COMPETITIVE ELECTRICITY MARKETS March 15, 2011

PA Customer Choice Legislation  Distribution service remains regulated by PAPUC.  Transmission service regulated by FERC [PJM tariff]. Transmission service essentially a pass- through cost for supply service  Generation - major component of supply service. “Unregulated” in PA  Administrative costs for providing supply service [back-office trading, hedging, systems, credit, working capital, etc]. 2

Price to Compare (PTC)  Includes generation, transmission and administrative costs of providing supply service.  Provides apples to apples comparison for consumers  PAPUC provides website for PTC comparison for competitive suppliers and utility default supply service. 3

Retail Rate Design  Policy Drivers – (1) incentives for energy efficiency, and (2) ease of price comparisons.  PAPUC Policy – simple cents/kwh rate.  Minimize or phase out declining block rates and demand rates.  With smart meters – evolution towards Time of Use or dynamic rates [Critical Peak Pricing, Critical Peak Rebates, Time of Use, Day Ahead hourly pricing, and Real time hourly pricing].  EGSs can customize their pricing structures to fit their customer needs. 4

Wholesale Rate Design  Energy – Locational Marginal Price [LMP]; bilateral contracts, hedges, etc.  Capacity – Each customer assigned a peak load contribution (PLC); demand-based determinant based on customer usage during the 5 highest hours of usage in PJM.  Ancillary services – demand and energy based charges; minor cost element  Transmission – Network Integrated Transmission Service; demand charge based on customer usage during highest hour of usage in each EDC service territory. 5

Competitive Markets Segments  Electricity Supply  Curtailment/Conservation Service Providers  Meter Service Providers  Billing Service Providers  Future – EV charging stations? 6

Customer Markets Segments  Default Service Customer Segments – residential, small commercial [ 500kw]  Distribution/Transmission Service – residential [heating and non-heating], small commercial [secondary], non-profits, and primary and sub- transmission industrial customers], lighting.  Economic Riders – generally just distribution cost discounts now [not supply cost discounts] – often related to promoting local employment/industry.; Can be related to competitive fuel competition. 7

Cost Unbundling Decisions  Generation costs  Transmission costs  Procurement costs  Working capital costs  Bad debt expense costs  Billing and collection costs  Overall – incremental vs. full cost 8

Licensing/Regulation  Electric Generation Suppliers [EGSs – regulated by PAPUC and PJM].  Conservation Service Providers [CSPs participating in utility energy efficiency programs – registered with PAPUC]  Curtailment Service Providers [PJM].  Metering Service Providers – EDC oversight, requirements included in EDC tariffs.  Billing Service Providers – no experience yet with EDCs. Some EGSs may use them. 9

Regulation 10 Wholesale Markets – FERC  FERC regulates via PJM tariffs in Pennsylvania  FERC regulates wholesale generators, transmission service, and various related ancillary services [black start, reserves, frequency regulation, and administration of wholesale markets]  FERC regulation entails market power mitigation of market-based services [generation], and regulation of cost-based services [transmission]. State - PAPUC  Cost based regulation of distribution service.  Approve default supply service procurement plans of EDCs.  Lighter regulation of EGSs – don’t regulate contract pricing, only certain consumer protection aspects of supply service.

EGS Regulations 11 EGS Consumer Protection Regulations [Chapter 54, subchapter A, Sections ]  Mostly applicable only to residential and small business customers.  Standardized industry terms must be used.  Bill format requirements  Contract content and disclosure requirements  Informational disclosure requirements  Marketing and sales requirements  Customer information privacy requirements  Complaint handling requirements EGS Licensing Regulations – [Chapter 54, Subchapter B, Sections ]. EGS transfers of customers to default supply service regulations. [Section ] EGS Reporting Requirements – Sales Activity [Chapter 54, Subchapter H, Sections ] License Application: * EGSs must execute certain documents and meet credit requirements to transact in wholesale markets pursuant to PJM tariffs and operating agreements.

EDC Regulations -Retail Choice 12  Code of Conduct [deals with equal treatment of affiliated and non-affiliated EGSs]  Quarterly Retail Choice Reporting Requirements  Prohibition on switching restrictions from EDC default supply service to competitive EGS supply service.

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