Restructuring Roundtable: Merchant vs Rate-Base presented by Dan Allegretti

The Basic Idea Merchant = Gooood!!!! Rate Base = Baaaad!!!!

Benefits of Moving to Merchant Model Utility-owned power plant Merchant power plant Three Main Benefits Competitive forces lead to more efficient operation Risk of generation plant cost over-runs shifted from captive ratepayers to merchant owner shareholders Provide more efficient & reliable power system

More Efficient Operation Improved Generator Performance. Since Wholesale Restructuring, plant availability in New England has increased by 8%, avoiding the construction of up to five 400 MW generating facilities. Reduced Emission Rates. While electricity generation within New England increased 25% between 1998 and 2004, associated SO2 rates decreased by 56%, NOX by 57% and CO2 by 22%. Consumer Savings. Consumers have saved between $6.5 and $7.6 billion between 1998 and 2005, based on projections of where prices would have trended in the absence of restructuring. Source: “A Review of Electricity Industry Restructuring in New England,” Polestar Communications and Strategic Analysis (for the New England Energy Alliance), September 2006.

Less Ratepayer Risk Example: Duke Energy “U.S. power company Duke Energy on Thursday significantly boosted its estimated cost for building two proposed power plants, citing higher material expenses and a shortage of skilled labor. Chief Executive Jim Rogers said at a press luncheon that the proposed clean-coal power plant in Indiana may cost $2 billion, up from a prior estimate of about $1 billion. The cost for the proposed conventional coal plant in the Carolinas has been increased to $3 billion from $2 billion, Rogers said.” *Source: Reuters, November 16, 2006.

Less Ratepayer Risk Example: Exelon In 2003 Exelon Corp. turned over ownership of the newly re-powered Mystic and Fore River generating plants to its lenders. According to the Boston business Journal Exelon had acquired the plants from Sithe for a $543 million note. None of this money was recovered from captive ratepayers through stranded cost recovery charges.

Efficient & Reliable System Nearly 40% of installed generation capacity is now merchant Competitive sector built almost all new generation since early 1990s Competitive Power’s Fuel Diversity: Coal – 36% Natural Gas – 27% Nuclear – 27% Renewables – 5% Other – 5%

How Much More Do You Need To See???? New England. $6.5 to 7.6 billion since restructuring. Polestar Study 2006. New York. 14.7 to 17.7% savings for all customers. NYPSC Staff 2006. PJM & NY Combined. $430 million to 1.3 billion/year. LECG 2006. Eastern Interconnect. $15 billion for 1999-2003. Global Energy Decisions 2005. Whole Nation. $34 billion over 7 years. Cambridge Energy Research Associates. Economists agree benefits are real. 2006 Open Letter.