Midwest Demand Response Initiative Kick-off Meeting Bob Lieberman, Commissioner, Illinois Commerce Commission John Norris, Chairman Iowa Utilities Board February 9, 2007 Chicago, IL

My lawyer told to be to say... My thoughts today are mine alone and do not necessarily reflect the positions of the Illinois Commerce Commission on any of the issues discussed today

Prologue Weather Adaptability Acknowledgements

The Challenge: Organized wholesale electricity markets are a whole new ballgame and almost no one truly understands them The early constructs that wholesale markets could be competitive without significant price response from the demand side were simply wrong Alice laughed, “There’s no use trying,” she said, “one can’t believe impossible things.” “I daresay you haven’t had much practice.” said the Queen. “When I was your age, I always did it for half-an-hour a day. Why, sometimes I’ve believed as many as six impossible things before breakfast.” Lewis Carroll Through the Looking Glass 1871

Organized wholesale electricity markets work, but... It’s hard to call them “competitive” when demand does not respond to price Price and costs will be significantly higher than they otherwise should be without significant price response from the demand side Without significant price response, suppliers do have market power

As a result, today’s wholesale market requires additional regulation and bureaucratic constraints The shift of regulatory authority has – for the most part - already occurred—from states to the FERC Organized wholesale electricity markets have had to resort to a wide range of administrative “meddling” –Capacity markets (RPM, etc.) –Artificial price caps A price responsive load will minimize the amount of Federal regulation required and lower costs customers pay

Whose job is it to solve the problem? Neither FERC nor RTOs can create a robust price response retail market Retail pricing is the sole responsibility of state regulators State regulators are concerned about the introduction of price responsive retail markets, even if they would result in lower prices

What will happen if the problem is not solved? Customers will pay for new capacity through higher prices This will occur in both vertically integrated and restructured states A price responsive load across the region will significantly reduce the costs for new capacity that customers will face as well as the operating costs.

The recipe for state/retail regulatory inaction Unlike Texas or New York, MISO is comprised of 15 states and one Canadian province Conventional wisdom is that individual state actions to create price response will have only a small effect, if any, and the benefits will flow across state boundaries. –Free rider problems, real or imagined, inhibits individual state action States need to work together to effectively discipline the wholesale market –Neither Commissioners nor Commission Staffs have the resources or knowledge to figure this out alone –This is not intuitive 2007 Electric Regions MISO Source: FERC Website

We need to work together to get the benefits of competitive wholesale markets We need a price-responsive retail market that will: –Discipline existing wholesale markets and lower LMP prices/bilateral contracts (market power mitigation) –Reduce the need for costly future generation (planning reserve margin issue) –Improve reliability –Save customers money –Reduce regulation instead of simply shifting it from states to regional organizations

The current MISO base case assumes a 1.75% growth in both demand and energy Preliminary MISO analysis –Base case analysis 1.75% growth demand and energy PV cost $282 billion –$39 billion capital costs –$243 billion production costs –Environmental Base Case ($25/ton carbon tax) PV cost $408 billion –$64 billion capital costs –$344 billion production costs Source: MISO ISO Transmission Asset Management

A reduction in the rate of growth for both energy and demand from 1.75% to 1.5% results in –Savings of $11.1 billion $5.9 billion capital costs $5.2 billion production costs A reduction in the rate of growth for both energy and demand from 1.75% to 1.25% results in –Savings of $21.8 billion $14.5 billion capital costs $7.3 billion production costs A reduction in the rate of growth for both energy and demand from 1.75% to 1.0% results in –Savings of $31.8 billion $20.4 billion capital costs $11.4 billion production costs Small reductions in the rate of growth of demand and energy produce significant and dramatic cost savings Source: MISO ISO Transmission Asset Management

A reduction in the rate of growth for both energy and demand from 1.75% to 1.5% results in –Savings of $17.1 billion $8.0 billion capital costs $9.1billion production costs A reduction in the rate of growth for both energy and demand from 1.75% to 1.25% results in –Savings of $35.0 billion $24.5 billion capital costs $10.6 billion production costs A reduction in the rate of growth for both energy and demand from 1.75% to 1.0% results in –Savings of $51.22 billion $33.1 billion capital costs $18.1 billion production costs Source: MISO ISO Transmission Asset Management The savings are even more pronounced in under the environmental scenario--$25/ton carbon tax

Midwest Demand Responsive Initiative Goals –To create the knowledge base among Midwestern regulators, staff and stakeholders to build a price-responsive retail market –To build the will to do better Expected outcomes –Create the tools necessary to imagine, visualize and value a robust price responsive retail market –Estimate the value of implementing such a retail market, from a price, cost and resource adequacy perspective –Inventory current status of price-responsive programs in the region –Create prototype program and rate design options to help state regulatory commissions achieve MWDRI objectives –Develop consensus for state advocacy to align wholesale market value with retail price-responsive initiatives –Develop consensus strategies for regional and state implementation