Transcript Document

A National Perspective
on Customer Choice
Programs
Craig G. Goodman
President
National Energy Marketers Association
202-333-3288
[email protected]
www.energymarketers.com
Retail Power Markets
Summit
February 25, 2004
National Energy Marketers Association
Overview
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.
National Energy Marketers Association
Overview
 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
National Energy Marketers Association
Overview
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.
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 PSC’s restructuring plan
authorized by statute.
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.
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
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, lowmargin commodity-related functions
Utility shareholders should share a portion of tax
credits with ratepayers based on percentage of
migration achieved in their service territories
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
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 marketbased pricing (New York, Maryland (BG&E Electric Schedule
DS), New Jersey Basic Generation Service CIEP customers)
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
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:
 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
 commodity acquisition
and portfolio
management,
 working capital,
 taxes,
 administrative and
general expenses,
 metering, billing,
collections,
 bad debt, information
exchange,
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
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.
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-O&R)
Prorate payments (New York, Massachusetts)
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
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)
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
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
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-O&R)
PUC role as advocate for consumers should extend to
marketers (The utility’s largest customers)
Creation of level playing field benefits all
Transitional Retail Market
Design Issues
Retail Technology
Metering, 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.
Transitional Retail Market
Design Issues
Retail Technology
Distributed 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
Transitional Retail Market
Design Issues
Retail Technology
Power 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 FERC’s
primary jurisdiction - FCC 2003 NOI and 2004 NOPR
Reliability implications
Non-discriminatory access to power lines
Utility provision of competitive services
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 Society’s
expectation of a utility’s 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.