Maine's Standard Offer Service Tom Welch Massachusetts Electric Restructuring Roundtable January 28, 2005

Standard Offer Design Available to all customers Bid by T&D territory, not state-wide Prices differentiated by customer size (small, medium, large) Billed through T&D company Fixed uncollectible amount in contract (based on prior year T&D experience); during contract term, T&D bears risk of misestimated uncollectible rate Use of “load profiling” to determine residual load Bids by percentage of load (to permit selection of multiple bidders) Objective is to obtain good price but avoid distorting retail market

Key Design Elements Relatively short term (6 mos. To 3 years) fixed price (for larger customer classes, can vary by season, time of day) Supplier takes all risk Load risk Price risk No adjustments (retroactive or otherwise) during term Relatively free customer entry/exit Anti-gaming rules No new deferred costs “Market” priced Retail price: price is not raised or lowered by regulator (avoids new stranded costs)

Design Implications for Attracting Supply Investment Standard Offer is not intended to provide incentives beyond those in the market for development of new supply Issue of degree of government involvement in encouraging new supply still unresolved (Editorial: Current LICAP proposal won't work) Standard Offer design could accommodate “transparent” efforts to encourage supply

Bid Process Issue RFPs Pre-bid conferences Seek “indicative” prices Describe product clearly Documents available in hard copy and on website Provide load data Pre-bid conferences Answer questions and post on website Seek “indicative” prices Periodic update of bids (can add or drop from “preferred” list) Most bidders are consistent, but some bid low initially to “get into the game”

Bid Process 2 Negotiate non-price terms Rank suppliers; negotiate with “best” (rank can change) Keep enough bidders to avoid being “boxed in” and to keep bidders nervous Negotiations are confidential Complete negotiations with preferred list before asking for “final” bids

Bid Process 3 Non-price terms (cont.) This phase is most time-consuming and difficult (our attempts to “standardize” terms resulted in very few bidders) Focus on bidders with best prices, but do not eliminate anyone until final bids are accepted Key non-price issues: security, breach/termination, change of law

Bid Process 4 Final bids Very rapid (one day) process; receive bids at 10:00, decide by 14:00; execute contracts the same day. All evaluation must be done in advance Requires thorough and accurate staff work and frequent meetings with Commissioners

History of Bids Some "start-up" issues (bids rejected for some in first years; T&D acted as supplier with market pass-through rates) Participation has been strong (multiple bids the norm) Taking 2 and 3 year prices for residential customers has muted political discourse

History of Bids Fifth year (2004) Prices significantly higher for residential class: increased from 5 to 7 cents (effective 3/1/05) Purchased in slices: 100% for first year, 2/3 for second year, 1/3 for third year; 1/3 will be rebid (for 3 years) going forward. Prices for 2nd and 3rd years are slightly lower. Total price increase for residential customers will be moderated by pass-through of decrease in stranded costs

Relationship of Bids to Market Bids track market closely, but market is much more variable than prices Following charts are primarily indicative of direction (exact comparison of wholesale price and retail price competing with standard offer is difficult)

Relationship of Standard Offer to Competitive Activity High percentage of Customers in larger classes have entered competitive market Participation in retail market is open to all who become licensed. Price is completely unregulated (bilateral contracts not reviewed by commission) Strong correlation among standard offer price, wholesale market price, and competitive activity Most competition based on price; some fixed price, some as differential from Standard Offer

Inherent Tension: Politics The system is designed to avoid government-driven (and ratepayer supported) long positions Retail Model (i.e. pass-through without “government – set” price) is essential component of Maine model Price shock may be destabilizing; impact of recent price increase is not yet known. Comparisons to national average prices and to increases in other fuel costs may be helpful.

Inherent Tension: Market Product is a hybrid Free aggregation given to suppliers Price and volume risk taken by suppliers Goals: Encourage competition without creating price umbrella Provide politically acceptable price without killing competition or creating deferrals