continued investment.

•  It is becoming more evident that rising construction material costs are an increasingly important driver contributing to the higher actual and planned utility industry infrastructure investments.

•  Nationwide, distribution investment is expected to be almost triple the size of projected transmission spending, according to the Edison Electric Institute. Distribution investment is likely to exceed generation and environmental capital spending, as well.

48

•  Non-ERCOT Transmission –  Wholesale open access transmission rights subject to Federal Energy

Regulatory Commission (FERC) jurisdiction.

–  FERC transmission pricing reflects location of generation.

–  FERC requires generators to bear higher cost relative to the ERCOT system of connecting with the transmission grid.

–  Certification in Texas is with the PUC.

–  Recently adopted PUC rules allows most non-ERCOT utilities to recover transmission investments between rate cases through a transmission cost recovery factor (TCRF).

Transmission & Distribution Market Design: Non-ERCOT

49

Competitive Renewable Energy Zones: Legislative and Regulatory Steps

•  The Texas Legislature mandated steady increases in renewable power in TX76RSB 7 (1999) and TX791RSB 20 (2005).

–  Starting Line: 880 MW in 1999 –  Old Goal 1: 2,880 MW by 2009 (Achieved by 2007) –  New Goal 1: 5,880 MW by 2015 –  New Target 1: 10,000 MW by 2025 –  New Target 2: 500 MW non-wind renewable generation

•  TX791SB 20 (2005) also required PUC to: –  designate Competitive Renewable Energy Zones (CREZs) in areas in which renewable

energy resources and suitable land areas are sufficient to develop generating capacity from renewable technologies;

–  develop a plan to construct necessary transmission capacity in a manner that is most beneficial and cost effective to customers; and

–  take into account transmission constraints, the need for generation and the level of financial commitment by generators when defining CREZs.

•  PUC adopted Substantive Rule 25.174 in December 2006, which creates framework for determining CREZs.

50

Map of Completed Competitive Renewable Energy Zones

51

Energy Efficiency

52

Energy Efficiency in Texas: Overview

•  Texas continues to be an energy leader through policies designed to improve the state’s energy efficiency programs and bring improved technologies to the electric market.

–  Utility-run programs have reduced customer consumption, thereby reducing the need for the construction of new generation.

–  Advanced metering provides information and opportunities that enable customers to take better control of their energy consumption and bills.

–  Houston and Dallas-Fort Worth ranked 1 and 2 nationally in number of homes that qualified for EPA’s “Energy Star” designation.

•  The Texas Electric Choice Act requires electric utilities to provide energy efficiency programs and

incentives, including efficiency programs for low-income customers.

–  TX80RHB 3693 raised the energy efficiency goal for electric utilities from 10% of annual demand growth to 15% in 2008 and 20% in 2009.

–  The recent PUC recently passed a rule requiring utilities to offset 30 percent of their projected growth in demand by 2013.

•  ERCOT competitive retailers are developing innovative plans and products that will help customers use less energy (e.g., customer education programs, energy audits, Internet-controllable thermostats, etc.)

53

Energy Efficiency Programs Have Exceeded Goals

•  In 2011, utilities in Texas exceeded their statewide legislative energy efficiency goals for the ninth straight year. Utilities achieved 529GWh of energy reduction and 270 MW of peak demand reduction.

•  These energy savings correspond to an equivalent reduction of approximately 615 million pounds of carbon dioxide emissions per year.

Total Energy Savings by Investor-Owned Utilities 2003 - 2011

Source: Frontier Associates LLC, “Energy Efficiency Accomplishments of Texas Investor Owned Utilities, Calendar Year 2011”

54

Benefits of Advanced Metering

•  Advanced meters and other new technologies and associated infrastructure will provide information and opportunities that will enable customers to better understand the impact of controlling their energy consumption.

•  By controlling their energy consumption, customers can better manage their bills and lessen their environmental impact.

•  Advanced meters will allow for more automation of utility functions such as meter reading and connections/disconnections, which help to reduce costs.

55

The Smart Grid Transforms the Way We Buy, Deliver and Use Electricity

Key Stakeholder

Consumers

Electric Utility

Retailers

• Automated meter reading • Improved system reliability and greater ease/timeliness of power restoration • Improved line fault detection and diagnostics • Real time grid feedback allows for more effective loading of utility assets • Enables increased monitoring and diagnostics to enhance the life of utility assets

•  Electric reliability improvements •  Friendly access to detailed consumption information to make informed choices and

enable faster transactions •  Enables and promotes energy conservation •  Efficient switching and connections/disconnections

• Expands retailer’s ability to offer new products • Establishes platform to offer future home appliance monitoring and control • Allows retailers to offer pre-payment programs • Efficient switching and connections/disconnections

Environment

• Enables demand-side management • Facilitates integration of solar and wind generation into grid • Promotes energy efficiency through immediate energy consumption awareness • Facilitates reduced electric consumption which leads to reduced power plant

emissions

Benefits

56

Advanced Meters Have been Proven to be Accurate, Safe and Reliable

•  Accuracy: Advanced meters are rigorously tested and must be independently certified to prove their measurements are accurate. In fact, repeated tests confirm that advanced meters are often more accurate than analog meters.

•  Beneficial: Increased reliability, restoration after a power outage and remote meter reading are among the immediate cost-savings for advanced meters.

•  Secure: Advanced meters are a technological leap, much like cell phones and other evolving industries. Utilities use advanced encryption technology to safeguard consumer data.

•  Safe: Digital meter radio frequency (RF) emissions are well below FCC standards and are minimal compared to the RF emissions of many commonly used household devices. The extensive scientific literature reflects that there is no credible evidence of negative health impacts from the low level of RF emissions from digital meters.

•  Private: Utilities adhere to PUC rules and strict policies, following Texas laws that regulate the use of personal information for business functions like billing and customer service.

57

Competitive Retail Electric Market in ERCOT

58

The ERCOT Competitive Retail Electric Market is Providing Strong Customer Benefits

Key Takeaways

–  Price offers are substantially lower than prices available just before competition began, especially when adjusted for inflation

–  Texas’ national electric price ranking has improved since the market opened in 2001

–  Every competitive area in ERCOT has variable and 1-year lock offers available that are far lower than the national average price and nearly all state averages

–  Among states like Texas that depend heavily on natural gas for power generation, Texas prices compare favorably, with even lower prices available to those in the competitive market

–  The ERCOT market provides efficient market prices that track natural gas prices

59

Service Area Average Fixed-

Price Offer (12-month term)

Lowest Fixed-Price Offer

(12-month term)

Lowest Price Offer

Available

Dec. 2001 prices, not adjusted for

inflation

Dec. 2001 prices, adjusted for inflation

AEP Texas Central

11.4¢/kWh 9.4¢/kWh 7.8¢/kWh 9.6¢/kWh 12.5¢/kWh

AEP Texas North


CenterPoint Energy


Oncor


TNMP


Lower Prices Available Today than Before Competition Began

Sources: PUC Historical Data, Bureau of Labor Statistics - Consumer Price Index (32% inflation since December 2001), www.powertochoose.org offers as of April 1, 2014

April 2014 December 2001

While ERCOT competitive offer prices have dropped, the latest average U.S. residential electricity prices are up 48% since 2001.

60

Texas’ National Price Ranking Has Improved Since 2001

0 2 4 6 8

10 12 14 16 18 20 22

WA

ND

ID

W

V

AR

M

T LA

N

E

CA UT

WY

S

D

OR

M

O

KY

TN

O

K

VA

GA IA

FL

IL

A

L N

M

NC

M

S

IN

AZ

MN

TX

C

O

OH

S

C

KS

PA

D

C

DE

N

V

WI

MD

M

I M

E

NJ

NH

V

T M

A RI

AK

N

Y

CT HI

0

2

4

6

8

10

12

14

16

18

KY WA ID WV

OR TN ND NE UT

WY

MT IN MO AL OK

MS

SD CO

MN KS MD SC AR GA

DC VA WI

LA NC MI

AZ

OH IA FL DE IL NM TX NV PA NJ CT

CA AK RI

MA

NH VT

ME

NY HI

Source: EIA average annual residential rates for 2001 and April 2014 monthly data (latest available information). Average lowest available price from powertochoose.org Web site as of April 1, 2014 for a residential customer using an average of 1,000 kWh per month.

¢/kW

h ¢/

kWh

2001 State Ranking (Pre-Competition)

April 2014 State Ranking (Latest Available) Average lowest 12-

month fixed price offer in competitive market in

Apr 2014: 9.0¢/kWh

61

Electric Price Offers Compared With Other Retail Products

Sources: Public Utility Commission of Texas, U.S. Energy Information Administration, Bureau of Labor Statistics, Zillow, Power to Choose

Gallon of Gas 187%

Dozen Eggs 108%

Ground Coffee 73%

Ground Beef 67%

Hourly Legal Services 52%

U.S. Average ResidenHal Electricity 48%

Loaf of White Bread 38%

AusHn Energy Average ResidenHal Electricity 22%

Gallon of Milk 21%

AusHn Rent 15%

ERCOT Average Lowest Fixed Price Offer -‐10%

ERCOT Average Lowest Available Offer -‐26%

Price Change: 2001 to 2014

62

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LOWEST"DFW

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LOWEST"ABILENE"PRICE"

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LOWEST"LEWISVILLE"PRICE"

LOWEST"CORPUS"CHRISTI"PRICE"

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Washington"

LOWEST"HOUSTON"PRICE":"1"YR"FIXED"

LOWEST"LEWISVILLE"PRICE":"1"YR"FIXED"

North"Dakota"

LOWEST"CORPUS"CHRISTI"PRICE":"1"YR"FIXED"

Idaho"

West"Virginia"

Arkansas"

Montana"

Louisiana"

Nebraska"

California"

Utah"

Wyoming"

South"Dakota"

Oregon"

Missouri"

Kentucky"

Tennessee"

Oklahoma"

Virginia"

Georgia"

Iowa"

Florida"

Illinois"

Alabam

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exico"

North"Carolina"

Mississippi"

Indiana"

Arizona"

Minnesota"

Texas"(Statewide)"

Colorado"

US"AVERAGE"

Ohio"

South"Carolina"

Kansas"

Pennsylvania"

District"of"Columbia"

Delaware"

Nevada"

Wisconsin"

Maryland"

Michigan"

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New"Jersey"

New"Ham

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Every Competitive Area in ERCOT Has Variable and 1-Year Lock Offers Available that are Lower than the National Average Price

Sources: PowerToChoose.org offers as of April 1, 2014 U.S. Energy Information Administration, latest available data

63

Offers in Competitive Areas Compare Well With Prices in Other Areas of the State With Other Market Structures

Sources: Phone surveys conducted November 29, 2011; Power to Choose Web site, November 29, 2011; PUC Bill Comparisons (Data is October 2011)

¢/kW

h

64

Texas Market Compares Favorably to Other States Utilizing Natural Gas as the Primary Generation Source

Sources: Energy Information Administration (data as of April 2014); EIA natural gas-intensive states; powertochoose.org as of April 1, 2014

Note: Texas statewide average price includes prices from both competitive and regulated areas of the state.

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

20.00

NY AK RI MA ME NV TX MS FL CA LA

¢/

kWh

Average Residential Electric Price Among Natural Gas-

Intensive States !October!2013!(Latest!Available!Consistent!Data)!

Average Lowest Available 12-Month Fixed Price Offer in ERCOT

Competitive Market (April 2014): 9.0¢/kWh

65

ERCOT Competitive Market Has Helped Drive Lower Retail Electricity Offer Prices

1 Average electric offers across the 5 TDSP’s for residential customers using an average of 1,000 kWh per month. Excludes any 0.0¢/kWh introductory offers. Sources: NYMEX; www.powertochoose.org

66

Protections in the Market for Retail Customers

•  Make Spanish-language support available to customers

•  Place customer deposits in interest-bearing accounts and return that interest to customers when the deposit is returned

•  Follow a mandated timeline for disconnection of customers

•  Provide notice in case of disconnection •  Investigate any customer complaint within 21 days •  Provide a Terms of Service Statement detailing

contract terms, cancellation penalties, deposit requirements, fees, payment arrangement options, how to cancel service, and other obligations of the REP

•  Allow a customer to cancel a service agreement within three federal business days after receiving the terms of service

•  Allow a customer to cancel the switch upon receiving notification that the switch will occur

•  Register with the PUC and meet financial requirements set by the Commission

•  Communicate clearly with consumers regarding notice of contract expiration

•  Demonstrate creditworthiness to purchase power to serve its customers

•  Demonstrate the technical ability to supply electricity

•  Maintain privacy of customer information •  Not discriminate among customers •  Not add charges to a customer’s electric bill for

services not requested by the customer •  Provide a “Your Rights as a Customer” disclosure •  Provide an Electricity Facts Label to allow for an

“apples-to-apples” comparison among REPs •  Make deferred payment plans available for those

expressing an inability to pay •  Provide the LITE-UP discount for low-income Texans

during summer months

Among other requirements, REPs serving residential customers must:

Even this brief sampling of regulations highlights that customers are protected

67

Appendix A: History of Electric Utility Regulation

In ERCOT

68

Pre-1975 •  Cities regulated electric utility service and rates. •  Generally, a declining cost industry – rate applications most often filed to decrease rates.

1975 •  Inflation, construction costs and fuel costs drive electricity rates up. •  64th Texas Legislature enacts Public Utility Regulatory Act (PURA) to implement state regulation of

electric utility service and rates (Cities permitted to retain original jurisdiction). –  Service area, transmission line and generating plant certification. –  Rate regulation (based on cost of service plus reasonable return on investment). –  Rates based on historical test year costs and original costs of infrastructure, less

depreciation. –  Service quality regulation. –  Customer protection.

History of Electric Utility Regulation in Texas

69

1976-1995

•  1978 U.S. Fuel Use Act required utilities to discontinue use of natural gas and encouraged the use of coal and nuclear for fuel.

•  Inflation, volatile fuel costs and the need to add new generating capacity continue to increase electricity rates.

•  Rate proceedings at PUC become increasingly adversarial.

–  Consumer groups concerned about frequency and amount of rate increases. –  Utilities concerned about increasingly large PUC cost disallowances that are at odds with the

regulatory compact and erode rates of return.

•  Large customers tire of subsidizing other ratepayers seek opportunities to by-pass regulated rates and obtain choice of suppliers.

–  Cogeneration/self-generation.

–  Advocate wholesale competition and transmission open access.

–  Advocate “retail wheeling”.

•  Natural gas was favored again when the 1978 U.S. Fuel Use Act was repealed in the 1990s.

History of Electric Utility Regulation in Texas

70

Wholesale competition legislation passed (SB 373)

May199

5

Jan. 2002

Retail competition legislation Passed (SB 7)

June 1999

Sept. 1999

ERCOT Electric rates frozen

Jan. 200

5

July 2001

Texas Choice pilot program begins

Affiliate REPs allowed to offer non-price-to-beat prices

Steps to Electric Competition In Texas

Retail choice begins in ERCOT

Jan. 2007

End of price-to-beat

71

Wholesale and Retail Electric Competition Were Passed With Broad, Bipartisan Support

•  Senate Bill 373, which opened the wholesale electricity market in Texas, passed in 1995 when the Democrats were the majority party in the House and Senate.

–  The Speaker of the House and the Lieutenant Governor were both Democrats, and the bill sponsors and authors were both Democrats.

•  Senate Bill 7, which opened the competitive market, passed in 1999. –  The Senate and the Lieutenant Governor were Republican, but the House was

still majority Democrat. The House sponsor and author of the bill and the House Speaker in 1999 were both Democrats.

–  Senate Bill 7 passed the House with a vote of 144 Ayes and 4 Nays.

•  It was a bipartisan measure: 74 of the Aye votes were from Democrats, while 68 were from Republicans.

–  The bill passed the Senate with a vote of 28 Ayes and 3 nays.

72

•  Senate Bill No. 373 enacted in May 1995

–  Required utilities to provide non-discriminatory open access transmission to support wholesale competition in ERCOT.

–  Recognized new, unregulated participants in ERCOT wholesale market.

!  Exempt wholesale generators

!  Power marketers

–  Allowed non-utility wholesale market participants to offer market-based prices in ERCOT.

–  Deregulated electric cooperative distribution rates.

Note: Non-ERCOT areas are subject to FERC jurisdiction for wholesale services, including transmission services.

Steps to Competition: Wholesale Competition

73

•  ERCOT market restructuring legislation, Senate Bill 7, passed in 1999 –  Initiated competition in ERCOT retail markets beginning January 2002. –  Municipally-owned utilities and electric cooperatives allowed to “opt-in”. –  Included environmental and energy efficiency provisions.

•  Required reduction of nitrogen oxide (NOx) emissions from older power plants by 50%, and sulfur dioxide emission from coal-fired facilities by 25%.

•  Utilities required to fund energy efficiency programs equal to at least 10% of each year’s annual growth in demand.

–  1999 - 2001 – Preparation for retail competition. •  Electricity rates frozen. •  ERCOT develops systems required to support competition. •  PUC promulgates competition rules. •  PUC determines rate unbundling cases.

–  July 2001 – Retail competition pilot project begins.

Steps to Competition: Retail Competition

74

Steps to Competition: Transition Period

•  January 2002-2006 Transition Period –  “Affiliated” generators

•  Required to make 15% of their power available to non-affiliated retail providers •  During first two years, limited to guaranteed market price for power as projected by PUC •  Given incentives to install environmental clean-up equipment

–  Transmission and Distribution Utilities •  Initial rates set using estimated/generic costs •  Recovery of stranded and other transition costs authorized but delayed until 2004 True-

up proceeding –  Securitization bonds lower cost to customers

–  “Affiliated” retail electric providers •  Required to lower base rates by six percent (Price to Beat)

–  Adjustable only for increases in natural gas prices –  Price to Beat remains in place until 12-31-06

•  No price competition allowed in former service area until 2005

75

•  Incumbents required to separate business activities into the following units. –  Power generation company. –  Retail electric provider. –  Transmission and distribution utility.

•  Generation and retail businesses are not regulated utilities. –  Power Generation Companies must be registered with PUC. –  Retail Electric Providers must be certified by PUC.

•  Transmission and distribution businesses remain regulated utilities.

•  Methods for separation of business activities. –  Creation of separate non-affiliated companies. –  Creation of separate affiliated companies owned by a common holding company. –  Sale of assets to a third party.

•  Each ERCOT utility chose different models.

•  Code of conduct rules enforce separation requirements.

Structural Unbundling

76

Appendix B: AECT Member Companies

77

American Electric Power Electric Utility

AEP Texas is connected to and serves more than a million electric consumers in the deregulated Texas marketplace. As an energy delivery company, AEP Texas delivers electricity safely and reliably to homes, businesses and industry across its nearly 100,000 square mile service territory in south and west Texas.

Southwestern Electric Power Company, headquartered in Shreveport, LA, serves 460,000 customers in East Texas and the Texas Panhandle, Northwest Louisiana, and the western edge of Arkansas. SWEPCO has been providing low-cost, reliable electricity to customers since 1912. SWEPCO is a vertically integrated company operating as a member of the Southwest Power Pool.

Service Territory Shown in Gold

Service Territory Shown in Dark Red

78

CenterPoint Energy Transmission & Distribu/on U/lity

CenterPoint Energy maintains the wires, poles and electric infrastructure serving its 5,000-‐square-‐mile electric service territory in the Houston metropolitan area. CenterPoint Energy ensures the reliable delivery of power to 2.2 million metered homes and businesses, but does not generate power or sell it to customers.

79

ConstellaHon and StarTex Power Retail Services

ConstellaHon’s retail companies serve more than two-‐thirds of the Fortune 100, approximately 100,000 business and public-‐sector customers and approximately 1 million residenHal customers across the naHon. ConstellaHon’s retail brands include ConstellaHon NewEnergy, Division, StarTex Power and BGE ConstellaHon NewEnergy – Gas HOME. In Texas, ConstellaHon’s retail enHHes serve over 150,000 residenHal and business customers.

Compe//ve Areas of Texas

80

El Paso Electric Company Ver/cally Integrated U/lity

El Paso Electric is a verHcally integrated uHlity serving approximately 396,000 customers in the Rio Grande Valley in west Texas and southern New Mexico. El Paso Electric is an operaHng member of the Western Electricity CoordinaHng Council.

81

Entergy Texas Ver/cally Integrated U/lity

The Entergy Texas service area starts at the southeast Texas/Louisiana border and stretches up into the piney woods of east Texas, down to the Gulf of Mexico and across to the lake country north of Houston. Entergy Texas serves approximately 385,000 customers in 26 counHes.

82

Exelon GeneraHon Electric Genera/on Company

CorporaHon is the naHon’s leading compeHHve energy provider and is one of the largest compeHHve U.S. power generators, with more than 35,000 megawabs of owned capacity comprising one of the naHon’s cleanest and lowest-‐cost power generaHon fleets. The company maintains strong posiHons in the Midwest and Mid-‐AtlanHc regions. In Texas, it owns and controls about 4,400 MW of natural gas-‐fired and wind generaHon, with plants in Dallas, Fort Worth, Granbury, LaPorte, and Wharton.

83

GDF SUEZ Electric Genera/on Company

•  North American headquarters in Houston, TX

•  GDF SUEZ employs ~2,300 people across operaHons in Canada, US & Mexico

•  Over 4,000 MW of power generaHon in Texas in Wise, Ellis, Hays, Goliad and Wharton counHes. 13,000+ MW naHonwide

•  4th largest retail provider to C&I customers

o  Serving approximately C&I 60,000 accounts in 12 markets and serving over 50% of the Fortune 100

o  Retail brands are ThinkEnergy & GDF SUEZ Energy Resources

84

Lone Star Transmission Transmission Company

Lone Star Transmission, LLC, is a rate-‐regulated transmission service provider in Texas that owns and operates approximately 330 miles of high-‐voltage transmission lines and associated equipment. Lone Star's transmission faciliHes stretch from Scurry County, northwest of Abilene, to Navarro County, just south of Dallas. Lone Star’s faciliHes were added as part of the CompeHHve Renewable Energy (CREZ) program in Texas, but today they enhance the safe and reliable transmission of electricity from all generaHon sources.

85

Luminant Electric Genera/on Company

Luminant is a compeHHve power generaHon business, including mining, wholesale markeHng and trading, and development operaHons. Luminant has more than 15,400 megawabs of generaHon in Texas, including 2,300 MW fueled by nuclear power and 8,000 MW fueled by coal. The company is also a large purchaser of wind-‐generated electricity.

86

NextEra Electric Genera/on Company

NextEra Energy Resource owns an extremely diverse pornolio of nearly 18,000 MW of generaHon naHonwide, including wind, solar, hydro, natural gas, and nuclear power. In Texas, NextEra’s footprint includes 5,243 MW of generaHon, including two combined-‐cycle natural gas plants and 15 wind faciliHes.

87

NRG Energy Electric Genera/on Company

NRG is the naHon’s largest compeHHve power generator with over 52,000 MW of fossil fuel, nuclear, solar and wind capacity across the country. Approximately 24% of NRG’s total generaHon is in Texas, making NRG Texas the second largest power generator in the State. Our diverse pornolio -‐-‐ 52% natural gas, 9% nuclear, 6% wind and 33% coal -‐-‐ is located in 13 counHes across Texas.

88

Oncor Transmission & Distribu/on U/lity

Oncor is a regulated electric distribuHon and transmission business that delivers reliable electricity to consumers. Oncor operates the largest distribuHon and transmission system in Texas, providing power to more than 3 million electric delivery points over more than 115,000 miles of transmission and distribuHon lines.

89

Reliant, Green Mountain and Cirro Energy Retail Services

Compe//ve Areas of Texas

Based in Houston, NRG provides comprehensive soluHons to meet consumers’ needs through our retail electricity brands, residenHal solar offerings and innovaHve consumer products and services to 1.9 million customers across the state.

90

Texas-‐New Mexico Power Co. Transmission & Distribu/on U/lity

TNMP provides electric service to 236,000 customers throughout Texas. TNMP is owned by PNM Resources, an energy holding company based in Albuquerque, New Mexico.

91

TXU Energy Retail Electric Provider

TXU Energy is a market-‐leading retail electric provider, powering the lives of more Texans than any other retailer. TXU Energy offers a variety of innovaHve products and soluHons, allowing its residenHal and business customers to choose opHons that best meet their needs including excepHonal customer service, compeHHvely priced electricity service plans, innovaHve energy efficiency opHons, renewable energy programs and other electricity-‐related products and services. Compe//ve Areas of Texas

92

Xcel Energy Ver/cally Integrated U/lity

Xcel Energy owns Southwestern Public Service Company, a regional electric uHlity that provides service to about 383,000 persons in a 52,000 square-‐mile area comprised of the South Plains and Panhandle of Texas, and eastern New Mexico.

93

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