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

2. 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

3. 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)

4. 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

5. 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”

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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)

12. 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

18. 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.

19. 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