1. Massachusetts Electric Restructuring Roundtable February 28, 2003 Bill Huss – Senior Vice President Tom Michelman – Principal Consultant
Summary Results of Recent National Studies on Retail Competition and Default Service

2. Presentation Summary Who is KEMA-XENERGY
Findings from Retail Restructuring Study
Findings from POLR Study

4. Retail Markets Growing
Despite California and Enron, competitively served load increased from 15,000 MW to 40,000 MW in 2002.
Texas market opens and seems to be a success
Companies continue to enter the market including wholesalers
Growth also occurs in other states such as Massachusetts and New York
There have also been retailer exits -- but fewer
The New Power Company ($700 million lost!)
Credit ratings suffer

5. Growth in Load Migration
2002 saw large gains in migration. XENERGY estimates:
40,000 MW late-2002 vs. 15,000 MW in mid-2001
2.1 Million customers late-2002 vs. 1.4 Million in mid-2001
Project 7 to 10 thousand MW additional migration in 2003
Estimated Megawatts Switched by State

6. MA Switching Over Time
Increases in C&I switching rates are related to drop in wholesale prices combined with
increases in Default Service rates
Increases in Standard Offer rates
In addition increases in residential switching associated with Cape Light Compact and Dominion Retail entry

7. 2002 Changes in Competitive Status
IL: Nov ICC allows ComEd to phase out capped rate default service for >= 3 MW customers
NJ: Nov BPU adopts new BGS with rates determined by competitive bid. Large C & I customers forced on hourly market passthrough.
AR: 2003 legislation repeals electric restructuring law
NM: 2003 settlement agreement terminates planned retail competition in PNM service territory.
NY – Continues with their important retail unbundling proceeding.
NYSEG customer choice program that’s part of a 5 yr rate plan and merger settlement. There are a lot of details, but the key elements are that customers have 3 primary choices: (1) a fixed, bundled rate from the utility (2) a variable, indexed supply rate from the utility and (3) a competitive supply rate.
Backing Away from Competition
Supporting Competition
Status Quo

8. Retailers Showing Increased Profitability
At least 15 retailers profitable in 2002
Reliant reports 25% gross margin
Favorable wholesale market conditions
Improved expertise and infrastructure
Pricing and risk management
Billing and customer service
Lower acquisition costs
Reliant reports $150 to $200 per customer
Dominion reports $15/customer using direct mail
Centrica and others focus on door-to-door, not mass advertising

9. No Single Successful Model
Full service and niche players
Regional and national successes
Pure wholesalers, mass marketers, and energy service companies

10. Retailer Positions
For the Retailers mapped on this slide we have some indication of profitability from
Commonwealth Energy, Texas Commercial Energy, First Choice Power, NewEnergy, Strategic Energy,
Sempra Energy Solutions, Pepco Energy Services, Reliant Energy.
Select Energy did not show profitability in 2002.
All the rest did not produce results or did not break out retail as a separate line item.

11. Mass Markets Continue to Lag
Texas plan creates scale for major affiliates.
TXU million customers
Reliant million
Centrica million
Other retailers with scale
Green Mountain ,000 customers
First Energy Solutions ,000
Dominion Retail ,000
First Choice Power ,000

12. Winter 02/03 Residential Switching

13. Non-Residential Customers Lead the Way
88% of Texas customers greater than 1 MW switched by Sept. 2002
Major suppliers
TXU (8-12 GW)
Reliant (7-10 GW)
Constellation/New Energy (4.3 GW)
Strategic Energy (2.6 GW)
ConEd Solutions, Exelon Energy, First Energy Solutions, KeySpan Energy, Select Energy, Sempra Energy Solutions all around 1 GW

14. Winter 02/03 Nonresidential Switching

15. What to Watch in 2003 New Jersey market heats up
Default service rates determined by competitive bid
Large customers get hourly market rate
Reliant considering market entry
Texas will continue to lead % more migration
Wholesale firms will continue to enter retail markets
New York and the NYSEG unbundling proceeding
Illinois-- large customer capped rate default service phased out
Residential customers continue to lag as options appear as part of regulated service

16. Transition periods are expiring
Generation price caps lifted
Move to market-based default service pricing
Customer assignment, etc.
End Dates of Transition Periods
*Definitions, rules and rate structures vary widely by state and service territory; some states have
extended transition periods or others implemented post-transition rate periods.

17. Default Service Status & Trends
Definitions
Default Service. For those who have not chosen a supplier or who no longer have a relationship with a supplier.
Includes “Standard Offer” and “Default Service” in Massachusetts
POLR Service. Subset of Default Service. For emergency or temporary electricity supply.

18. Default Service Models & Market Effectiveness
Fixed Administrative Price – MA SO
Competitive Bidding / Price Indices – MA DS
Wholesale Spot Price Pass Through – NJ HEP, MD-BGE Schedule P
No Regulated Price – TX Non-PTB

19. DS Models - Typical Characteristics I

20. DS Models - Typical Characteristics II

21. DS Price Component Models
Wholesale
NJ-BGS, NJ-NYSEG BRO, OH DS
Retail Adders
MD-DS, NY-ConEd DS, DC-DS
Retail
TX-POLR, TX PTB, UK Deemed Contracts, PA GPU-CDS
Example Wholesale Components:
Energy procurement, capacity, ancillary services, wholesale hedging, other supply-related risk management, LMP, congestion costs, administrative costs, line losses, renewables, auction costs, transmission charges,
Example Retail Components: Uncollectibles, metering, billing, call center, dispute resolution, distribution charges (possibily), return to default service provider.

22. Existing & Proposed Models for DS & POLR Design

23. Trends in DS & POLR Design

24. Perceived Pros: Utility as DS Provider
High expected reliability
Familiar regulatory control
Confidence of continued market participation
Historically good financial standing
Established local retail infrastructure
Perceived experience and wherewithal to procure supplies
Preserves status quo for customers who do not choose – minimal confusion
Communications and control tools at the onset of market opening
Best position to handle emergency supply situations
Established benefits from scale and customer diversity
Avoids a transfer or involuntary reassignment of customers

25. Perceived Cons: Utility as DS Provider
Incumbent advantages will lead to the utility being the “provider of first resort”
Retail competition changes the regulatory compact: if no longer granted a supply monopoly, then why retain the associated public service obligation?
Increases the need for a POLR because suppliers do not enter or will eventually exit the retail market
Customers gain no experience with dealing with competitive retailers during the transition period
Price caps result in unacceptable risks and inefficiencies with no upside potential
Incumbent utility may no longer have the financial stamina as “wires companies” to handle POLR obligations
Risks borne by single entity
Incumbent may want out of the merchant business