Met-Ed and Penelec’s 2011 to 2013 Default Service Program: The May 2010 Solicitation Chantale LaCasse, Senior Vice President, NERA Amparo Nieto, Senior Consultant, NERA Kush Patel, Consultant, NERA 15 April 2010

2 Met-Ed and Penelec Default Service Program Agenda  Overview of Met-Ed and Penelec’s Default Service Program  Key Elements of the May 2010 Solicitation  Products and Supplier’s Business Opportunity  Auction Rules  Proposal Submission Process for the May 2010 Solicitation

3 Met-Ed and Penelec Default Service Program Disclaimer  Any statements describing or referring to documents and agreements are summaries only, and are qualified in their entirety by reference to such documents and agreements  The governing documents are:  Joint Petition for Settlement of Metropolitan Edison Company (“Met- Ed”) and Pennsylvania Electric Company (“Penelec”) for their Default Service Programs (Docket Nos. P and P )  Metropolitan Edison Company/Pennsylvania Electric Company Default Service Program Fixed Auction Process and Rules  Metropolitan Edison Company/Pennsylvania Electric Company Default Service Program Hourly Auction Process and Rules  Met-Ed and Penelec Default Service Supplier Master Agreements for the Residential, Commercial, and Industrial Customer Classes

4 Met-Ed and Penelec Default Service Program Overview of the Program

5 Met-Ed and Penelec Default Service Program Met-Ed and Penelec’s Default Service Program  Met-Ed and Penelec filed their Default Service (“DS”) Program on February 20, 2009 to procure power from those customers that do not choose service from an Electric Generation Supplier (“EGS”)  The DS program starts when generation rate caps expire on January 1, 2011 and ends on May 31, 2013  The Pennsylvania Public Utility Commission (“PaPUC”) approved the Petition for Settlement on Nov 6, 2009:  NERA’s role is to serve as the Independent Evaluator as well as the interface between Bidders and the Companies

6 Met-Ed and Penelec Default Service Program The Met-Ed and Penelec’s DS Program is Comprehensive  The Program covers three classes of customers for each Company  Residential or R Class; Commercial or C Class (up to 400 kW); Industrial or LI Class (above 400 kW)  Specifies three bidding processes for different portions of the supply  Full requirements products (energy, capacity, ancillary services, applicable Transmission Services, any other service as required by PJM) through descending clock auctions  T wo parallel procurement processes as part of the same DS program:  RFPs to obtain Solar Photovoltaic Alternative Energy Credits (“SPAECs”) over a 10 year period (will be available to DS Suppliers to satisfy their solar requirements under the AEPS Act)  RFPs for block power supply products

7 Met-Ed and Penelec Default Service Program How Many Solicitations and When  Four solicitations are planned every year in January, March, May, and October, allowing price diversity in the supply base  All solicitations have a Fixed Auction while the Hourly Auction is held once a year 2010FixedHourly2011FixedHourly2012FixedHourly Jan Jan Jan Mar Mar Mar May May May Oct * Oct *Solicitation for Fixed Price Industrial product

8 Met-Ed and Penelec Default Service Program Two Different Auctions For Two Different Price Plans  Fixed Auction is for a fixed price plan  Industrial opt-in: payments and rates based on the final auction price  Residential:  Stub period: payments and rates based on the final auction price for 95% and the real time PJM price and a fixed $9/MWh adder for 5% for each MWh served  Starting June 1, 2011: 100% fixed at the final auction price  Commercial: payments and rates based on the final auction price for 90% of each MWh served and is paid the real time PJM price and a fixed $9/MWh adder for 10%  Hourly Auction is for service priced to the hourly market  Industrial: payments and rates based on the final auction price, the real-time PJM price, and a fixed $2 adder

9 Met-Ed and Penelec Default Service Program What Portion of Supply Is at Auction: Residential and Commercial  100% in the stub period from January 1, 2011 to May 31, 2011  For the remainder of the Program term: Residential Class 75% full requirements supply through the Fixed Auction 25% block energy through RFP with Company balancing and other components from PJM markets Commercial Class 100% full requirements supply through the Fixed Auction

10 Met-Ed and Penelec Default Service Program What Portion of Supply Is at Auction: Industrial customers Industrial Class Full requirements supply for the remainder through the Hourly Auction Up to 50 MW supply through the Fixed Auction to customers that affirmatively enroll  Industrial Class straddles the two Auctions

11 Met-Ed and Penelec Default Service Program Auction Web Site  Auction web site will be your main source of information:  Web site includes:  All solicitation documents and forms  Relevant Commission decisions  Data Room  Link to submit questions  Frequently Asked Questions page  Please direct all questions relating to the Auctions to NERA and not to FirstEnergy personnel

12 Met-Ed and Penelec Default Service Program Key Elements of the May 2010 Solicitation

13 Met-Ed and Penelec Default Service Program Main Features of the Auction 1.A Fixed Auction with a descending-clock format 2.Residential and Commercial products, each with three dimensions:  the Company  the Class  the supply period 3.Each Class DS load divided into “tranches”  A tranche represents a fixed share of load for the Class  Sized to approximately 50 MW

14 Met-Ed and Penelec Default Service Program What’s New in the May 2010 Solicitation  New products. In addition to the 5-month products for the stub period, Auction procures supply for:  Residential 24-month (June 1, 2011 to May 31, 2013)  Commercial 12-month (June 1, 2011 to May 31, 2012)  There will be a total of eight products in the Auction  Different payment basis for the Residential Class. In the stub period payments based on final auction price for 95% while for the 24-month contract the payment is based on final auction price for 100%

15 Met-Ed and Penelec Default Service Program What’s New in the May 2010 Solicitation  Seasonal Factors. Suppliers paid on the basis of Auction price that is adjusted seasonally  Seasonal factors for period starting June 1, 2012 may be updated in May 2011 SeasonPeriodsSeasonal Factor Winter Jan 1-May 31, Oct May 31, 2012 Oct May 31, 2013 Summer Jun 1-Sept 30, Jun 1-Sept 30, 2012

16 Met-Ed and Penelec Default Service Program The Products of the May 2010 Fixed Auction Products, Tranche Targets and Load Caps May 2010 Solicitation ProductSupply Period Total No. Tranches Load Cap Tranche Size (%) Met-Ed R-5 Jan 2011 – May Met-Ed R-24Jun 2011 – May Met-Ed C-5Jan 2011 – May Met-Ed C-12Jun 2011 – May Penelec R-5 Jan 2011 – May Penelec R-24Jun 2011 – May Penelec C-5Jan 2011 – May Penelec C-12Jun 2011 – May Total4026

17 Met-Ed and Penelec Default Service Program Auction Format is a Clock Auction  Multi-product design  Tranches for both Met-Ed and Penelec are procured at once  Multi-round design  Suppliers state how many tranches they want to supply at prices suggested by the Independent Evaluator  Prices tick down if there is excess supply  Suppliers could switch their bids from one product to another in a given Auction  All in price in $/MWh

18 Met-Ed and Penelec Default Service Program Fixed Auction Example: Prices Tick Down When There Is Excess Supply Round 1 Product Price ($/MWh) ME-R ME-R ME-C ME-C #bid#to buy Excess Supply Oversupply Ratio PN-R PN-R PN-C PN-C Round 2 Start Price

19 Met-Ed and Penelec Default Service Program Fixed Auction Example: Prices Tick Down When There Is Excess Supply Round 2 ProductPrice ($/MWh) ME-R ME-R ME-C ME-C #bid#to buy Excess Supply Oversupply Ratio PN-R PN-R PN-C PN-C

20 Met-Ed and Penelec Default Service Program Commission Has Approved the SMAs  Different Supplier Master Agreement (“ SMA”) for each Class and Company  The parties to the SMA are the Company and the Default Service Supplier  Participants in the proceeding had the opportunity to submit comments and to propose modifications  Final Agreements are approved by the PaPUC and are non-negotiable

21 Met-Ed and Penelec Default Service Program May 2010 Auction Timeline MondayTuesdayWednesdayThursdayFriday April Webcast 16 Initial Alternate Guaranty Form Final Decision on Alt Guaranty MAY May 5 Part 1 Date Bidders Qualified Bidder Training 17May 18 Part 2 Date Bidders Qualified May 24 AUCTION BEGINS

22 Met-Ed and Penelec Default Service Program Commission Will Consider Auction Results  Independent Evaluator will submit a report the day after bidding closes  Commission will consider the results of the Auction within one business day  Either all results are approved (for both Companies and all Classes) or all results are rejected

23 Met-Ed and Penelec Default Service Program SMA Execution and Beyond  If Commission accepts the results, SMAs executed within three business days  If any security is required under the creditworthiness standards of the Agreement, it is posted upon execution of the Agreement  Any financial guarantees submitted as part of the Proposal process are returned to the Supplier

24 Met-Ed and Penelec Default Service Program Supplier’s Role and Standard Contract

25 Met-Ed and Penelec Default Service Program What is a Tranche?  A tranche is a set percentage of a Company’s Default Service load for a Class (Residential, Commercial, or Industrial)  Winning suppliers will be serving the tranches of DS Supply for a specific Company and Class  Loads upon which Suppliers are paid are adjusted for losses to the zonal aggregate load bus and de-rated in accordance with PJM’s marginal loss implementation procedures  All Default Service customers are free to come and go from Default Service provided that they give notice at least 16 days before their next scheduled meter reading date

26 Met-Ed and Penelec Default Service Program Each Company will inform PJM of each Supplier’s obligation for each category of ancillary service From PJM perspective, DS Suppliers are “Electric Generation Suppliers” (EGS) and must be registered as Load Serving Entities (LSE) by January 1, 2011 PJM’s Perspective of Suppliers Each Day: Unforced capacity obligation Each Company will inform PJM the DS Supplier Responsibility Share of each Supplier’s Peak Load Capacity obligation, which PJM will use to determine that Supplier’s capacity obligation Each Hour: Energy at zone bus PJM will know each Company’s total zonal energy and each Company will transmit to PJM the share of each EGS and each DS Supplier’s Responsibility Share

27 Met-Ed and Penelec Default Service Program Fixed Auction  Aggregate supply portfolio from wholesale sources  Assess and price load variability, market price volatility and migration risk  Platform for participation in future auctions  Provide price-risk management services Wholesale Sources include: Generation owners in PJM or in adjoining regions, wholesale marketers, financial and OTC power and gas markets, PJM markets, weather derivatives markets Supplier Role and Business Opportunity

28 Met-Ed and Penelec Default Service Program Key Elements of Credit Provisions of SMAs  Security requirements are on a sliding scale on the basis of credit ratings and Tangible Net Worth (“TNW”)  Minimum Rating to obtain unsecured credit line is BB- from S&P / Fitch and Ba3 from Moody’s Credit Rating of Default Service Supplier Max. Credit Limit (lesser of the % of TNW and credit limit cap below) S&PMoody’sFitch% of TNWCredit Limit Cap BBB+ and above Baa1 and above BBB+ and above 16% of TNW$75,000,000 BBBBaa2BBB10% of TNW$50,000,000 BBB-Baa3 BBB-8% of TNW$25,000,000 BB+Ba1 BB+4% of TNW$15,000,000 BBBa2BB3% of TNW$10,000,000 BB-Ba3 BB-2% of TNW$5,000,000 Below BB-Below Ba3Below BB-0% of TNW$0

29 Met-Ed and Penelec Default Service Program Key Elements of Credit Provisions of SMAs (cont.) Fixed Auction SMAs: Independent Credit Requirement (“ICR”) as well as Mark-to-Market  ICR declines over the term of each of the SMAs (See Appendix B of the SMA)  Initial ICR for the May 2010 Solicitation  $375,000 per Tranche for a 5-month product  $750,000 per Tranche for a 12-month product  $1,500,000 per Tranche for a 24-month product  The Independent Credit Threshold (“ICT”) determined as a function of the Supplier’s credit ratings and % of TNW is used to either partially or fully cover the aggregate ICR amounts across all Default Service obligations to a given Company

30 Met-Ed and Penelec Default Service Program Supply Payments for the May 2010 Solicitation Vary by Class  Seasonal supplier payments:  Final auction price for a product times a seasonal billing factor SeasonPeriods Seasonal Payment Factor Winter Jan 1-May 31, Oct May 31, 2012 Oct May 31, 2013 Summer Jun 1-Sept 30, Jun 1-Sept 30, 2012

31 Met-Ed and Penelec Default Service Program Supply Payments for the May 2010 Solicitation Vary by Class  Commercial Class  90% Fixed at the final auction price. 10% varies based on the real-time PJM hourly energy price at the Company zone plus a fixed pre-specified adder of $9.00/MWh  Residential Class  100% Fixed for the 12- and 24-month products  For the 5-month products is:  95% Fixed at the final auction price and  5% varies based on the real-time PJM hourly energy price at the Company zone plus a fixed pre-specified adder of $9.00/MWh Rates for customers are determined on the same basis

32 Met-Ed and Penelec Default Service Program Compliance with AEPS through AECs  Compliance with Tier I and II requirements must be demonstrated using Alternative Energy Credits or AECs issued by PJM-EIS GATS  Suppliers must use PJM-EIS GATS to transfer AECs to the Companies to meet their AEPS requirements  Prior to using the PJM-EIS GATS, Suppliers must register into GATS and open a Retail LSE Account  GATS Administrator is available to help Suppliers through process: For information and forms, see: Phone: ; Fax:  Suppliers will be responsible for any changes to non-solar Tier I and Tier II requirements prior to execution of a Default Service SMA  Suppliers will not be responsible for future legislative or administrative changes to the Tier I and Tier II requirements that are imposed following the effective date of the Default Service SMA

33 Met-Ed and Penelec Default Service Program Supplier Risk Mitigation Features  Full requirements excludes Network Integration Transmission Service (“NITS”), which is paid by the Company and recovered from customers  Supplier is protected from the following risks:  Change in NITS rate  Changes in AEPS law  Risks of procurement of SPAECs  Supplier assumes other risks of full requirements product, including migration risks

34 Met-Ed and Penelec Default Service Program Bidding in the Auction

35 Met-Ed and Penelec Default Service Program 1.Bids are binding until the price ticks down:  A bidder cannot change the number of tranches bid on a product if the going price did not tick down 2.Total number of tranches bid cannot increase:  Bidders can only maintain or reduce their total number of tranches bid from one round to the next 3.Auction closes on all products at once:  Winners are determined for all products at the same time 4.Uniform price:  All winners on a product are given the same price Descending Clock Auction Has Four Main Features

36 Met-Ed and Penelec Default Service Program Round Schematic Bids at Going Prices Information to Bidders Round and Bidding Start Round and Bidding Start Bidding Ends Round Ends  Total excess supply in the round and going prices for next round (Price for a product ticks down if tranches bid are greater than the target)

37 Met-Ed and Penelec Default Service Program What is a Bid in Round 1?  A bid is a number of tranches for each product that a supplier is willing to serve at the going prices of the round. Example:  Two rules:  the total number of tranches bid on all products cannot exceed bidder’s initial eligibility  the number of tranches bid on a product cannot exceed the load cap Fixed-Auction Bids at Round 1 Prices ME-R-5ME-C-12PN-R-5PE-C

38 Met-Ed and Penelec Default Service Program Round 1 Report The Bidder can see:  Range of total excess supply  Total excess supply is the sum of excess supply for all products  Range includes actual total excess supply  Five-tranche range at start of Auction  The next round prices (round 2)  The bidder’s own bid in round 1 Bidder has no information about others’ bids, identities or eligibilities Fixed Auction Round 1 Total Excess Supply: Product Round 2 Price ($/MWh) ME-R ME-R ME-C ME-C PN-R PN-R PN-C PN-C

39 Met-Ed and Penelec Default Service Program Changes in Round 2 Bidding  A bidder will be able to:  Keep the number of tranches bid for each product the same as in round 1  Withdraw some tranches from the Auction  Switch between products, by reducing tranches bid on one product and increasing tranches bid on another  Both withdraw and switch If the price for a product has not ticked down, a bidder cannot reduce the number of tranches bid for that product

40 Met-Ed and Penelec Default Service Program What Are The Rules In Round 2?  The total number of tranches bid on all products combined cannot exceed eligibility in round 2 (the number of tranches bid in round 1)  Again, the number of tranches bid on any one product cannot exceed the load cap for that product

41 Met-Ed and Penelec Default Service Program Bidders Must Name an Exit Price When Withdrawing a Tranche  A bidder must enter an exit price (a final and best offer):  Above current going price  Below or equal to the going price of the previous round Fixed Auction productME-R-5ME-C-12PN-R-5PE-C-12 Price Round Bid Round Price Round Bid Round Exit Price94.51

42 Met-Ed and Penelec Default Service Program A Bidder Could Be Asked to Provide Switching Priority Information  A bidder may reduce the tranches bid on one or more products and increase the tranches bid on more than one product  The bidder will be asked for a switching priority to be used if not all switches can be granted Switching Priority 12 Fixed Auction productME-R-5ME-C-12PN-R-5PE-C-12 Price Round Bid Round Price Round Bid Round 24131

43 Met-Ed and Penelec Default Service Program A Bidder Could Be Asked to Indicate Which Tranche is Withdrawing  A bidder may decrease the number of tranches bid on more than one product but switch only part of them  The bidder will be asked to designate which tranches are being withdrawn and name an exit price for the withdrawn tranches Exit Exit Price Fixed Auction productME-R-5ME-C-12PN-R-5PE-C-12 Price Round Bid Round Price Round Bid Round 22131

44 Met-Ed and Penelec Default Service Program Changes in Round 2 Calculating Phase  A bidder may have requested a switch or a withdrawal – but it may not be granted if necessary to fill the tranche targets  The Independent Evaluator fills tranche target in this order:  first with tranches bid at the going price  then by retaining exits (if necessary to fill the target)  then by denying switches (if still necessary)

45 Met-Ed and Penelec Default Service Program Changes in Round 2 Reporting  Each bidder gets this information:  A range of total excess supply  The prices for next round  The bidder’s own bid, including:  Any tranches requested to be withdrawn that were retained (retained at the exit price)  Any tranches requested to be switched that were denied (retained at the last price freely bid)

46 Met-Ed and Penelec Default Service Program Same Rules Apply for Rounds 3, 4…  Eligibility in round 3 is equal to eligibility in round 2 minus tranches withdrawn in round 2 (even if any of those exits were denied)  Bidder can reduce number of tranches bid on a product (via switching or withdrawal) only if price has ticked down in that round  Exit price must still be above current going price and equal to or below previous going price

47 Met-Ed and Penelec Default Service Program When Does The Auction Close?  The Auction closes when total excess supply equals zero and none of the prices have ticked down  Bidding on all products will stop at the same time and the final auction prices will be calculated then  All bidders who win tranches of a product will be paid the final auction price for that product

48 Met-Ed and Penelec Default Service Program Bids Are Submitted Online  Bidding is done through online Internet bidding through specialized auction software  Bidders access an Internet link  Bidders log in to the auction software using a Login ID and password provided by the Independent Evaluator to the Authorized Representative  Bids are submitted and round results received through the auction software

49 Met-Ed and Penelec Default Service Program Standard PC  Windows 98, Windows Me, Windows NT 4.0, Windows 2000, Windows XP, or Windows Vista Internet Connection  Primary access through a company network  Secondary access through an alternative ISP Web Browser  Internet Explorer 7, Internet Explorer 8, Firefox 3.0, Firefox 3.1, Firefox 3.5, Safari 4, or Chrome 2 Backup Systems  Backup laptop and backup connection  Dedicated fax machine System Requirements Are Minimal

50 Met-Ed and Penelec Default Service Program To Be Technically Prepared  Bidding teams in two geographical locations  Reduces the likelihood that disruptions in one location will affect your participation  Access to a backup ISP  Backup computer (preferably a laptop with charged batteries and access to the backup ISP)  A dedicated fax machine for backup bidding

51 Met-Ed and Penelec Default Service Program Pauses  A bidder can request an extension to the bidding phase two times during the Auction  Typically due to technical problems  Bidders will be advised of length of extension (typically 15 min)  All bidders will benefit from the extended bidding phase  The Independent Evaluator can call a “time-out” any time  For example, in case of general technical difficulty  Generally no more than 15 minutes

52 Met-Ed and Penelec Default Service Program Proposal Submission Process

53 Met-Ed and Penelec Default Service Program 1.Alternate Guaranty Process (Optional) 2.Part 1 Proposal: Basic Contact Information and financial information  New Bidders use the “Long Part 1 Form” to submit the Part 1 Proposal  Bidders that submitted a successful Part 1 Proposal in January or March may use the “Short Part 1 Form” for the May auction 3.Part 2 Proposal: Indicative Offers and Financial Guarantees 4.Submission of Bids: Auction Starts Stages of Proposal Submission Process

54 Met-Ed and Penelec Default Service Program Key Dates 16 April 2010 Deadline to submit initial Alternate Guaranty Form and supporting documents 5 May 2010 Part 1 Proposal deadline 10 May 2010 Part 1 Proposal Notification 18 May 2010 Part 2 Proposal deadline 21 May 2010 Part 2 Proposal Notification 24 May 2010 Auction starts

55 Met-Ed and Penelec Default Service Program Requirements for Part 1 1.Applicant’s Contact Information  Designated Representative : point of contact for Independent Evaluator  Officer of the Bidder makes certifications in Proposal 2.Licensing requirements  No state licensing required  Supplier must be an LSE in PJM by January 1, Agree to Auction Rules and SMAs 4.Financial Information for creditworthiness evaluation  Annual and quarterly financial information  Senior unsecured debt ratings 5.Comments on Pre-Bid Letter of Credit (optional) Part 1 Forms are available for completion on the Web site

56 Met-Ed and Penelec Default Service Program  A Supplier with a successful Part 1 Proposal may submit a Part 2 Proposal  Need to provide an indicative offer and preliminary interest at the maximum starting price and minimum starting price  Provide Pre-Bid Security proportional to indicative offer at maximum starting price  Bidders relying on their own financial standing and qualifying for an unsecured credit line under the SMA, submit a Letter of Credit or cash of $125,000 per tranche  Bidders relying on the financial standing of a guarantor submit a Letter of Credit or cash of $125,000 per tranche and a Letter of Intent to Provide a Guaranty of $250,000 per tranche  Bidders that do not qualify for an unsecured credit line under the SMA and that do not have a Guarantor submit a Letter of Credit or cash of $375,000 per tranche Requirements for Part 2

57 Met-Ed and Penelec Default Service Program Role of the Indicative Offers,  For the Bidder, the indicative offer at the maximum starting price sets:  The maximum number of tranches that the bidder can bid in the auction (initial eligibility)  The amount of pre-bid security required with the Part 2 Application,  For the Companies, they can use the indicative offers in setting prices for round 1 of the Auction

QUESTIONS???