Retail Competition:Managing a Difficult Transition

David L. O’ConnorCommissioner

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

Reduce electricity prices to all customers

Provide choice of supplier to all customers

Maintain the reliability of the electric system

Maintain the quality of regulated services

Settlements, then the Law

Roundtable Negotiations 1995

“Power Choice” 1996

MECo Settlement 1996

BECo & EUA Settlements 1997

Legislation 1997

Retail Access Day March 1, 1998

Key Provisions of Massachusetts Act

10/15% Rate Reduction

Choice of Power Supplier

Stranded Cost Recovery

Standard Offer and Default Service

Public Benefit Programs

Consumer Protection and Education

Power Plant Siting

Results So Far Consumers Saved at Least $1.5 Billion

Utilities Divested 90% of Plants

Stranded Costs Reduced by 30%

Consolidation of Distribution Companies

Many new Power Plants being Built

Retail Market Developing Very Slowly

Competitive Suppliers Focused on Large C & I

Municipal and Other Aggregation Groups Formed

Standard Offer Service

Power supplied to eligible customers at “fixed” rates

Price at least 10% lower than pre-restructuring

Generation costs increase / stranded costs decrease

Customer may choose competitive supplier any time

Recent price increases due to fuel costs

Ends in 2005

Massachusetts Standard Offer Prices Are Low But Going Up

Source: National Grid

Ce n

ts/k

Wh

Default Service

Provides any customer with power at any time

New customers; returns from competitive suppliers

Through Dec. 2000: equal to Standard Offer price

January 2001: “average monthly market price”

Power supply purchases on 6 and 12 month basis

Continues indefinitely

Default Service Prices Are Going Up Too

0

1

2

3

4

5

6

7

8

9

10

Jan-00 Feb-00 Mar-00 Apr-00 May-00 Jun-00 Jul-00 Aug-00 Sep-00 Oct-00 Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01

cen

ts/k

Wh

Source: WMECo 2000 Reconciliation Filing & DOER

Wholesale Generation

Default Service Retail (Residential)

What Massachusetts is Trying to Do

Increase retail response to peak prices

Diversify utility power purchases to hedge price risk

Help retail suppliers reach default customers

Energy Efficiency and Load Management Reduce Clearing Prices

$0.00

$200.00

$400.00

$600.00

$800.00

$1,000.00

$1,200.00

1 3 5 7 9 11 13 15 17 19 21 23

Hour

$/M

W ECP

ADJ_ECP

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 ProgramSummer 2001

Up to 600 MW of reductions (2.5% of peak)

3,000 to 5,000 large C&I customers

Demand reduction or distributed generation qualify

ISO-NE pays Load Servers (LSE’s) who pay customers

LSE’s paid “reserves” price for all hours

LSE’s paid “energy” price for dispatched hours

Differences in Utility Power Supply Purchasing

Summer 2000

Contracts, Own Generation

(%)

Spot Market

(%)

California 45 55

New England 80 20

Source: Anjali Sheffrin, Presentation: CMR-Global Market Power Mitigation, October 4, 2000

Changes to Default Service Procurement

0

2

4

6

8

10

12

Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01

Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Dec-01 Jan-02 Feb-02 Mar-02 Apr-02

Monthly Prices

Average Price

Cen

ts/k

Wh

Source: MECO Filings with MA DTE

6.4

8.4

Default Service Customers Are IncreasingTotal Monthly kWh Sales

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

April 1999 December 1999 December 2000

Competitive Supply

Default Service

Standard Offer

Source: DOER Customer Migration Numbers

Distribution Companies Co-Market

with Retail Suppliers

Distribution Company

Default ServiceCustomers

Wholesale Suppliers

Retail Suppliers

Reports and Information

Available at DOER Website:

www.state.ma.us/doer

Customer Migration Data

1998 Market Monitoring Report

1999 Market Monitoring Report