THE GEE STRATEGIES GROUP Robert W. Gee President Electric Deregulation Begins January 1, 2002 January 1, 2002 Is Your Company Ready? Ft. Worth, Texas November

THE GEE THE GEE

STRATEGIES GROUPSTRATEGIES GROUP

Robert W. GeeRobert W. Gee

PresidentPresident

Electric Deregulation BeginsElectric Deregulation Begins January 1, 2002January 1, 2002

Is Your Company Ready?Is Your Company Ready?Ft. Worth, TexasFt. Worth, Texas

November 6, 2001 November 6, 2001

HARD LESSONS HARD LESSONS LEARNED IN OTHER LEARNED IN OTHER

STATES, STATES, AND WHAT THE FEDS AND WHAT THE FEDS

MAY DOMAY DO

THE GEE STRATEGIES THE GEE STRATEGIES GROUPGROUP 2

OverviewOverview

What’s gone right? What’s gone wrong? What have we learned? how do federal players hope to

respond?


Why Ask These Why Ask These Questions ?Questions ?

24 STATES DECIDED TO OPEN 24 STATES DECIDED TO OPEN RETAIL MARKETSRETAIL MARKETS

2 REVERSED COURSE2 REVERSED COURSE 5 MAKING MID-COURSE 5 MAKING MID-COURSE

CORRECTIONSCORRECTIONS CALIFORNIA“DREAMING”CALIFORNIA“DREAMING”

““SCREAMING”SCREAMING”


The Critics’ View: The Critics’ View: Defining “Success”Defining “Success”

VOLUME OF ALTERNATE SUPPLIERS VOLUME OF ALTERNATE SUPPLIERS ENTERING MARKET ENTERING MARKET

DEGREE OF MARKET PENETRATION DEGREE OF MARKET PENETRATION (# OF CUSTOMERS SWITCHING TO (# OF CUSTOMERS SWITCHING TO ALTERNATE SUPPLIERS)ALTERNATE SUPPLIERS)

PROSPECTS FOR SUSTAINABLE PROSPECTS FOR SUSTAINABLE COMPETITION COMPETITION


But Are These The But Are These The Right Metrics Of Right Metrics Of

Success?Success? NUMBER OF STATES COMPLETING NUMBER OF STATES COMPLETING

THE TRANSITION PROCESS TO A THE TRANSITION PROCESS TO A FULLY COMPETITIVE MARKET: FULLY COMPETITIVE MARKET: ZEROZERO

CURRENT JUDGMENTS BASED CURRENT JUDGMENTS BASED SOLELY ON INITIAL EXPERIENCE OF SOLELY ON INITIAL EXPERIENCE OF TRANSITIONAL MARKET & TRANSITIONAL MARKET & REGULATED STRUCTURE HYBRIDS REGULATED STRUCTURE HYBRIDS


Policy Goals: WhatPolicy Goals: What States Want From States Want From

RestructuringRestructuring ENSURE OPPORTUNITY FOR RESIDENTIAL AND ENSURE OPPORTUNITY FOR RESIDENTIAL AND

SMALL BUSINESS PARTICIPATION, OR NO HARMSMALL BUSINESS PARTICIPATION, OR NO HARM ENCOURAGE GROWTH OF EFFICIENT, COMPETITIVE ENCOURAGE GROWTH OF EFFICIENT, COMPETITIVE

GENERATION MARKETGENERATION MARKET ACHIEVE BROAD CUSTOMER & NEW ALTERNATIVE ACHIEVE BROAD CUSTOMER & NEW ALTERNATIVE

SUPPLIER PARTICIPATION SUPPLIER PARTICIPATION ADDRESS TRANSITIONAL UNECONOMIC “STRANDED ADDRESS TRANSITIONAL UNECONOMIC “STRANDED

COSTS”COSTS” RETAIN SYSTEM BENEFITS (RELIABILITY, LOW-RETAIN SYSTEM BENEFITS (RELIABILITY, LOW-

INCOME ASSISTANCEINCOME ASSISTANCE,, CONSERVATION & CONSERVATION & RENEWABLES)RENEWABLES)

IMMEDIATELY LOWER RATESIMMEDIATELY LOWER RATES PROBLEM: SOME GOALS AT ODDS W/ ONE PROBLEM: SOME GOALS AT ODDS W/ ONE

ANOTHERANOTHER


Moral One: Rate Moral One: Rate Discounts Can be CostlyDiscounts Can be Costly

DISCOUNTS AFFECT SHOPPING CREDIT & DISCOUNTS AFFECT SHOPPING CREDIT & LESSEN “HEADROOM” NECESSARY FOR LESSEN “HEADROOM” NECESSARY FOR NEW RETAIL ENERGY PROVIDERS TO EARN NEW RETAIL ENERGY PROVIDERS TO EARN PROFITSPROFITS

BUT DISCOUNTS STRONGLY FAVORED AS BUT DISCOUNTS STRONGLY FAVORED AS POLITICAL PRICE TO WIN LEGISLATIVE POLITICAL PRICE TO WIN LEGISLATIVE SUPPORT SUPPORT

MANDATING EXCESSIVELY DEEP MANDATING EXCESSIVELY DEEP STANDARD OFFER RATE DISCOUNTS CAN STANDARD OFFER RATE DISCOUNTS CAN STRANGLE COMPETITION “IN THE CRIB”STRANGLE COMPETITION “IN THE CRIB”


The Massachusetts The Massachusetts Case: An Early Bird Case: An Early Bird Misses The WormMisses The Worm

MARCH 1, 1998: FULL RETAIL CHOICEMARCH 1, 1998: FULL RETAIL CHOICE CURRENT RETAIL CUSTOMERS: COULD CONTINUE ON CURRENT RETAIL CUSTOMERS: COULD CONTINUE ON

STANDARD OFFER RATES UNTIL 2004; ELIGIBLE FOR STANDARD OFFER RATES UNTIL 2004; ELIGIBLE FOR DEFAULT RATES THEREAFTERDEFAULT RATES THEREAFTER

DAY ONE:DAY ONE: 10 % DISCOUNT OFF BUNDLED RATE; FOLLOWED 10 % DISCOUNT OFF BUNDLED RATE; FOLLOWED BY FURTHER 5% REDUCTION ON 3/1/99BY FURTHER 5% REDUCTION ON 3/1/99

RATE REDUCTION FINANCED THROUGH DEBT W/ LOAN RATE REDUCTION FINANCED THROUGH DEBT W/ LOAN REPAYMENT BASED ON FUTURE DISTRIBUTION CO. REPAYMENT BASED ON FUTURE DISTRIBUTION CO. SURCHARGESSURCHARGES

POTENTIAL COMPETITORS: REQUIRED TO COMPETE POTENTIAL COMPETITORS: REQUIRED TO COMPETE AGAINST DISCOUNTED STANDARD OFFER RATES BUT AGAINST DISCOUNTED STANDARD OFFER RATES BUT UNABLEUNABLE TO LIKEWISE IMPOSE LATER SURCHARGE TO LIKEWISE IMPOSE LATER SURCHARGE


Jan. 2000Jan. 2000 Mass. Offers To Residential Mass. Offers To Residential Customers/Percent Of Customers Choosing Customers/Percent Of Customers Choosing

Alternate SuppliersAlternate Suppliers

Source: K. Rose, Source: K. Rose, ELECTRIC ELECTRIC

RESTRUCTURNG RESTRUCTURNG ISSUES FOR ISSUES FOR

RESIDENTIAL RESIDENTIAL AND SMALL AND SMALL BUSINESS BUSINESS

CUSTOMERS, CUSTOMERS, June 2000June 2000


Customer Switching Customer Switching Results In Mass. (4/99 Results In Mass. (4/99

TO 7/01):TO 7/01):What’s The Point?What’s The Point?

Source: Competition and Consumer Protection Perspectives on Source: Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail CompetitionElectric Power Regulatory Reform: Focus on Retail Competition , , Report by the Federal Trade Commission Staff, September 2001Report by the Federal Trade Commission Staff, September 2001


Moral Two: Rate Moral Two: Rate Freezes Can Leave You Freezes Can Leave You

Out In The ColdOut In The Cold FROZEN STANDARD OFFER RATES INTENDED TO FROZEN STANDARD OFFER RATES INTENDED TO HOLD NON-PARTICIPATING CUSTOMERS HOLD NON-PARTICIPATING CUSTOMERS HARMLESS HARMLESS

SUSTAINABLE SO LONG AS FUEL COSTS AND SUSTAINABLE SO LONG AS FUEL COSTS AND PURCHASED POWER COSTS STABLE OR DECLININGPURCHASED POWER COSTS STABLE OR DECLINING

BUT IF COSTS ESCALATE, FREEZE CAN INDUCE BUT IF COSTS ESCALATE, FREEZE CAN INDUCE CUSTOMER BEHAVIOR STRONGLY CUSTOMER BEHAVIOR STRONGLY COUNTERINTUITIVE TO PROMOTING COMPETITIONCOUNTERINTUITIVE TO PROMOTING COMPETITION

CUSTOMERS ARE ENCOURAGED TO “GAME” CUSTOMERS ARE ENCOURAGED TO “GAME” SYSTEM BY SWITCHING BACK TO STANDARD SYSTEM BY SWITCHING BACK TO STANDARD OFFER SUPPLIERS TO MINIMIZE PRICE EXPOSUREOFFER SUPPLIERS TO MINIMIZE PRICE EXPOSURE


The Pennsylvania Case: The Pennsylvania Case: Where Did Everyone Where Did Everyone

Go?Go? RETAIL CHOICE BEGAN SEPT. 1998; FULLY RETAIL CHOICE BEGAN SEPT. 1998; FULLY IMPLMENTED STATEWIDE BY JAN. 2000IMPLMENTED STATEWIDE BY JAN. 2000

RATE REDUCTIONS NOT MANDATED BUT RATE REDUCTIONS NOT MANDATED BUT SOME UTILITIES AWARDED DISCOUNTS SOME UTILITIES AWARDED DISCOUNTS PER SETTLEMENTS (E.G., PECO: 8 % & 6 % PER SETTLEMENTS (E.G., PECO: 8 % & 6 % IN YEARS 1 AND 2, RESPECTIVELY)IN YEARS 1 AND 2, RESPECTIVELY)

LENGTHY STRANDED COST RECOVERY LENGTHY STRANDED COST RECOVERY PERIOD = HIGH HEADROOM, FAVORABLE PERIOD = HIGH HEADROOM, FAVORABLE FOR COMPETITORSFOR COMPETITORS

RATE CAPS FOR GENERATION FIXED AT RATE CAPS FOR GENERATION FIXED AT 1997 LEVELS UNTIL 2006, OR UNTIL 2008-1997 LEVELS UNTIL 2006, OR UNTIL 2008-2011 FOR SOME DISTRIBUTION UTILITIES2011 FOR SOME DISTRIBUTION UTILITIES


WINTER 2000- SPRING WINTER 2000- SPRING 2001: MARKET 2001: MARKET

MELTDOWNMELTDOWN FUEL PRICES SHARPLY ESCALATED ( I.E., FUEL PRICES SHARPLY ESCALATED ( I.E.,

NATURAL GAS = $4.44/MMBTU VS. $ 2.39/MMBTU NATURAL GAS = $4.44/MMBTU VS. $ 2.39/MMBTU IN WINTER 1999IN WINTER 1999

WHOLESALE POWER PRICES INCREASED OWING WHOLESALE POWER PRICES INCREASED OWING TO NATURAL GAS RISE, MAKING ALTERNATIVE TO NATURAL GAS RISE, MAKING ALTERNATIVE SUPPLIERS BEAR COSTS OR PASS THROUGH SUPPLIERS BEAR COSTS OR PASS THROUGH COSTS TO CUSTOMERCOSTS TO CUSTOMER

RESULT: MASS MIGRATION OF “SWITCHING” RESULT: MASS MIGRATION OF “SWITCHING” CUSTOMERS RETURNING TO STANDARD OFFER CUSTOMERS RETURNING TO STANDARD OFFER SERVICE SUPPLIERS WITH FIXED RATES SERVICE SUPPLIERS WITH FIXED RATES


Pennsylvania Pennsylvania Residential Customers Residential Customers

Switching ActivitySwitching Activity

Source: Competition and Consumer Protection Perspectives on Source: Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail CompetitionElectric Power Regulatory Reform: Focus on Retail Competition , , Report by the Federal Trade Commission Staff, September 2001Report by the Federal Trade Commission Staff, September 2001


Penn. Customers Served Penn. Customers Served By An Alternative By An Alternative

Supplier As Of April 2000Supplier As Of April 2000

Source: PA Office of Consumer AdvocateSource: PA Office of Consumer Advocate


Penn. Customers Served By An Penn. Customers Served By An Alternative Supplier As Of July Alternative Supplier As Of July

20012001

* Includes 223,747 residential customers assigned to Competitive Default Service (CDS)



Penn. Customers Served By Penn. Customers Served By An Alternative Supplier As An Alternative Supplier As

Of October 2001Of October 2001

* Includes 242,336 residential customers assigned to Competitive Default Service (CDS)



Percent of Penn. Commercial Percent of Penn. Commercial Customers Served by Customers Served by Alternative SupplierAlternative Supplier

Sources: PA Office of Consumer Advocate and Ken RoseSources: PA Office of Consumer Advocate and Ken Rose


Percent of Penn. Industrial Percent of Penn. Industrial Customers Served by Customers Served by Alternative SupplierAlternative Supplier

Sources: PA Office of Consumer Advocate and Ken RoseSources: PA Office of Consumer Advocate and Ken Rose


Any Good News?Any Good News?

MARKET APPEARS TO HAVE STABILIZED OVER MARKET APPEARS TO HAVE STABILIZED OVER LAST FEW MONTHS LAST FEW MONTHS

PA PUC HAS PERMITTED DISTRIBUTION COS. PA PUC HAS PERMITTED DISTRIBUTION COS. TO SET LIMITS FOR CUSTOMER TO RETURN TO TO SET LIMITS FOR CUSTOMER TO RETURN TO STANDARD OFFER SERVICE (E.G., MUST STAY STANDARD OFFER SERVICE (E.G., MUST STAY 12 MONTHS BEFORE SWITCHING BACK)12 MONTHS BEFORE SWITCHING BACK)

PUC ENCOURAGED DISTRIBUTION COS. TO PUC ENCOURAGED DISTRIBUTION COS. TO OFFER SHORTER PERIOD SERVICE W/ OFFER SHORTER PERIOD SERVICE W/ PAYMENT OF MARKET-BASED GENERATION PAYMENT OF MARKET-BASED GENERATION RATESRATES


Any Other Good News?Any Other Good News? TEXAS MAY BE BETTER SITUATED TO AVOID TEXAS MAY BE BETTER SITUATED TO AVOID

THESE FAILURESTHESE FAILURES RATE DISCOUNT NOT AS DEEP AS RATE DISCOUNT NOT AS DEEP AS

MASSACHUSETTS’: 6 PERCENT VS. 10 & 15 MASSACHUSETTS’: 6 PERCENT VS. 10 & 15 PERCENTPERCENT

DURATION OF RATE FREEZE KEYED TO LESSER DURATION OF RATE FREEZE KEYED TO LESSER OF 5 YEARS OR EROSION OF 40 % OF OF 5 YEARS OR EROSION OF 40 % OF DISTRIBUTIONS COS.’ MARKET SHARE FOR DISTRIBUTIONS COS.’ MARKET SHARE FOR RESIDENTIAL AND SMALL COMMERCIAL RESIDENTIAL AND SMALL COMMERCIAL CUSTOMERSCUSTOMERS

““PRICE TO BEAT” CAN BE ADJUSTED FOR GAS PRICE TO BEAT” CAN BE ADJUSTED FOR GAS COSTS AND PURCHASED POWER COSTS UNLIKE COSTS AND PURCHASED POWER COSTS UNLIKE PENNSYLVANIA’SPENNSYLVANIA’S


LessonsLessons ROAD TO HELL PAVED WITH GOOD ROAD TO HELL PAVED WITH GOOD

INTENTIONSINTENTIONS POLICYMAKERS AT A DILEMMA: BY POLICYMAKERS AT A DILEMMA: BY

EXCESSIVELY PROTECTING NON-EXCESSIVELY PROTECTING NON-PARTICIPATING CUSTOMERS, YOU RISK PARTICIPATING CUSTOMERS, YOU RISK KILLING COMPETITION KILLING COMPETITION

WRONGLY DESIGNED DISCOUNTS AND RATE WRONGLY DESIGNED DISCOUNTS AND RATE FREEZES CAN FRUSTRATE EMERGENCE OF FREEZES CAN FRUSTRATE EMERGENCE OF COMPETITIVE MARKETSCOMPETITIVE MARKETS

NUMBERS DON’T LIE: NEW STATE PROGRAMS NUMBERS DON’T LIE: NEW STATE PROGRAMS SHOULD HEED PRIOR MISTAKES, AND DESIGN SHOULD HEED PRIOR MISTAKES, AND DESIGN MARKETS ACCORDINGLY MARKETS ACCORDINGLY


The Federal ResponseThe Federal Response PROPOSED LEGISLATION DOES NOT PROPOSED LEGISLATION DOES NOT

ADDRESS THESE SPECIFIC MARKET ADDRESS THESE SPECIFIC MARKET DESIGN DEFICIENCIESDESIGN DEFICIENCIES

FOCUS IS ON BOLSTERING FOCUS IS ON BOLSTERING FUNCTIONALITY OF WHOLESALE POWER FUNCTIONALITY OF WHOLESALE POWER MARKETS AND ELIMINATING BARRIERS MARKETS AND ELIMINATING BARRIERS FOR INCREASED GENERATION FOR INCREASED GENERATION

PROPOSALS BY CHAIRS OF SENATE PROPOSALS BY CHAIRS OF SENATE COMMITTEE ON ENERGY & NATURAL COMMITTEE ON ENERGY & NATURAL RESOURCES (BINGAMAN) AND HOUSE RESOURCES (BINGAMAN) AND HOUSE SUBCOMMITTEE ON ENERGY & AIR SUBCOMMITTEE ON ENERGY & AIR QUALITY (BARTON)QUALITY (BARTON)


Senate and House Senate and House Proposals On Proposals On TransmissionTransmission

EXTEND FERC OPEN ACCESS JURISDICTION TO ALL EXTEND FERC OPEN ACCESS JURISDICTION TO ALL TRANSMITTING UTILITIES, INCLUDING MUNIS ,COOPS, & TRANSMITTING UTILITIES, INCLUDING MUNIS ,COOPS, & FPA’S: BOTH, BUT BARTON ALLOWS M’S & C’S TO SET OWN FPA’S: BOTH, BUT BARTON ALLOWS M’S & C’S TO SET OWN RATES W/FERC REVIEW RATES W/FERC REVIEW

FERC AUTHORITY TO ORDER UTILITY TO JOIN RTO: BOTHFERC AUTHORITY TO ORDER UTILITY TO JOIN RTO: BOTH FERC JURISDICTION OVER ALL RETAIL TRANSMISSION; YES FERC JURISDICTION OVER ALL RETAIL TRANSMISSION; YES

UNDER BINGAMAN, BARTON OPEN TO PROPOSALS FROM UNDER BINGAMAN, BARTON OPEN TO PROPOSALS FROM STAKEHOLDERS & MEMBERSSTAKEHOLDERS & MEMBERS

FERC EMINENT DOMAIN SITING AUTHORITY: RTO CAN USE FERC EMINENT DOMAIN SITING AUTHORITY: RTO CAN USE FERC BACK-UP AUTHORITY (BINGAMAN) ; FERC AUTHORITY FERC BACK-UP AUTHORITY (BINGAMAN) ; FERC AUTHORITY IF STATES NOT RESPONDING IN 12 MONTHS OR PROPOSAL IF STATES NOT RESPONDING IN 12 MONTHS OR PROPOSAL REJECTED AS NOT IN PUBLIC INTEREST (BARTON)REJECTED AS NOT IN PUBLIC INTEREST (BARTON)


Senate and House Senate and House Proposals On Electric Proposals On Electric

Supply IssuesSupply Issues INTERCONNECTION STANDARDS: BOTH INTERCONNECTION STANDARDS: BOTH

GIVE FERC AUTHORITY TO ORDERGIVE FERC AUTHORITY TO ORDER ADVANCED METERING: BARTON SEEKING ADVANCED METERING: BARTON SEEKING

PROPOSALSPROPOSALS FERC MERGER REVIEW: BINGAMAN FERC MERGER REVIEW: BINGAMAN

STREGTHENS, BARTON REPEALS (DEFERS STREGTHENS, BARTON REPEALS (DEFERS TO FTC & JUSTICE)TO FTC & JUSTICE)

RELIABILITY: BOTH GIVE FERC OVERSIGHT RELIABILITY: BOTH GIVE FERC OVERSIGHT OF ORGANIZATION SETTING MANDATORY OF ORGANIZATION SETTING MANDATORY STANDARDS (I.E., NERC)STANDARDS (I.E., NERC)


Prognosis For Prognosis For Comprehensive Federal Comprehensive Federal

Legislation?Legislation? CROWDED CROWDED

CONGRESSIONAL CONGRESSIONAL AGENDA OWING TO AGENDA OWING TO WAR & NATIONAL WAR & NATIONAL SECURITY ISSUESSECURITY ISSUES

DRILLING IN ARCTIC DRILLING IN ARCTIC NATIONAL WILDLIFE NATIONAL WILDLIFE REFUGE STILL MAJOR REFUGE STILL MAJOR STICKING POINTSTICKING POINT

BUT ENERGY & BUT ENERGY & SECURITY LINK SECURITY LINK GROWINGGROWING


For More Information Contact:For More Information Contact:

The Gee Strategies GroupThe Gee Strategies GroupRobert W. GeeRobert W. Gee

PresidentPresident1954 N. Cleveland St.1954 N. Cleveland St.Arlington, VA 22201Arlington, VA 22201

(703) 465-9181 (voice and fax)(703) 465-9181 (voice and fax)(703) 593-0116 (mobile)(703) 593-0116 (mobile)

Email: [email protected]: [email protected]

Documents

THE GEE STRATEGIES GROUP Robert W. Gee President Electric Deregulation Begins January 1, 2002 January 1, 2002 Is Your Company Ready? Ft. Worth, Texas November