New Market Structures: APEC COAL TRADE AND INVESTMENT LIBERALISATION AND FACILITATION (TILF) WORKSHOP (TILF) WORKSHOP Kuala Lumpur, Malaysia March 8, 2002 Robert W. Gee President THE GEE STRATEGIES GROUP THE TEXAS ALTERNATIVE

THE GEE STRATEGIES GROUP2 Overview How the Texas electricity market will be fundamentally restructured Operational Basics of Texas Electric Choice Purpose of Market Power Mitigation Measures Role of the ERCOT Independent System Operator for wholesale market Future Challenges: Sufficient Generation and Transmission Capacity

THE GEE STRATEGIES GROUP3 Texas Is Unique 85 percent of market not subject to federal wholesale jurisdiction within Electric Reliability Council of Texas Texas restructuring plan extends to wholesale market reforms Areas outside of 85 percent are still subject to new law but application being deferred or under consideration for deferral

THE GEE STRATEGIES GROUP4 Electric Power Regions of the U.S and Canada

THE GEE STRATEGIES GROUP5 No Rush to Judgment in the Lone Star State Not under economic pressure for reform State took several years to weigh options and alternatives Had benefit of witnessing experience in other countries (U.K.) and other states (California, Pennsylvania)

THE GEE STRATEGIES GROUP6 50 State Average Residential Electric Bills & Rates Texas 3rd highest average annual residential bill of $1,047 per customer. Texas 27nd highest average residential rate of 7.55 cents per kilowatt-hour.

THE GEE STRATEGIES GROUP7 Basics of Texas Electric Choice Statewide customer choice began January 1, 2002 Integrated utilities split into separate businesses Base rates frozen until 2002 Price to Beat: 6% rate reduction in 2002 for residential and small commercial customers Customers have access to renewable energy, energy efficiency programs, and distributed generation Municipal and cooperative utilities given choice to opt in or out of competition

THE GEE STRATEGIES GROUP8 Unbundling Utilities: Before and After under Texas Retail Choice Generation Transmission & Distribution Retail Services Metering Billing Customer Service Energy Service Integrated Utility All regulated Generation Ancillary Services Competitive Transmission & Distribution Wires Non-bypassable Fee Nuclear Decommissioning Administer DSM Metering Regulated Retail Services Metering Billing Customer Service Energy Services Competitive

THE GEE STRATEGIES GROUP9 Fundamental Structural Market Reforms – Each utility must separate into a: Power Generation Company (PGC) Transmission and Distribution Utility (TDU) Retail Electric Provider (REP) – The REP will be the entity with the primary contact with customers and will purchase energy and T&D service on their behalf

THE GEE STRATEGIES GROUP10 The New Market Structure

THE GEE STRATEGIES GROUP11 How Does It Work? All REPs & PGCs have equal access to the transmission & distribution grid Retail customers contact REPs for service REPs & PGCs contract for power to serve retail customers TDU bills REP for customers use of the grid REP sends bill to retail customer Aggregators can also bargain with REPs on customers behalf Customers have option to change suppliers Residential & small commercial customers (below 1 MW of peak demand) who do not change still get 6% rate reduction

THE GEE STRATEGIES GROUP12 Uniform terms and conditions for delivery service Published tariffs for delivery service Switching, billing, and other information exchanged electronically through uniform rules Utilities do not provide competitive services Key Features of Retail Market

THE GEE STRATEGIES GROUP13 How Information and Power Flows

THE GEE STRATEGIES GROUP14 Preventing Market Power: Ownership Restrictions on Generation Law limits generation ownership of single company to 20 percent in power region Code of conduct for transactions between affiliates Requires divestiture by utility-affiliated power generation company w/ greater than 400 Mw of capacity of at least 15 percent of its capacity during the first five years of retail competition, or until utility-affiliated company loses 40 percent of residential and small commercial business.

THE GEE STRATEGIES GROUP15 Price to Beat – The Competitors Edge Default rate offered by utility- affiliated REP at 6% discount for residential and small commercial customers Affiliated REP must charge PTB until it loses 40% of PTB customers or January 2005, whichever first In non-ERCOT areas, PTB must be maintained for 5 years PTB can be adjusted for changes in market price of natural gas and purchased energy No PTB for industrial and large commercial customers-- Open competition permitted Difference between PTB and market price to serve represents headroom for non-affiliated REPs

THE GEE STRATEGIES GROUP16 The Price to Beat – Illustration

THE GEE STRATEGIES GROUP17 The Pilot Program Began August 1, 2001 Limited to 5 percent of utilitys customers or load Large commercial customer response Over 100,000 residential customers participating Currently, 28 REPs certified to do business

THE GEE STRATEGIES GROUP18 Essential Elements of a Workably Competitive Wholesale Market Neutral organization responsible for: – Access to transmission system – Reliability – Settle wholesale accounts – Manage customer switching Policy promoting equitable interconnection process for new generation capacity Mechanism for regional transmission planning Role of Electric Reliability Council of Texas Independent System Operator (ISO)

THE GEE STRATEGIES GROUP19 The ERCOT ISO: Market Principles Bilateral energy market; No Oversight of Pool or Power Exchange Maintains reliability and provides access, but has minimal role in markets ERCOT creates markets for balancing energy and ancillary services Ancillary services can be self-provided (matching output to load and contingency reserves) ERCOT will oversee congestion management by zones

THE GEE STRATEGIES GROUP20 How Bilateral Trades Occur

THE GEE STRATEGIES GROUP21 Can Texas Avoid the Fate of California? Will Texas have sufficient generating capacity? Will Texas have sufficient transmission capacity? Texas officials say yes with proper planning & oversight

THE GEE STRATEGIES GROUP22 New Electric Generating Plants in Texas Austi n Sa n Antoni o Housto n El Paso Corpus Christi Dalla s Harris County Ellis County 27 Plants completed since ,343 MW 27 Plants under construction--13,991 MW 31 Plants announced or planned

THE GEE STRATEGIES GROUP23 ERCOT Reserve Margins

THE GEE STRATEGIES GROUP24 ERCOT Installed and Planned Capacity – 2001

THE GEE STRATEGIES GROUP25 Transmission Constraints in ERCOT South North RGV South West East DFW East HVDC Paris North HVDC Houston Ship Channel Corpus Christi Laredo CPL NORTH CPL SOUTH

THE GEE STRATEGIES GROUP26 Transmission Projects in Texas DFW East HVDC Paris North HVDC Houston Ship Channel Corpus Christi Laredo Under Construction Pending at PUC Recommended by ERCOT Under Consideration at ERCOT

THE GEE STRATEGIES GROUP27 Conclusion Texas is taking a gamble that it has the right stuff others lacked Unique factors may give it the edge Time will tell whether they got it right

THE GEE STRATEGIES GROUP28 For More Information Contact: Robert W. Gee President THE GEE STRATEGIES GROUP 7609 Brittany Parc Court Falls Church,VA Tel: Fax: Special Thanks to Commissioner Brett Perlman, Public Utility Commission of Texas Public Utility Commission of Texas for assistance in providing graphics