RULES OF THE ROAD FOR OHIO’S JOURNEY TO ELECTRICITY CHOICE Public Utilities Commission of Ohio Case No EL-COI December 11, 2013 Philip R. O’Connor, Ph.D. PROactive Strategies, Inc. 1

LESSONS FROM MORE THAN A DECADE OF CUSTOMER CHOICE Half-measures, delay & excess focus on unneeded safety nets generally operate to dilute benefits. All of the concerns about adverse results from choice have proven unfounded: volatility, price levels, generation investment, utility credit. Transaction cost barriers to residential choice can be largely addressed by PoR, UCB, internet enrollment and muni-agg. Flexibility for utilities to re-organize is important to optimize value and encourage cooperation. 2

THE OHIO PROCESS IS TIMELY: A SECOND RESTRUCTURING WAVE Ohio customers are showing an appetite for choice & deserve a clear, straight path. An impending wave of industry restructuring: – The shale gas revolution and regulatory pressure on coal are upending traditional cost formulas. – Traditionally lower priced states are losing their advantage as prices in competitive states fall. – Big decisions must be made as to whether customers will bear the risks of new investment. PUCO has recognized the need to bring order, direction and greater certainty for all parties. 3

WHEN GIVEN A CHOICE – CUSTOMERS CHOOSE Except for Texas, customer choice largely confined to the northeast quadrant of the US. Yet over one-third of US electricity usage is in the 13 fully competitive states & DC. More than 20% of all 2012 US usage served by non-utility suppliers: 740TWh/3,687TWh =.20 During the post-2007 period of the economic slowdown, customer choice in both residential and non-residential sectors has surged by >50%. 4

TRADITIONAL MONOPOLY IS THE OUTLIER IN THE U.S. NORTHEAST 5

U.S. LOAD SERVED BY NON-UTILITIES UP >50%

20% OF ALL U.S. LOAD NOW SERVED BY NON-UTILITIES 7

MORE THAN 90% OF ILLINOIS LOAD SERVED BY NON-UTILITY SUPPLIERS 8

FOUR KEY ARGUMENTS AGAINST CHOICE FAIL THE EMPIRICAL TEST Assertions of choice opponents have proven untrue: 1)There is no statistically significant difference in retail price volatility between choice and monopoly states except for lower volatility in choice states )Choice state price increases lower than inflation while monopoly states higher than inflation. 3)Competitive electricity markets have attracted substantial investment in generation, with Illinois becoming the key export state in the Upper Midwest. 4)Differences in utility credit ratings between choice & monopoly states are not statistically significant. 9

WEIGHTED PRICE VOLATILITY: LOWER IN CHOICE STATES Weighted Groups Standard Deviation Coefficient of Variation Stat Competitive (14) 4.06%3.10%17.06%6.88%* Traditional (30) 4.11%3.91%17.30%7.42%* Hybrid (5) 5.16%4.59%15.63%8.27% 10

UPPER MIDWEST VOLATILITY : IL & OH LOWER THAN IN, MI & WI State Std. Dev. Coefficient of Variation Std. Dev. Coefficient of Variation IL OH IN MI WI

: CHOICE STATE RATES LESS THAN INFLATION – MONOPOLY MORE 12

SHALE GAS REVOLUTION: CHOICE & MONOPOLY STATE PRICES DIVERGE ALL-SECTOR AVERAGE ¢/kWh % CHANGE 13

RESIDENTIAL CUSTOMERS ARE REALIZING COMPETITVE BENEFITS RESIDENTIAL AVERAGE ¢/kWh % CHANGE 14

UPPER MIDWEST PRICE DIVERGENCE: CHOICE v MONOPOLY 15

: ILLINOIS & OHIO GAINING A PRICE ADVANTAGE WITH CHOICE 16

ILLINOIS PRICE POSITION v U.S. AVG IMPROVED $36 BILLION SINCE

UPPER MIDWEST GENERATION: CHOICE STATES ADDED CAPACITY State Name Plate Capacity (MW) Pct. Change Illinois 38,13249,73930% Ohio28,93636,30525% Indiana23,36330,76532% Michigan27,25533,06621% Wisconsin12,75020,03057% Total130,436169,90530% 18

ILLINOIS’ COMPETITIVE GENERATION: TAKING THE LEAD IN EFFICIENCY MWh Production per MW Capacity Capacity Factor State Illinois 3,5443,98340%45% Ohio 4,9353,76456%43% Indiana 4,9113,94956%45% Michigan 3,9253,30945%38% Wisconsin 4,0323,32246%38% 19

STATE PRODUCTION/USAGE RATIOS: ILLINOIS IS NOW A MAJOR EXPORTER 20

UTILITIES IN CHOICE STATES HAVE COMPETITIVE CREDIT RATINGS More Credit SupportiveLess Credit Supportive S&PMoody'sS&PMoody's Average Score Average Rating BBB+Baa1BBBBaa2 Choice Avg Score Choice Avg Rating BBBBaa1BBB+Baa2 NO Choice Avg NO Choice Avg BBB+Baa1BBBBaa2 21

STEPS FOR OHIO TO CONSIDER: CLEAR PUCO PHILOSOPHY IS PARAMOUNT 1)PUCO can provide clarity of purpose and certainty by ending the ESP/MRO dichotomy. 2)Facilitate generation divestment/devolution & competitive corporate re-org. 3)Wind-down & end inter-class cross-subsidies. 4)Terminate a “regulated” price supply product as a referent for the market in order to avoid ongoing version of the ESP/MRO dichotomy. 22

STEPS FOR OHIO TO CONSIDER: THE DEVILISH DETAILS 5) Procure default/POLR supply through a class tranche of load auction to translate bid prices directly to retail prices with minimal adjustment. 6) Improve type, accuracy, access, timeliness of customer data from utilities to help customers and suppliers deal with one another effectively. 7) Seamless enrollment & contract portability. 8) Standard Purchase of Receivable across all Ohio utilities to reduce transaction costs. 23

Philip R. O’Connor, Ph.D. PROactive-Strategies, Inc. -- Chicago, Illinois Dr. Phil O’Connor is President of PROactive Strategies, a Chicago consulting firm providing advice in the energy and insurance industries. For over two decades Phil has been recognized as a leading advocate of competitive market solutions for regulated businesses. Phil is the author of Customer Choice in Electricity Markets: From Novel to Normal, published by COMPETE Coalition in November 2010 and co-author with Terrence L. Barnich of “The Grand Experiment: Has Restructuring Succeeded on Either Continent?”, published in Public Utilities Fortnightly, February He co-authored with John L. Domagalski “Regulation and Relevancy: Assessing the Impact of Electricity Customer Choice,” in ElectricityPolicy.com, January In addition to a lengthy career in the private sector, Phil has had extensive government and political experience, having chaired the Illinois Commerce Commission serving as Director of the Illinois Department of Insurance and as a member of the Illinois State Board of Elections. Five consecutive Illinois Governors have appointed him to various boards and commissions. From March 2007 to March 2008, Phil served in the U.S. Embassy in Baghdad, Iraq with the US Army Corps of Engineers and the US State Department as an advisor to the Iraqi Ministry of Electricity. A magna cum laude graduate of Loyola University of Chicago, Phil received his Masters and Doctorate in Political Science from Northwestern University