1. 1 Dr. Ahmed Kaloko Chief Economist Pennsylvania Public Utility Commission Harrisburg, Pennsylvania Transition from Public Service to Competitive Markets The Pennsylvania Experience

2. 2 ORGANIZATION This chart reflects the Commission’s organization structure and the authorized staff complement as of November 14,, 2000 PENNSYLVANIA PUBLIC UTILITY COMMISSION Operations & Administration Prosecutory Functions Total Complement (500)

3. 3 PENNSYLVANIA

4. 4 The Keystone State Pennsylvania…home of: n n The Declaration of Independence n n The Constitution n n The Liberty Bell n n Hershey Chocolate n n The most competitive electric market in the United States

5. 5 The Vertical Chain How an Electric Company Delivers its Product GENERATION Plants produce the product - Electricity TRANSMISSION The Towers move the product DISTRIBUTION The wires carry electricity into a house a business an industry

6. 6 Historical Perspective n n Access to facilities (GT&D) is closed. No Competition. n n Investments in generation, transmission and distribution are recovered through bundled rates set by the Pennsylvania Public Utility Commission.

7. 7 Historical Perspective n n Third largest producer of electricity in the US n n $10 billion in annual electric revenues n n Electric rates:15% higher than national avg. n n Produces 52% of the energy consumed in the PJM region n n 5.2 million customers n n 57% of our energy is produced from coal sources, 36% nuclear energy Pennsylvania…

8. 8 Electric Revenue, Consumption and Cost by Customer Class - 2001 Current Energy Usage and Revenue Impact

9. 9 West Penn R - 6.7 cents/kwh C - 5.8 cents/kwh I - 4.4 cents/kwh PECO R - 11.7 cents/kwh C - 10.6 cents/kwh I - 6.7 cents/kwh Penn Power R - 8.5 cents/kwh C - 6.8 cents/kwh I - 4.7 cents/kwh Penelec R - 9.8 cents/kwh C - 7.3 cents/kwh I - 6.0 cents/kwh Duquesne R - 11.8 cents/kwh C - 8.10 cents/kwh I - 5.8 cents/kwh PP&L R - 8.2 cents/kwh C - 7.7 cents/kwh I - 5.53 cents/kwh Met-Ed R - 9.8 cents/kwh C - 7.8 cents/kwh I - 5.65 cents/kwh Prices Before Competition - 1996 Historical Perspective Price Disparities

10. 10 PJM/MAAC ECAR

11. 11 n n Utilities Recover Stranded Costs Financial Certainty n n Residential Consumers Lower Prices Customer Protection n n Industrial Consumers Lower Prices n n Environmentalists Protect Environment n n Labor Reliability Job Security n n Energy Suppliers High Price to Compare Level Playing Field Transition to Customer Choice Stakeholder Negotiation

12. 12 Transition to Customer Choice n n Rate Cap n n Stranded Cost Recovery (CTC) n n Securitization of Stranded Costs n n Licenses for New Entrants n n Prohibition of Anti-Competitive Behavior n n Consumer Education n n Continued Consumer Protection in a Competitive Marketplace Customer Choice Act

13. 13 Transition to Customer Choice Generic n n Working Groups n n Rulemakings/Regulations Reliability Slamming Universal Service Consumer Information Licensing Requirements Advanced Metering Quality of Service State Taxes Competitive Safeguards Company Specific n n Filings n n Decisions n n Appeals n n Settlements Two Tracks

14. 14 Transition to Customer Choice n n Supplier agreements with customer n n Supplier agreements with incumbent utilities n n Wholesale transmission access contracts n n Price to compare by incumbent utility n n Business Practices n n Electronic Data Interchange (EDI) n n Customer privacy Requirements

15. 15 Customer Choice Today Generation: Pricing of generation set by marketplace. Transmission: Open access and comparability of transmission service. Distribution: Distribution remains monopoly service subject to regulation.

16. 16 Customer Choice Today West Penn 3.24 cents/kwh PECO 5.65 cents/kwh Penn Power 4.84 cents/kwh Penelec 4.52 cents/kwh Duquesne 4.75 cents/kwh PP&L 4.63 cents/kwh Met-Ed 4.52 cents/kwh Price to Compare

17. 17 Customer Choice Today n n All customers may choose as of 1/1/00 n n Transmission charge set by Federal Government n n Distribution charge and CTC (Stranded Investment Recovery) set by State PUC n n $18 billion stranded cost requested - $11 billion allowed n n Over 93% of customers are aware of competition n n 19,000 MW in the construction queue which represents an investment of $9 billion in Pennsylvania

18. 18 Customer Choice Today n n Over 5.2 million customer accounts, serving 12 million Pennsylvanians n n 2 million customers volunteered n n 1 million customers made a choice n n 500,500 customers switched 9% Residential Load 35% Commercial Load 42% Industrial Load n n Guaranteed savings - over $458 million (1999), $200 million (2000) n n Maximum potential customer savings 1999 - $1 billion

19. 19 Saving Millions Each Year n Schools, municipalities, government agencies, businesses and residents saving money Selected Examples: Philadelphia School District PPG Industries Penn State University Monroeville Borough Thomas Dodd, residential customer Norman Adam, residential customer $3.6 million $3.5 million $1.5 million $50,000 $213 $147

20. 20 Transition to Wholesale Markets-PJM ISO n Pa PUC and PJM ISO Relationship n EDCs, LSE, and PJM ISO Relationship n Regional Markets-Alliance, PJM ISOs n Convergence of Electric and Gas Markets n Electric and Gas Reliability

21. 21 Regulated Utility Electric Supply & Demand

22. 22 PJM ISO Operating Agreement n n Independent Board of Managers n n PJM Office of Interconnection (OI) n n Member Committees (Planning, Operations & Energy Market) n n Finance Committee reports to the Board of Managers n n Reliability Assurance Agreement Reports to the PJM-OI n n Transmission Owners Administration Committee reports to the PJM OI n n ADR, Tariff & Audit Advisory Committees report to PJM OI

23. 23 PJM Market Operations & Functions n n Control Area Responsibility - Economic Dispatch n n Installed Capacity Obligation & Reliability Assurance n n Transmission Service (Network & Point-to- Point Services) OASIS & FTR n n Capacity Market n n Day Ahead Energy & Hourly Energy Markets for LSE n n PJM Locational Marginal Pricing n n Support Retail Market Anonymously n n Bilateral Transactions

24. 24 COMPETITIVE WHOLESALE & RETAIL POWER MARKET

25. 25 PJM Spot Market Average Monthly Clearing Prices 1998 Annual Peak 48,397 MW July 22 = 48,397 MW July 1998 Usage 24,307,403 MWH 1999 Annual Peak 51,700 MW July 6 = 51,700 MW July 1999 Usage 27,136,732 MWH Market Clearing Price LMP Market Based Rates PJM 1997 Annual Peak 49,406 MW July 15 = 49,406 MW July 1997 Usage 23,345,258 MWH 2000 Annual Peak 49,417 MW Aug. 9 = 49,417 MW

26. 26 PENNSYLVANIA ELECTRIC & GAS RELIABILITY SYSTEM Energy Reliability Under Competitive Markets EGS NGS

27. 27 Conclusion n n The marketplace is a better determinant of price than the government and acts as an impetus for innovation in technology.