1. 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

2. September 2002 2 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

3. September 2002 3 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?

4. September 2002 4 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)

5. September 2002 5 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

6. September 2002 6 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

7. September 2002 7 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

8. September 2002 8 CHRISTENSENASSOCIATES Typical Duke Prices on High Price and Average Price Day 0 50 100 150 200 250 300 135791113151719212325 Hours $/mWh

9. September 2002 9 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

10. September 2002 10 CHRISTENSENASSOCIATES Real-Time Pricing for GPC  Two-part tariff design  Day-ahead RTP — 250 kW minimum  Hour-ahead RTP — 5 MW minimum

11. September 2002 11 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

12. September 2002 12 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

13. September 2002 13 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

14. September 2002 14 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

15. September 2002 15 CHRISTENSENASSOCIATES

16. September 2002 16 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.

17. September 2002 17 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 

18. September 2002 18 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)

19. September 2002 19 CHRISTENSENASSOCIATES Economy Weather Fuel Price Unit Availability Tie Lines Wholesale Market RTP Prices Factors with Major Influence on RTP Prices

20. September 2002 20 CHRISTENSENASSOCIATES Typical RTP-DA Prices *Hour at end of interval HR*cent/kWhstatus 1789.4200A 1849.5094A 1929.2998A 20 8.2002A 21 7.6772A 22 5.2903A 23 3.6407A 24 3.2380A HR*cent/kWhstatus 013.1440A 023.1151A 032.9661A 042.9329A 052.9307A 062.9384A 072.9980A 083.0449A HR*cent/kWhstatus 09 3.0531A 10 3.6141A 11 4.7617A 12 5.2418A 13 7.8890A 14 39.1817A 15 79.3005A 16109.7100A

21. September 2002 21 CHRISTENSENASSOCIATES  Portion of customers found to respond significantly to RTP prices: 60-75%  Range of flexibility parameters:.01 -.40 (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

22. September 2002 22 CHRISTENSENASSOCIATES Typical Load Response Increased Usage in All Hours 0:004:008:0012:0016:0020:00 24:00 5 6 7 8 9 10 Increased Usage In Low-Priced Hours and No Response in High-Price Hours (Hiding behind the Baseline Load) 0:00 4:00 8:00 12:0016:0020:0024:00 5 6 7 8 9 10

23. September 2002 23 CHRISTENSENASSOCIATES Demand Profile

24. September 2002 24 CHRISTENSENASSOCIATES Actual kWCBL kWCents/kWh Demand Profile

25. September 2002 25 CHRISTENSENASSOCIATES Distribution of RTP Price Elasticities SIC 20 Food Products

26. September 2002 26 CHRISTENSENASSOCIATES Distribution of RTP Price Elasticities Commercial Office Buildings

27. September 2002 27 CHRISTENSENASSOCIATES Distribution of RTP Price Elasticities Schools and Universities

28. September 2002 28 CHRISTENSENASSOCIATES Distribution of RTP Price Elasticities Supermarkets

29. September 2002 29 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

30. September 2002 30 CHRISTENSENASSOCIATES Price/Load Response RTP-DA

31. September 2002 31 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

32. September 2002 32 CHRISTENSENASSOCIATES Price/Load Response RTP-HA

33. September 2002 33 CHRISTENSENASSOCIATES Predicted Load Curve Impact

34. September 2002 34 CHRISTENSENASSOCIATES Load Changes in All Hours Price Change Hour 17 Only Original Load New Load 750 800 850 900 950 1000 1357911131517192123

35. September 2002 35 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 250 300 350 400 450 500 550 1357911131517192123

36. September 2002 36 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

37. September 2002 37 CHRISTENSENASSOCIATES Expected Load Changes

38. September 2002 38 CHRISTENSENASSOCIATES What Customers Like About RTP  Access to competitive market prices  Low expected energy cost  Certainty of cost of consumption changes

39. September 2002 39 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.

40. September 2002 40 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.

41. September 2002 41 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

42. September 2002 42 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

43. September 2002 43 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

44. September 2002 44 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

45. September 2002 45 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

46. September 2002 46 CHRISTENSENASSOCIATES CfD Example:

47. September 2002 47 CHRISTENSENASSOCIATES Settlement for High Average Price: = (10.0-6.0) * 744,000 = $29,760. GPC pays Customer $29,760. -OR- Settlement for Low Average Price: = (4.0-6.0) * 744,000 = ($14,880). Customer pays GPC $14,880. CfD Example:

48. September 2002 48 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

49. September 2002 49 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

50. September 2002 50 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