Retail Competition: Managing a Difficult Transition David L. O’Connor Commissioner Massachusetts Division of Energy Resources (DOER) Presentation to National Governor’s Association Executive Policy Forum on Electric Restructuring April 6, 2001 t:\pub_info\presentations\restructuring\NGA April 6, 2001.ppt

Restructuring Goals in Massachusetts n Reduce electricity prices to all customers n Provide choice of supplier to all customers n Maintain the reliability of the electric system n Maintain the quality of regulated services

Settlements, then the Law n Roundtable Negotiations 1995 n “Power Choice” 1996 n MECo Settlement 1996 n BECo & EUA Settlements 1997 n Legislation 1997 n Retail Access Day March 1, 1998

Key Provisions of Massachusetts Act n 10/15% Rate Reduction n Choice of Power Supplier n Stranded Cost Recovery n Standard Offer and Default Service n Public Benefit Programs n Consumer Protection and Education n Power Plant Siting

Results So Far n Consumers Saved at Least $1.5 Billion n Utilities Divested 90% of Plants n Stranded Costs Reduced by 30% n Consolidation of Distribution Companies n Many new Power Plants being Built n Retail Market Developing Very Slowly n Competitive Suppliers Focused on Large C & I n Municipal and Other Aggregation Groups Formed

Standard Offer Service n Power supplied to eligible customers at “fixed” rates n Price at least 10% lower than pre-restructuring n Generation costs increase / stranded costs decrease n Customer may choose competitive supplier any time n Recent price increases due to fuel costs n Ends in 2005

Massachusetts Standard Offer Prices Are Low But Going Up Source: National Grid Cents/kWh

Standard Offer with Fuel Adjustment Source: DOER/Distribution Company Filings

Standard Offer and Stranded Costs Source: DOER/Distribution Company Filings

Default Service n Provides any customer with power at any time n New customers; returns from competitive suppliers n Through Dec. 2000: equal to Standard Offer price n January 2001: “average monthly market price” n Power supply purchases on 6 and 12 month basis n Continues indefinitely

Default Service Prices Are Going Up Too Source: WMECo 2000 Reconciliation Filing & DOER Wholesale Generation Default Service Retail (Residential)

What Massachusetts is Trying to Do n Increase retail response to peak prices n Diversify utility power purchases to hedge price risk n Help retail suppliers reach default customers

Energy Efficiency and Load Management Reduce Clearing Prices Source: ISO-NE, DOER Analysis Wholesale Prices would have been considerably higher on June 7, 1999 without the benefits of Load Management and Energy Efficiency

New England Demand Response Program Summer 2001 n Up to 600 MW of reductions (2.5% of peak) n 3,000 to 5,000 large C&I customers n Demand reduction or distributed generation qualify n ISO-NE pays Load Servers (LSE’s) who pay customers n LSE’s paid “reserves” price for all hours n LSE’s paid “energy” price for dispatched hours

Differences in Utility Power Supply Purchasing Summer 2000 Contracts, Own Generation (%) Spot Market (%) California New England Source: Anjali Sheffrin, Presentation: CMR-Global Market Power Mitigation, October 4, 2000

Changes to Default Service Procurement Monthly Prices Average Price Cents/kWh Source: MECO Filings with MA DTE

Default Service Customers Are Increasing Source: DOER Customer Migration Numbers

Distribution Companies Co-Market with Retail Suppliers Distribution Company Default Service Customers Wholesale Suppliers Retail Suppliers

Reports and Information Available at DOER Website: n Customer Migration Data n 1998 Market Monitoring Report n 1999 Market Monitoring Report