Transcript Slide 1

Texas Deregulation – A Success Story
ERCOT’s Robust Competitive Wholesale Market Led To A
Large Capital Infusion…
The ERCOT Market Framework Has Been A Success
Market Objectives
 Leverage market solutions wherever possible and
encourage competition
 Minimize ERCOT intervention
ERCOT supply curve; Implied heat rate
04; MMBtu/MWh
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 Establish tools to maintain grid reliability
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Implementation
 Bilateral Contracts - Participants contract up to
100% of energy needs in lieu of a centrally
managed market
 Balancing Energy Market - ERCOT operates thin
balancing energy pool to balance real-time supply
and demand
ERCOT
 Out of Merit - ERCOT can order plants on/off to
maintain grid reliability
 Retail Price to Beat (PTB) - Default service rate
mandated for incumbent retailers until January 1,
2007 – may offer different prices starting in 05
Positive impact
 Large infusion of capital
 Intense retail competition
Internal combustion
18
15
22 GW
Gas/oil
12
9
CCGT
6
Nuclear
Coal
3
0
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
Cumulative capacity MW
 Competitive rates for end-users
 High system reliability
Deregulation led to investment of over $15 billion and the addition of 22GW
of low-cost CCGT capacity
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2
…And A Reduction In Market Heat Rates
The ERCOT Regulatory Framework Has Led To Strong
Retail Competition…
ERCOT heat rate cycle
98-04; MMBtu/MWh
Residential Customer Switching
04; percent
16
CCGT reinvestment economics
20
14
19
12
10
8
6
10
4
7
CCGT marginal heat rate
2
6
0
98
99
00
01
02
03
3
2
2
1
1
MD
MA
CT
ME
CA
04
TX
Lower market heat rates have mitigated the effects
of higher gas prices for consumers
OH
DC
NY
PA
ERCOT has the most active de-regulated retail market in the US
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Source: KEMA
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Texas Deregulation – A Success Story
…With Customer Switching In Line With Other Successful
Deregulated Markets…
…Giving End Use Customers Access To Lower Prices
Competitive residential price1 vs. regulated rate
02-04; Percent savings
Incumbent market share1
Years since deregulation; Percent
Competitive large business price vs. regulated rate
02-04; Percent
33%
21%
100%
25%
Wireline
15%
13%
90%
North Texas residential
80%
7%
11%
12%
2003
2004
South Texas residential
70%
2002
2003
UK residential2
60%
2004
Long Term
2
Scenario
2002
Long Term
2
Scenario
Customers have benefited from access to lower electricity prices than they
would have experienced under a regulated rate regime
50%
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
1
Competitive Residential price based on 15% discount to TXU PTB as currently offered by market competitors, e.g., Utility Choice (14.6%), Cirro (14.6%) and
Gexa (16.6%); Regulated world assumes 7.8 GW added capacity in the rate base at a cost of $600/kw, O&M costs approximately 20/kw-yr resulting in an
average cost of $93/kw-yr average cost in the rate base
2 Based on 2004 with the following assumptions: Competitive prices assume $4.07/MMBtu Henry Hub gas price, 24X7 heat rate of 7.3 MWh/MMBtu, and
incumbent residential gross margins of 30% and LC&I gross margins of 5%
1
Market share estimates based on customer count
Estimates for 2003 and 2004
Source: PUC; OFGEM
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There Is Still Room For Improvement In ERCOT…
Market design and
governance
Retail market
Delivery regulation
…As Key Milestones Approach
Est. annual
system cost
Example inefficiency
Bad debt
Out of Merit production
Wholesale market
design
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Load balancing between
market participants
Unaccounted for Energy
Slow build of
transmission for
RMR exit
Poor siting of generation
raises transmission costs
($millions)
2501
702
603
1204
455
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Potential solution
Eliminate switching
for customers with
outstanding balances
Send generators price
signals to back down or up
Create a day-ahead
market for energy and
ancillary services
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System data and reporting
Additional incentives or
mandates for TDSPs to
construct transmission
Require plant siting
approval to consider
transmission costs
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4
5
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Estimated cost of bad debt for key ERCOT retailers in 2003; TXU retail bad debt in 2003 was $120 MM
OOME down cost to the system
Reduction of “ask” price to energy retailers of 0.2 cents / KWh on 300 TWh
Unaccounted for energy costs at 1% of load at $40 / MWh on 300 TWh (Line loss can represent an additional 5% of load cost)
Based on 6 month RMR costs for delay at La Palma of $15 million and 12 month RMR costs on delay at Davis of $30 MM
ERCOT requires approximately 2 GW of new capacity per year; better siting reduces transmission cost by $10,000 per MW
Effective Date
Affiliate Retailers may offer other price
structures in addition to PTB
January 1, 2005
Sunset Review recommendations are
considered by Texas Legislature
Session begins January 11, 2005
PTB is no longer a required offering
January 1, 2007
Sunset Review1
 The Sunset Advisory Commission reviews performance of The Public Utility Commission of Texas
(PUC) and the Office of Public Utility Counsel (OPUC) every 12 years
 The next review should be completed during the 2005 session
 Key recommendations of the Sunset Advisory Commission include:
– Changes to ERCOT/PUC governance structure
– Extension of the PUC for 6 years
Market inefficiencies drive significant costs to market participants
across the ERCOT system
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Milestone
The competitive market in Texas is functioning well and
TXU does not anticipate any major structural changes in the marketplace
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The Sunset process is guided by a 12-member body of legislators and public members appointed by the
Lieutenant Governor and the Speaker of the House of Representatives.
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