Massachusetts Electric Restructuring Roundtable DTE’s Default Service Order (April 24, 2003)

1. Massachusetts Electric Restructuring Roundtable DTE’s Default Service Order (April 24, 2003) May 2, 2003 Paul Vasington Chairman, Mass. DTE

2. Default Service, DTE 02-40 • Investigation opened, June 2002 • Comments filed in August and September • Order on LMP issued February 13, 2003 • D.T.E. 02-40-A • Order on other issues on April 24, 2003 • D.T.E. 02-40-B

3. DTE 02-40-A, 2/13/03 • With SMD starting March 1, 2003, prices for load will be calculated for eight zones in New England. • Massachusetts will consist of three zones: NEMA/Boston, SEMA, and West/Central. • Cambridge, Commonwealth, FG&E, and Western Mass. Electric are each within one zone. • Service territory for Mass. Electric crosses all three zones. • Service territory for Boston Edison crosses two zones: NEMA and SEMA.

4. DTE 02-40-A (cont.) • The issue is whether retail prices for these two companies should be procured and differentiated by zone or averaged. • The DTE decided that supply for default service should be procured by load zone. • Default service prices for residential and small commercial customers will be averaged across load zones. • To the extent that procurement costs are different between zones, default service prices for medium and large C&I customers will be different based on the zone the customer is located in.

5. DTE 02-40-A (cont.) • Reasons for decision • “For medium and large C&I customers, for which an active competitive market has already developed, default service rates should, wherever practicable and as soon as practicable, be set in a manner that does not undermine this competition.” • “[F]or residential and small C&I customers for whom there are currently few competitive options, it is appropriate to treat LMP differently. … zone-differentiated default service rates would have little effect [on competition] at this time.”

6. Default Service, DTE 02-40-B • Issues • Statement of Policy • Costs to be included in default service prices; • Procurement and pricing; • Providers of default service.

7. Statement of Policy • “Competition is the means to an end -- that end being maximizing consumer welfare. Maximizing consumer welfare means minimizing long-term costs to consumers while maintaining the safety and reliability of electric service. If consumer welfare is maximized with very few customers switching to competitive suppliers, it is not a policy failure, as long as there is free choice and there are no artificial impediments for either suppliers or consumers. In this Order, we are removing what we identify as artificial impediments and are creating a more efficient market structure with better price signals and a more stable market framework.”

8. Costs Included in Prices • Procurement-related wholesale costs • Direct retail costs: • unrecovered bad debt, • Costs of complying with the default service regulatory requirements, including required communications with default service customers, and • compliance with RPS. • These costs estimated at between 0.2 and 0.3 cents per kilowatt-hour • Costs not included: • Indirect retail costs (e.g., cust. service, billing, ISO reporting) • Customer acquisition costs

9. Procurement and Pricing • Medium and Large C&I Customers • “current procurement terms provide default service customers with a level of price certainty that is more appropriate provided by the competitive market, thus promoting default service as a longer-term alternative to competitive supply, rather than as a short-term, last resort service.” • “A persuasive, though not yet convincing, case can be made for the proposition that a procurement term of one month would (1) provide efficient price signals to customers because the resulting prices would track wholesale market price on a monthly basis; (2) provide customers with an appropriate level of price certainty; and (3) provide appropriate protection from spot market price volatility.” • Technical Session to discuss this on May 15, 2003

10. Procurement and Pricing (cont.) • Residential and Small Commercial Customers • There is a balance to be struck between providing sufficient price certainty as well as efficient price signals. • The current fixed, six-month option is the appropriate balance for current and foreseeable market conditions for these customers. • The Department sees merit in revising the current practice in which each distribution company procures 100 percent of its default service supply every six months. • NSTAR’s suggestion to procure 50 percent of its default service supply semi-annually, for twelve-month terms, strikes a better balance between price certainty and price efficiency than does the current approach.

11. Providers of Default Service • The Department is not convinced that having competitive suppliers provide default service would significantly assist in the development of an efficient competitive market for smaller customers. • smaller customers’ lack of participation in the competitive market may be due to: • the small level of available savings; • suppliers may be hesitant to enter the market for smaller customers because of the high per-customer costs incurred in acquiring and serving these customers; and • customers may not yet be sufficiently informed and educated about their competitive options. • In addition, legitimate questions have been raised about whether customer assignments in the manner proposed would be consistent with statutory prohibitions against slamming.

12. Other Issues • Renewable Portfolio Standard • Distribution companies have to fully describe the manner in which they have complied with their RPS obligations. • If a distribution company identifies long-term contracts as an efficient way for it to comply with RPS requirements, the company may seek Department approval for such an approach. • “Green” Pricing Options • The Department will not require distribution companies to offer “green” default service options to their customers, but a distribution company that seeks to provide a “green” product to its default service (and standard offer service) customers may submit a specific proposal to the Department for our review.