1. A National Perspective on Customer Choice Programs
Craig G. Goodman
President
National Energy Marketers Association
Retail Power Markets Summit
February 25, 2004

3. National Energy Marketers Association Overview
Who is The National Energy Marketers Association (NEM)
Natural Gas and Electricity, Wholesale and Retail,
Energy-Related Products, Services, Information, and
Advanced Technologies - risk management technologies, clearing solutions, sophisticated electronic trading platforms as well as predictive and real time electronic trade confirmations and settlement capabilities, customized software for the back, middle or front office and generator or wellhead to user metering, billing, and data exchange capabilities as well as advanced grid reliability, power line siting, information and transmission technologies.

4. National Energy Marketers Association Overview
Who is NEM?
Wholesale and Retail Suppliers of Electricity and Natural Gas
Independent Power Producers (IPPs)
Suppliers of Distributed Generation
Energy Brokers, Power Traders and Electronic Trading Exchanges
Advanced Metering and Load Management Firms
Billing and Information Technology Providers
Credit, Risk Management and Financial Services Firms
Software Developers
Broadband Over Power Lines, Power Line Communications (PLC) and Hybrid PLC Companies

5. National Energy Marketers Association Overview
What Does NEM Do?
State and Federal Regulatory Commissions, Legislators
In 2003, NEM was active in 73 different proceedings in 15 states, plus multiple proceedings at the FERC, CFTC, FCC and the FTC
Consumer Representatives and Utilities
Develop and implement Transitional Wholesale and Retail Market Designs so that utility shareholders and marketers could become partners in a consumer-focused, value-driven transition to an orderly, reliable and competitive retail marketplace.

6. Status of U.S. Electricity Choice Programs
Electricity - 24 states and the District of Columbia have either enacted enabling legislation or issued a regulatory order to implement retail access*
17 states and the District of Columbia are active in the restructuring process (choice is or will soon be available) -Arizona, Connecticut, Delaware, District of Columbia, Illinois, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio, Oregon, Pennsylvania, Rhode Island, Texas and Virginia
5 states have delayed restructuring or the implementation of retail access - Arkansas, Montana, Nevada, New Mexico, and Oklahoma
1 state has suspended retail access - California
*Source: U.S. Energy Information Administration
In West Virginia, the Governor and legislature have not approved the PSC’s restructuring plan authorized by statute.

7. The Benefits of Competition
Energy choice programs provide consumers with a myriad of benefits:
Better price and service options
Access to innovative new offerings of products, services, information and technology
Lower energy prices lower the cost of doing business permitting companies to better compete,
Lower energy prices helps states to attract new businesses, increase job opportunities and increase state tax revenues
Consumer Protection-The ability to do business when you want, with whom you want, and then to buy what you want is one of the greatest consumer protections that government can offer.

8. The National Energy Challenge Transitional Retail Market Design Issues
NEM members have identified a core set of issues that impede the transition to price competitive markets and prevent consumers from realizing the benefits of competition:
Transitional Retail Market Design Issues
Retail Technology Issues
Transitional Wholesale Market Design Issues
Wholesale Technology Issues
We are in a transition from an early 20th Century – integrated utility business model to a hi-tech, consumer focused, value-driven, price competitive model of the 21st Century

9. The National Energy Challenge Transitional Retail Market Design Issues
Marketers and utilities should be partners:
Marketers should become the utilities largest and best customers
Marketers can remove costs and risks from utility operations
Tax and Regulatory Incentives should encourage upgrading infrastructure and shedding high-risk, low- margin commodity-related functions
Utility shareholders should share a portion of tax credits with ratepayers based on percentage of migration achieved in their service territories

10. The National Energy Challenge
The longer we delay in reaching a competitive end state in the markets, the longer consumers will suffer the consequences
Higher prices (duplicative costs and rents)
Fewer competitive options
Sub-optimal settlements

11. Transitional Retail Market Design Issues Market-Based Utility Pricing
Issue: Consumers and Regulators Fear Price Volatility
As a result, utilities are forced to provide high-risk, low-return commodity services and to cross-subsidize certain classes of consumers. In turn, consumers never get the proper price signals to lower demand and make efficiency investments.
Solution: A Transitional Market Design must encourage :
Utilities to exit the merchant function, invest in infrastructure and congestion relief and permit the market to manage price risks and implement creative low income products.
During the Transition, utility default rates should utilize market-based pricing (New York, Maryland (BG&E Electric Schedule DS), New Jersey Basic Generation Service CIEP customers)

12. Transitional Retail Market Design Issues Market-Based Utility Pricing
Issue: Prices to Beat Tend to Be Misleading
Floating Interest Rates and Fixed Rates are Different
Regulated Prices and Market Prices are different. However, the difference is often hidden from the consumer.
Example: New Jersey-Wholesale Basic Generation Service (BGS)
Insulates Fixed Price Contracts from volatility and price risks because 2/3 of supply will always be locked in
Creates retail boom when forward price is below BGS rate
Creates retail bust when forward price is above BGS rate
Solution: Default Prices Should Reflect Current Market Conditions and the embedded costs of serving no-notice retail load

13. Transitional Retail Market Design Issues Market-Based Utility Pricing
The Embedded Cost of Serving No-Notice Retail Load. In addition to the wholesale cost of commodity, electric default rates must include:
transmission charges,
scheduling and control area services, and distribution line losses,
a share of pool operating expenses,
risk management premiums,
load shape costs,
regulatory compliance, and customer care
commodity acquisition and portfolio management,
working capital,
taxes,
administrative and general expenses,
metering, billing, collections,
bad debt, information exchange,

14. Transitional Retail Market Design Issues Consumer Shopping Credits
Issue: Designing Consumer Shopping Credits
Solution: During the Transition
Fully Allocated Embedded Cost-Based Unbundling (New York)
Embedded costs are “Just and reasonable”
Educates consumers on proper pricing signals
Reveals and mitigates cross-subsidies
Caveat: Migrating customers should not be required to make double payments for services

15. Transitional Retail Market Design Issues Safety-Net Programs
Issue: Designing Transitional Safety Nets
Safety Net Programs define the limits of price competition
Safety Net Programs define protected “core customers”
Solution: Carefully Define and Encourage Targeted Solutions
Lazy Non-Shoppers should not be a “Protected Class”
Tax and Regulatory Incentives can help until the competitive marketplace can develop low income products.

16. Transitional Retail Market Design Issues Payment Allocations
Issue: Current Payment Allocation Increases Bad Debt
Solutions:
Pay consumable portion of the bill first
Once commodity consumed, it cannot be recovered
Assets can be reused and secure future payments
Purchase receivables (Ohio-Columbia, Dominion East Ohio and Vectren Energy Delivery, New York-O&R)
Prorate payments (New York, Massachusetts)

17. Transitional Retail Market Design Issues Exit Fees
Issue: Exit Fees Penalize Shoppers and Increase Costs
Exit fees penalize migrating customers for exercising the right to choose (Michigan, Illinois)
Price competition benefits all consumers
Incents utilities to continue to invest in competitive services thereby further increasing stranded costs
Solution:
Quantify the costs of implementing retail access and any potential "stranded costs" net of associated benefits after a reasonable migration level has been achieved
Recover net stranded costs via a competitively neutral charge

18. Transitional Retail Market Design Issues Customer Acquisition Costs
Issues: Customer Acquisition Costs Impact Prices
Safety Net Regulations
Consumer Protections
Wet Signatures
Do Not Call Lists
Solutions: Cost-Effective Access to Customers
Telephonic and internet enrollment
PUCs can provide customer lists
Utilities should provide customer lists at no or low cost (Massachusetts, Ohio)

19. Transitional Retail Market Design Issues Storage and Capacity Concerns
Issue: Utilities limit marketer access to storage and capacity (citing reliability concerns)
Solutions:
Access to market area storage and pipeline capacity for customers that switch a must
Utility to contract for only the level of capacity required to serve sales customers (Ohio-Dominion East Ohio)
Marketers should have automatic option to acquire capacity for customers that switch
A slice of the system at no more than max rates

20. Transitional Retail Market Design Issues Creditworthiness Requirements
Onerous, over-collateralized and discriminatory credit requirements imposed on many marketers
Solutions:
Marketers may satisfy creditworthiness requirements through favorable credit rating, parental guarantees and/or reasonable bonding requirements
Utility should offset posted credit requirements by the amount of ESCO receipts that the utility currently possesses (New York) and supplier gas storage

21. Transitional Retail Market Design Issues Utility Incentives
Utilities Not Motivated to Open Markets
Utilities Compete for Market Share
Solutions:
All rates, tariffs, regulatory and tax incentives should be tied to the percentage of customer migration
Utilities should actively promote customer switching (New York-O&R)
PUC role as advocate for consumers should extend to marketers (The utility’s largest customers)
Creation of level playing field benefits all

22. Transitional Retail Market Design Issues Retail Technology Metering, Billing & Information Services
Issues: Billing, metering, customer care and ancillary services are competitive functions
Consumers receive inadequate data to permit price responsive demand
Solution:
Utilities’ fully allocated embedded costs of providing these services should be unbundled from rates to provide consumers with proper pricing signals
Give consumers access to low-cost, reliable, advanced metering services and related ITs (New York, Maryland, Illinois, Virginia, California)
Including, ownership, installation, servicing of equipment, maintenance, testing, reading, data management, validation, editing, estimations, pulse output transmission via Internet and billing.

23. Transitional Retail Market Design Issues Retail Technology Distributed Generation
System capacity needs, transmission and distribution constraints, the desire for enhanced reliability, market power concerns, and consumers' drive to exert greater influence over their energy destiny all point toward a growing need for distributed generation
Solution:
National, or at a minimum, statewide technical safety and reliability requirements, application procedures, forms, standard agreements, related testing and certification requirements (New York, Ohio, Texas, California)
Eliminate existing penalties to reduce the costs and risks of investments by consumers in distributed generation technology

24. Transitional Retail Market Design Issues Retail Technology Power Line Technologies
Providing ubiquitous, low-cost, last mile, last inch access to consumers for a completely new array of high-value energy and related products, services, information and technologies
Solution:
Wide-scale deployment of power line technologies
Issues:
Jurisdictional issues arising from Supreme Court precedent, recent legislation, and FCC and FERC’s primary jurisdiction - FCC 2003 NOI and 2004 NOPR
Reliability implications
Non-discriminatory access to power lines
Utility provision of competitive services

25. Transitional Retail Market Design Conclusions
The near simultaneous natural gas price spike and the cascading Midwest blackout has more sharply defined the essential nature of the “Social Compact” that underlies the grant of a franchise monopoly in a subtle but important way.
A properly designed competitive market should both permit and encourage utilities to shed high-cost, high risk, no or low return use of its capital and credit, and instead, encourage redeployment of financial resources to upgrade infrastructure and grid reliability. `

26. Transitional Retail Market Design Conclusions
The early 20th Century utility business model obfuscates the true costs of energy, undermines the ability of ratepayers to become informed consumers and promotes high risk, sub-optimal returns on utility resources. On the contrary, it is clearly in the public interest for competitively generated capital to incur, mitigate, and manage market risks as well as design and implement new value-added technologies.
Additionally, it appears that that the true nature of Society’s expectation of a utility’s obligation to the Public Interest is in the reliability of its transportation and delivery of energy rather than the efficiency with which it purchases, meters, bills and collects charges for the sale of energy.