Dynamic Pricing, Tariffs, and Price Responsive Demand Programs Real Time Pricing at Georgia Power Company and Duke Power Company Michael T. O’Sheasy Christensen Associates September 9, 2002

September CHRISTENSENASSOCIATES Topics  What is RTP and What are the Benefits?  RTP at Georgia Power Company and Duke Power Company  Why does an RTP Product make sense (and cents)?  Features of a Two-Part RTP and resultant prices  Price Response and Market Effects  PPP and Portfolio Pricing

September CHRISTENSENASSOCIATES An electricity rate structure in which retail energy prices: Vary frequently (e.G., Hourly), With short notice (e.G., Hour-ahead or day- ahead), To reflect expected hourly costs It can mimic an open market and market prices What is Real-Time Pricing?

September CHRISTENSENASSOCIATES Benefits from a Real-Time Pricing Program  Improved system reliability  Reduced wholesale price volatility  Less reliance on outside (high-priced) power purchases  Typical utility will achieve, at least cost, a “virtual generation” asset to achieve about 5% of total system load requirements in critical hours (about 20% load response of load participants total load)

September CHRISTENSENASSOCIATES Benefits from a Real-Time Pricing Program  Customer satisfaction — Provides open access to market — Two-part structure limits price risk exposure  Facilitates economic growth — Industrial/commercial customers on RTP grow faster — Growth tends to occur off-peak — Utilities “earnings before income taxes” may increase  RTP customers have incentive to innovate with economic energy efficiency programs/devices

September CHRISTENSENASSOCIATES The Duke Program  Program Began Fall of 1993  Currently 53 Customers  Average Prices — Transmission $.034 — Distribution $0.04  Demand Reduction 200 mW at High Prices  Two-Part Tariff Design  Program Began Fall of 1993  Currently 53 Customers  Average Prices — Transmission $.034 — Distribution $0.04  Demand Reduction 200 mW at High Prices  Two-Part Tariff Design

September CHRISTENSENASSOCIATES Price Responsive Customers  Universities with Generators  Textile and Chemical Fiber Plants with Generators  Large Paper Manufacturer with Grinders  Steel Mill and Electrode Manufacturer Each with an Arc Furnace  Brewery with Generator  Food Processor with Generator  25 Customers Identified as Price Responsive

September CHRISTENSENASSOCIATES Typical Duke Prices on High Price and Average Price Day Hours $/mWh

September CHRISTENSENASSOCIATES RTP in the State of Georgia Year 2001  Largest Program in the World  > 1600 Customers — > 5,000 MW — > $1 billion revenue  IRP Resource  Price Protection Products

September CHRISTENSENASSOCIATES Real-Time Pricing for GPC  Two-part tariff design  Day-ahead RTP — 250 kW minimum  Hour-ahead RTP — 5 MW minimum

September CHRISTENSENASSOCIATES GPC Philosophy on RTP 1. RTP is the marginal cost of providing electricity Lambda Losses Marginal Cost of Transmission Outage/ct Cost Risk Adder

September CHRISTENSENASSOCIATES 2.Powerful Product in a supplier’s Pricing Portfolio Customers Satisfaction Economic Development Customer Choice Constant Profit Contribution per kWh Credits below CBL GPC Philosophy on RTP

September CHRISTENSENASSOCIATES Why is There a Need for RTP? 1. Product characteristics create risk 2. Many customers have on- site flexibility which can manage risk Expected Ave ¢/KWH Hours Target Customers Load Shape KW Off Peak On Peak Target Customers Actual Load Shape Target Customers Forecasted Load Shape On peak and off peak prices* based upon forecasted load shape On peak and off peak prices* based upon actual load shape Hours ¢/KWH TOU Prices Scenarios *Assume Actual Hourly Prices equal Forecasted Hourly Prices

September CHRISTENSENASSOCIATES Risk on Seller 100%, 100% 100% 0 HUD CED TOU 1 Part RTP 2 Part RTP Curtailable Energy Load Shape Risk on Seller Cost Risk on Seller Flat Bill Flat Energy

September CHRISTENSENASSOCIATES

September CHRISTENSENASSOCIATES Features of “Two-Part” RTP  Customer pays for a baseline level of usage (e.g., recent historical usage) at standard tariff prices. Customer is revenue neutral at baseline usage.  Differences in usage from the baseline (increases or decreases) are billed at RTP prices.  Demand response benefits the RTP customer, the utility, and all other customers.

September CHRISTENSENASSOCIATES Two-Part RTP Bill Customer’s bills change from their “Standard” Bill only when they change their hourly loads from the “Baseline” load shape RTP Bill = Standard Bill Load Hour + M.C. Hour x 

September CHRISTENSENASSOCIATES MWh 1 24 Actual load Customer “sells” load at high RTP prices Customer “buys” load at low RTP prices CBL Hour of Day Example of Incremental Energy Charges (Relative to Baseline)

September CHRISTENSENASSOCIATES Economy Weather Fuel Price Unit Availability Tie Lines Wholesale Market RTP Prices Factors with Major Influence on RTP Prices

September CHRISTENSENASSOCIATES Typical RTP-DA Prices *Hour at end of interval HR*cent/kWhstatus A A A A A A A A HR*cent/kWhstatus A A A A A A A A HR*cent/kWhstatus A A A A A A A A

September CHRISTENSENASSOCIATES  Portion of customers found to respond significantly to RTP prices: 60-75%  Range of flexibility parameters: (Approximately equal to negative of own- price elasticity) A short-period price spike of 10 to 20 times the typical price can yield load reductions of 10 to 20% (e.g., 150 MW from 1,000 MW of load) Do Customers Respond to RTP? Summary of Findings

September CHRISTENSENASSOCIATES Typical Load Response Increased Usage in All Hours 0:004:008:0012:0016:0020:00 24: Increased Usage In Low-Priced Hours and No Response in High-Price Hours (Hiding behind the Baseline Load) 0:00 4:00 8:00 12:0016:0020:0024:

September CHRISTENSENASSOCIATES Demand Profile

September CHRISTENSENASSOCIATES Actual kWCBL kWCents/kWh Demand Profile

September CHRISTENSENASSOCIATES Distribution of RTP Price Elasticities SIC 20 Food Products

September CHRISTENSENASSOCIATES Distribution of RTP Price Elasticities Commercial Office Buildings

September CHRISTENSENASSOCIATES Distribution of RTP Price Elasticities Schools and Universities

September CHRISTENSENASSOCIATES Distribution of RTP Price Elasticities Supermarkets

September CHRISTENSENASSOCIATES Load at highest prices Highest prices Reference Load Load at moderate prices Reference prices Moderate prices RTP-DA Prices and Load Response, by Price Day-type

September CHRISTENSENASSOCIATES Price/Load Response RTP-DA

September CHRISTENSENASSOCIATES Load at highest prices Highest prices Reference Load Load at moderate prices Reference prices Moderate prices RTP-HA Prices and Load Response, by Price Day-type

September CHRISTENSENASSOCIATES Price/Load Response RTP-HA

September CHRISTENSENASSOCIATES Predicted Load Curve Impact

September CHRISTENSENASSOCIATES Load Changes in All Hours Price Change Hour 17 Only Original Load New Load

September CHRISTENSENASSOCIATES Look at Price Responsive Customers Average Load Price Response 497 mW 347 mW Note: Price Response on High Price Days for 24 Customers $0.20 $0.047 Load Drops 150 mW Morning to Afternoon of High Priced Day

September CHRISTENSENASSOCIATES Implications for Demand-Side Strategies market prices sensitive to demand at high demand levels (elasticity  12) $70, Retail Retail Demand MWs $400 $200 Supply Demand response – e.g., RTP – an essential market feature

September CHRISTENSENASSOCIATES Expected Load Changes

September CHRISTENSENASSOCIATES What Customers Like About RTP  Access to competitive market prices  Low expected energy cost  Certainty of cost of consumption changes

September CHRISTENSENASSOCIATES What Do Customers Think?  This chemical company’s threshold is around the 6¢/kWh range. At times they will “buy through” some higher priced hours when they have to meet a customer’s order. They love the rate.  This mining company responded heavily to pricing in July. When the price were over 20¢/kWh, they would curtail below their threshold by a couple of mW.

September CHRISTENSENASSOCIATES What Do Customers Think?  This wood product company break point is around 3.0 cents per kWh. At 3.0 cents or lower, they maximize RTP purchases. At 8.0 cents per kWh, they maximize self generation.  This aggressive commercial facilities manager cuts back florescent fixtures by 1/3, adjusts thermostat, reduces chillers in the afternoon, turns down water heating, and allows the temperature to float on chilled water loop.

September CHRISTENSENASSOCIATES Why Offer RTP?  Lowest priced product based upon sound risk principles  Provides a connection between wholesale and retail energy markets — Retail prices reflect wholesale costs — Demand response to high prices provides needed capacity relief and reduces wholesale prices — Mitigates market power

September CHRISTENSENASSOCIATES Why Two-Part RTP Works  Fundamentally sound market design. Two-part RTP has the same basic structure common to all other commodity markets (future/forward contracts and settlement at spot)  Incremental/decremental load priced at RTP induces efficient consumption/curtailment  The CBL priced at standard tariff provides customer a hedge against price risk without sacrificing efficiency  Voluntary and simple

September CHRISTENSENASSOCIATES Wholesale Markets Employ Vehicles to Mitigate Risks  Few can tolerate the level of price risk; forwards and options essential to electric markets PRICES DAYS $140 $ 30 $ 18 SPOT FORWARD

September CHRISTENSENASSOCIATES Price Protection Products  Allows RTP customer to manage RTP price risk and volatility  Financial hedge contracts that lock in a price for a specific time period

September CHRISTENSENASSOCIATES  CAPS, Collars, Indexes, and Contracts for Differences (CfD’s)  Customer still benefits by reducing load in response to high RTP prices in specific hours Price Protection Products

September CHRISTENSENASSOCIATES CfD Example:

September CHRISTENSENASSOCIATES Settlement for High Average Price: = ( ) * 744,000 = $29,760. GPC pays Customer $29,760. -OR- Settlement for Low Average Price: = ( ) * 744,000 = ($14,880). Customer pays GPC $14,880. CfD Example:

September CHRISTENSENASSOCIATES Real Time Pricing Summary Benefits Coupled with PPP  Participants — Provides industrial and commercial customers the cost-based pricing they want and gives them more control over their bill and lower unit costs  Non-participants — Protects them from revenue erosion and benefits them by allowing Utility to operate more efficiently at a lower cost to all ratepayers

September CHRISTENSENASSOCIATES  Utility Company — Provides more efficient pricing and a more competitive position  State — Attracts new business and rewards business expansion, resulting in increased employment and tax revenues Real Time Pricing Summary Benefits Coupled with PPP

September CHRISTENSENASSOCIATES Portfolio Pricing on Risk Principles: Expected Customer Cost vs. Price Risk Profile FIP RTP-DA VIP RTP w/ Adjustable CBL RTP w/ PPP RTP-HA PLL