Solving Energy Deregulation Crisis: Path to State Control

1. Is ReReg the Answer? And if so, how do we get there? A presentation to The Massachusetts Roundtable May 19, 2006 by Nancy Brockway NBrockway & Associates

2. First, what is the problem? • High rates • Public upset –thank goodness we’re not Maryland! • Boom/Bust • Inadequate (recent) investment • Especially in severe load pockets • Threats of reliability crisis • Public mistrust of “black box” markets • Especially post-Enron/post-California

3. How do pro-Dereg folks answer? • Don’t worry, it’s just high gas costs • It’ll go away some day, and/or • It’s not our fault, and/or • We need the extra cash over our costs to incent us , and/or • High prices send the proper signals to conserve. • Meanwhile, we need more money from consumers • FERC – “Please give us a LICAP with as few obligations as possible and as few penalties as possible.” • Only with strong pushback from load (representing public) were ANY obligations and ANY penalties included in settlement. • Even so, “transition payments” are a big transfer.

4. Eat your spinach. We need subsidies mandated by government. If it’s not working for you, don’t look at us! In other words, generators say:

5. But, do we even HAVE a market? • Energy clearing prices are capped by government action. • Load has a government-mandated pay-or-play purchase obligation, for capacity and ancillary services. • Costs vary greatly within 8760 hours, but most customers see only 2 or 3 rates. • Providing significantly more discrete prices is a non-starter • Metering costs still prohibitive • Public would have a fit. (see Delaware Statute) • Marketers have bailed except those with cash cows.

6. Can we get a functioning market? • NO • Can’t lift wholesale price caps much • Can’t avoid RMRs or FCMs or something to keep generators afloat & happy during bust phase. • Can’t implement real time pricing • Can’t achieve customer/public trust • Can’t accommodate public goods aspects of electricity production and delivery • Environmental footprint

7. Can we limp along like this? • Sadly, yes. • Black box allows participants to point fingers, evade responsibility. • Other things on the public’s mind. • No reliability crisis just yet for all NE. • On the other hand • Connecticut forecasts 40-50% rate increases! • Current prices are no picnic. • Already don’t have enough reserves to prevent gaming.

8. It’s going to get worse…

9. Can we “go back”? • With political will, yes. • Steps being taken already • Maine bill • Rhode Island bills • PSNH investments • NU shedding marketing arm • But short of condemnation/state seizure, will take time. • And even eminent domain may not prevent double-paying for assets. • Building is expensive, and current long-term contract prices are inflated. • Ironically, if wait for next bust, political will may collapse, too.

10. How could we restore state control? • Need vertical integration • to avoid FERC and • to assert states’ public interest standards. • Need to allow EDCs to build/buy/contract for “default” load. • Have to “renegotiate regulatory compact.” • POLR becomes the lodestone • Most customers use it anyway • Reject concept of POLR as a stick to market • Prevent arbitrage of POLR service by big dogs • Over time develop portfolio

11. Alternatives to V-I IOUs • Allow for consumer coops with right to buy/build • Have to be opt-out to succeed. • Allow easier municipalization. • Create, enhance state power authorities.

12. What states are doing, considering:

13. Key Features of Delaware StatuteHouse Bill No. 6 as amended • Generation, supply & sale of electricity = public utility function. • Does not abolish retail choice. • IOU to provide Standard Offer Service. • Returning Customers get spot rate for 1 year after return. • 60% increase spread over 4 years, on opt-out basis. • With PSC ok, IOU may meet SOS by: • Entering into long/short contracts • Own and operate generation facilities • Build generation and transmission facilities • Make investments in DSM • Take any other PSC-ok’d action to diversify retail load. • IOU must undertake Integrated Resource Planning • Must file plan to obtain 10+ year contracts to stabilize price • Must purchase 30% from wholesale mkt via bid/auction • Allows non-price factors to count in benefit/cost calculus

14. Key Features of Maine BillLRs 2041, 3152 • SOS procurement changes: • Allows PUC to include DSM in SOS • Allows PUC to set SOS at different terms • Allows PUC to order IOUs to enter into LT Capacity Kos (not more than 10 years), and include energy in SOS • Must allow cost recovery including CoC impacts. • PUC may enter into Kos for interruptible, DSM or EE capacity resources – RFP process every 3 years • Capacity Kos must increase reliability and/or lower cost • Priority to new interruptible, DSM and EE capacity resources and new renewable recourses located in ME • PUC to adopt long term plan for electric resource adequacy. • Statute Requires 10% increase in new renewables by 2017

15. What if they gave a market and nobody came? • Problem in allowing, or worse yet, requiring long term contracts, with no physical hedge: • Can’t get a reasonable long-term quote today • May never get one, in a business fraught with regulatory risk. • Takes two to tango.

16. Recommendations • Hang on to your remaining IOU-owned generation for your life • Restore the “obligation to build” • Don’t fall for Wall Street’s demands for iron-clad recovery guarantee • If you do, make sure to take it out of the CoC • Keep non-price values firmly in mind • Consider a State power authority to create shadow market for power, at least