A National Perspective on Customer Choice Programs

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A National Perspective on Customer Choice Programs
Craig G. Goodman President National Energy
Marketers Association 202-333-3288 cgoodman_at_energy
marketers.com www.energymarketers.com
Retail Power Markets Summit February 25, 2004
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(No Transcript)
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National Energy Marketers AssociationOverview

• Who is The National Energy Marketers Association
  (NEM)
• Natural Gas and Electricity, Wholesale and
  Retail,
• Energy-Related Products, Services, Information,
  and
• Advanced Technologies - risk management
  technologies, clearing solutions, sophisticated
  electronic trading platforms as well as
  predictive and real time electronic trade
  confirmations and settlement capabilities,
  customized software for the back, middle or front
  office and generator or wellhead to user
  metering, billing, and data exchange capabilities
  as well as advanced grid reliability, power line
  siting, information and transmission
  technologies.

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National Energy Marketers AssociationOverview

• Who is NEM?
• Wholesale and Retail Suppliers of Electricity and
  Natural Gas
• Independent Power Producers (IPPs)
• Suppliers of Distributed Generation
• Energy Brokers, Power Traders and Electronic
  Trading Exchanges
• Advanced Metering and Load Management Firms
• Billing and Information Technology Providers
• Credit, Risk Management and Financial Services
  Firms
• Software Developers
• Broadband Over Power Lines, Power Line
  Communications (PLC) and Hybrid PLC Companies

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National Energy Marketers AssociationOverview

• What Does NEM Do?
• State and Federal Regulatory Commissions,
  Legislators
• In 2003, NEM was active in 73 different
  proceedings in 15 states, plus multiple
  proceedings at the FERC, CFTC, FCC and the FTC
• Consumer Representatives and Utilities
• Develop and implement Transitional Wholesale and
  Retail Market Designs so that utility
  shareholders and marketers could become partners
  in a consumer-focused, value-driven transition to
  an orderly, reliable and competitive retail
  marketplace.

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Status of U.S. Electricity Choice Programs

• Electricity - 24 states and the District of
  Columbia have either enacted enabling legislation
  or issued a regulatory order to implement retail
  access
• 17 states and the District of Columbia are active
  in the restructuring process (choice is or will
  soon be available) -Arizona, Connecticut,
  Delaware, District of Columbia, Illinois, Maine,
  Maryland, Massachusetts, Michigan, New Hampshire,
  New Jersey, New York, Ohio, Oregon, Pennsylvania,
  Rhode Island, Texas and Virginia
• 5 states have delayed restructuring or the
  implementation of retail access - Arkansas,
  Montana, Nevada, New Mexico, and Oklahoma
• 1 state has suspended retail access - California
• Source U.S. Energy Information Administration
• In West Virginia, the Governor and legislature
  have not approved the PSCs restructuring plan
  authorized by statute.

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The Benefits of Competition

• Energy choice programs provide consumers with a
  myriad of benefits
• Better price and service options
• Access to innovative new offerings of products,
  services, information and technology
• Lower energy prices lower the cost of doing
  business permitting companies to better compete,
• Lower energy prices helps states to attract new
  businesses, increase job opportunities and
  increase state tax revenues
• Consumer Protection-The ability to do business
  when you want, with whom you want, and then to
  buy what you want is one of the greatest consumer
  protections that government can offer.

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The National Energy Challenge Transitional
Retail Market Design Issues

• NEM members have identified a core set of issues
  that impede the transition to price competitive
  markets and prevent consumers from realizing the
  benefits of competition
• Transitional Retail Market Design Issues
• Retail Technology Issues
• Transitional Wholesale Market Design Issues
• Wholesale Technology Issues
• We are in a transition from an early 20th Century
  integrated utility business model to a hi-tech,
  consumer focused, value-driven, price competitive
  model of the 21st Century

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The National Energy Challenge Transitional
Retail Market Design Issues

• Marketers and utilities should be partners
• Marketers should become the utilities largest and
  best customers
• Marketers can remove costs and risks from utility
  operations
• Tax and Regulatory Incentives should encourage
  upgrading infrastructure and shedding high-risk,
  low-margin commodity-related functions
• Utility shareholders should share a portion of
  tax credits with ratepayers based on percentage
  of migration achieved in their service territories

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The National Energy Challenge

• The longer we delay in reaching a competitive end
  state in the markets, the longer consumers will
  suffer the consequences
• Higher prices (duplicative costs and rents)
• Fewer competitive options
• Sub-optimal settlements

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Transitional Retail Market Design Issues
Market-Based Utility Pricing

• Issue Consumers and Regulators Fear Price
  Volatility
• As a result, utilities are forced to provide
  high-risk, low-return commodity services and to
  cross-subsidize certain classes of consumers.
  In turn, consumers never get the proper price
  signals to lower demand and make efficiency
  investments.
• Solution A Transitional Market Design must
  encourage
• Utilities to exit the merchant function, invest
  in infrastructure and congestion relief and
  permit the market to manage price risks and
  implement creative low income products.
• During the Transition, utility default rates
  should utilize market-based pricing (New York,
  Maryland (BGE Electric Schedule DS), New Jersey
  Basic Generation Service CIEP customers)

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Transitional Retail Market Design Issues
Market-Based Utility Pricing

• Issue Prices to Beat Tend to Be Misleading
• Floating Interest Rates and Fixed Rates are
  Different
• Regulated Prices and Market Prices are different.
  However, the difference is often hidden from the
  consumer.
• Example New Jersey-Wholesale Basic Generation
  Service (BGS)
• Insulates Fixed Price Contracts from volatility
  and price risks because 2/3 of supply will always
  be locked in
• Creates retail boom when forward price is below
  BGS rate
• Creates retail bust when forward price is above
  BGS rate
• Solution Default Prices Should Reflect Current
  Market Conditions and the embedded costs of
  serving no-notice retail load

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Transitional Retail Market Design Issues
Market-Based Utility Pricing

• The Embedded Cost of Serving No-Notice Retail
  Load. In addition to the wholesale cost of
  commodity, electric default rates must include

• commodity acquisition and portfolio management,
• working capital,
• taxes,
• administrative and general expenses,
• metering, billing, collections,
• bad debt, information exchange,

• transmission charges,
• scheduling and control area services, and
  distribution line losses,
• a share of pool operating expenses,
• risk management premiums,
• load shape costs,
• regulatory compliance, and customer care

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Transitional Retail Market Design Issues
Consumer Shopping Credits

• Issue Designing Consumer Shopping Credits
• Solution During the Transition
• Fully Allocated Embedded Cost-Based Unbundling
  (New York)
• Embedded costs are Just and reasonable
• Educates consumers on proper pricing signals
• Reveals and mitigates cross-subsidies
• Caveat Migrating customers should not be
  required to make double payments for services

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Transitional Retail Market Design Issues
Safety-Net Programs

• Issue Designing Transitional Safety Nets
• Safety Net Programs define the limits of price
  competition
• Safety Net Programs define protected core
  customers
• Solution Carefully Define and Encourage
  Targeted Solutions
• Lazy Non-Shoppers should not be a Protected
  Class
• Tax and Regulatory Incentives can help until the
  competitive marketplace can develop low income
  products.

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Transitional Retail Market Design Issues
Payment Allocations

• Issue Current Payment Allocation Increases Bad
  Debt
• Solutions
• Pay consumable portion of the bill first
• Once commodity consumed, it cannot be recovered
• Assets can be reused and secure future payments
• Purchase receivables (Ohio-Columbia, Dominion
  East Ohio and Vectren Energy Delivery, New
  York-OR)
• Prorate payments (New York, Massachusetts)

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Transitional Retail Market Design Issues Exit
Fees

• Issue Exit Fees Penalize Shoppers and Increase
  Costs
• Exit fees penalize migrating customers for
  exercising the right to choose (Michigan,
  Illinois)
• Price competition benefits all consumers
• Incents utilities to continue to invest in
  competitive services thereby further increasing
  stranded costs
• Solution
• Quantify the costs of implementing retail access
  and any potential "stranded costs" net of
  associated benefits after a reasonable migration
  level has been achieved
• Recover net stranded costs via a competitively
  neutral charge

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Transitional Retail Market Design Issues
Customer Acquisition Costs

• Issues Customer Acquisition Costs Impact Prices
• Safety Net Regulations
• Consumer Protections
• Wet Signatures
• Do Not Call Lists
• Solutions Cost-Effective Access to Customers
• Telephonic and internet enrollment
• PUCs can provide customer lists
• Utilities should provide customer lists at no or
  low cost (Massachusetts, Ohio)

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Transitional Retail Market Design Issues
Storage and Capacity Concerns

• Issue Utilities limit marketer access to
  storage and capacity (citing reliability
  concerns)
• Solutions
• Access to market area storage and pipeline
  capacity for customers that switch a must
• Utility to contract for only the level of
  capacity required to serve sales customers
  (Ohio-Dominion East Ohio)
• Marketers should have automatic option to acquire
  capacity for customers that switch
• A slice of the system at no more than max rates

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Transitional Retail Market Design Issues
Creditworthiness Requirements

• Issue
• Onerous, over-collateralized and discriminatory
  credit requirements imposed on many marketers
• Solutions
• Marketers may satisfy creditworthiness
  requirements through favorable credit rating,
  parental guarantees and/or reasonable bonding
  requirements
• Utility should offset posted credit requirements
  by the amount of ESCO receipts that the utility
  currently possesses (New York) and supplier gas
  storage

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Transitional Retail Market Design Issues
Utility Incentives

• Issues
• Utilities Not Motivated to Open Markets
• Utilities Compete for Market Share
• Solutions
• All rates, tariffs, regulatory and tax incentives
  should be tied to the percentage of customer
  migration
• Utilities should actively promote customer
  switching (New York-OR)
• PUC role as advocate for consumers should extend
  to marketers (The utilitys largest customers)
• Creation of level playing field benefits all

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Transitional Retail Market Design Issues Retail
TechnologyMetering, Billing Information
Services

• Issues Billing, metering, customer care and
  ancillary services are competitive functions
• Consumers receive inadequate data to permit price
  responsive demand
• Solution
• Utilities fully allocated embedded costs of
  providing these services should be unbundled from
  rates to provide consumers with proper pricing
  signals
• Give consumers access to low-cost, reliable,
  advanced metering services and related ITs (New
  York, Maryland, Illinois, Virginia, California)
• Including, ownership, installation, servicing of
  equipment, maintenance, testing, reading, data
  management, validation, editing, estimations,
  pulse output transmission via Internet and
  billing.

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Transitional Retail Market Design Issues Retail
TechnologyDistributed Generation

• Issue
• System capacity needs, transmission and
  distribution constraints, the desire for enhanced
  reliability, market power concerns, and
  consumers' drive to exert greater influence over
  their energy destiny all point toward a growing
  need for distributed generation
• Solution
• National, or at a minimum, statewide technical
  safety and reliability requirements, application
  procedures, forms, standard agreements, related
  testing and certification requirements (New York,
  Ohio, Texas, California)
• Eliminate existing penalties to reduce the costs
  and risks of investments by consumers in
  distributed generation technology

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Transitional Retail Market Design Issues Retail
TechnologyPower Line Technologies

• Issue
• Providing ubiquitous, low-cost, last mile, last
  inch access to consumers for a completely new
  array of high-value energy and related products,
  services, information and technologies
• Solution
• Wide-scale deployment of power line technologies
  
• Issues
• Jurisdictional issues arising from Supreme Court
  precedent, recent legislation, and FCC and FERCs
  primary jurisdiction - FCC 2003 NOI and 2004
  NOPR
• Reliability implications
• Non-discriminatory access to power lines
• Utility provision of competitive services

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Transitional Retail Market Design Conclusions
The near simultaneous natural gas price spike
and the cascading Midwest blackout has more
sharply defined the essential nature of the
Social Compact that underlies the grant of a
franchise monopoly in a subtle but important
way. A properly designed competitive market
should both permit and encourage utilities to
shed high-cost, high risk, no or low return use
of its capital and credit, and instead, encourage
redeployment of financial resources to upgrade
infrastructure and grid reliability.
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Transitional Retail Market Design Conclusions
The early 20th Century utility business model
obfuscates the true costs of energy, undermines
the ability of ratepayers to become informed
consumers and promotes high risk, sub-optimal
returns on utility resources. On the contrary,
it is clearly in the public interest for
competitively generated capital to incur,
mitigate, and manage market risks as well as
design and implement new value-added
technologies. Additionally, it appears that that
the true nature of Societys expectation of a
utilitys obligation to the Public Interest is in
the reliability of its transportation and
delivery of energy rather than the efficiency
with which it purchases, meters, bills and
collects charges for the sale of energy.