HARD LESSONS LEARNED IN OTHER
STATES,
AND WHAT THE FEDS
MAY DO
THE GEE
STRATEGIES GROUP
Robert W. Gee
President
Electric Deregulation Begins
January 1, 2002
Is Your Company Ready?
Ft. Worth, Texas
November 6, 2001
Overview
What’s gone right?
What’s gone wrong?
What have we learned?
how do federal players hope to
respond?
THE GEE STRATEGIES GROUP
2
Why Ask These Questions ?
24 STATES DECIDED TO OPEN
RETAIL MARKETS
2 REVERSED COURSE
5 MAKING MID-COURSE
CORRECTIONS
CALIFORNIA“DREAMING”
“SCREAMING”
THE GEE STRATEGIES GROUP
3
The Critics’ View: Defining
“Success”
 VOLUME OF ALTERNATE SUPPLIERS
ENTERING MARKET
 DEGREE OF MARKET PENETRATION
(# OF CUSTOMERS SWITCHING TO
ALTERNATE SUPPLIERS)
 PROSPECTS FOR SUSTAINABLE
COMPETITION
THE GEE STRATEGIES GROUP
4
But Are These The Right Metrics
Of Success?
 NUMBER OF STATES COMPLETING
THE TRANSITION PROCESS TO A
FULLY COMPETITIVE MARKET: ZERO
 CURRENT JUDGMENTS BASED
SOLELY ON INITIAL EXPERIENCE
OF TRANSITIONAL MARKET &
REGULATED STRUCTURE HYBRIDS
THE GEE STRATEGIES GROUP
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Policy Goals: What States Want
From Restructuring
 ENSURE OPPORTUNITY FOR RESIDENTIAL AND






SMALL BUSINESS PARTICIPATION, OR NO HARM
ENCOURAGE GROWTH OF EFFICIENT,
COMPETITIVE GENERATION MARKET
ACHIEVE BROAD CUSTOMER & NEW ALTERNATIVE
SUPPLIER PARTICIPATION
ADDRESS TRANSITIONAL UNECONOMIC
“STRANDED COSTS”
RETAIN SYSTEM BENEFITS (RELIABILITY, LOWINCOME ASSISTANCE, CONSERVATION &
RENEWABLES)
IMMEDIATELY LOWER RATES
PROBLEM: SOME GOALS AT ODDS W/ ONE
ANOTHER
THE GEE STRATEGIES GROUP
6
Moral One: Rate Discounts Can be
Costly
 DISCOUNTS AFFECT SHOPPING CREDIT &
LESSEN “HEADROOM” NECESSARY FOR
NEW RETAIL ENERGY PROVIDERS TO
EARN PROFITS
 BUT DISCOUNTS STRONGLY FAVORED AS
POLITICAL PRICE TO WIN LEGISLATIVE
SUPPORT
 MANDATING EXCESSIVELY DEEP
STANDARD OFFER RATE DISCOUNTS CAN
STRANGLE COMPETITION “IN THE CRIB”
THE GEE STRATEGIES GROUP
7
The Massachusetts Case: An
Early Bird Misses The Worm
 MARCH 1, 1998: FULL RETAIL CHOICE
 CURRENT RETAIL CUSTOMERS: COULD CONTINUE ON
STANDARD OFFER RATES UNTIL 2004; ELIGIBLE FOR
DEFAULT RATES THEREAFTER
 DAY ONE: 10 % DISCOUNT OFF BUNDLED RATE; FOLLOWED
BY FURTHER 5% REDUCTION ON 3/1/99
 RATE REDUCTION FINANCED THROUGH DEBT W/ LOAN
REPAYMENT BASED ON FUTURE DISTRIBUTION CO.
SURCHARGES
 POTENTIAL COMPETITORS: REQUIRED TO COMPETE
AGAINST DISCOUNTED STANDARD OFFER RATES BUT
UNABLE TO LIKEWISE IMPOSE LATER SURCHARGE
THE GEE STRATEGIES GROUP
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Jan. 2000 Mass. Offers To Residential Customers/Percent Of
Customers Choosing Alternate Suppliers
Source: K. Rose,
ELECTRIC
RESTRUCTURNG
ISSUES FOR
RESIDENTIAL
AND SMALL
BUSINESS
CUSTOMERS,
June 2000
THE GEE STRATEGIES GROUP
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Customer Switching Results In
Mass. (4/99 TO 7/01):
What’s The Point?
Source: Competition and Consumer Protection Perspectives on
Electric Power Regulatory Reform: Focus on Retail Competition,
Report by the Federal Trade Commission Staff, September 2001
THE GEE STRATEGIES GROUP
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Moral Two: Rate Freezes Can
Leave You Out In The Cold
 FROZEN STANDARD OFFER RATES INTENDED TO
HOLD NON-PARTICIPATING CUSTOMERS
HARMLESS
 SUSTAINABLE SO LONG AS FUEL COSTS AND
PURCHASED POWER COSTS STABLE OR
DECLINING
 BUT IF COSTS ESCALATE, FREEZE CAN INDUCE
CUSTOMER BEHAVIOR STRONGLY
COUNTERINTUITIVE TO PROMOTING
COMPETITION
 CUSTOMERS ARE ENCOURAGED TO “GAME”
SYSTEM BY SWITCHING BACK TO STANDARD
OFFER SUPPLIERS TO MINIMIZE PRICE EXPOSURE
THE GEE STRATEGIES GROUP
11
The Pennsylvania Case: Where
Did Everyone Go?
 RETAIL CHOICE BEGAN SEPT. 1998; FULLY
IMPLMENTED STATEWIDE BY JAN. 2000
 RATE REDUCTIONS NOT MANDATED BUT
SOME UTILITIES AWARDED DISCOUNTS
PER SETTLEMENTS (E.G., PECO: 8 % & 6 %
IN YEARS 1 AND 2, RESPECTIVELY)
 LENGTHY STRANDED COST RECOVERY
PERIOD = HIGH HEADROOM, FAVORABLE
FOR COMPETITORS
 RATE CAPS FOR GENERATION FIXED AT
1997 LEVELS UNTIL 2006, OR UNTIL 20082011 FOR SOME DISTRIBUTION UTILITIES
THE GEE STRATEGIES GROUP
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WINTER 2000- SPRING 2001:
MARKET MELTDOWN
 FUEL PRICES SHARPLY ESCALATED ( I.E.,
NATURAL GAS = $4.44/MMBTU VS. $ 2.39/MMBTU
IN WINTER 1999
 WHOLESALE POWER PRICES INCREASED OWING
TO NATURAL GAS RISE, MAKING ALTERNATIVE
SUPPLIERS BEAR COSTS OR PASS THROUGH
COSTS TO CUSTOMER
 RESULT: MASS MIGRATION OF “SWITCHING”
CUSTOMERS RETURNING TO STANDARD OFFER
SERVICE SUPPLIERS WITH FIXED RATES
THE GEE STRATEGIES GROUP
13
Pennsylvania Residential
Customers Switching Activity
Source: Competition and Consumer Protection Perspectives on
Electric Power Regulatory Reform: Focus on Retail Competition,
Report by the Federal Trade Commission Staff, September 2001
THE GEE STRATEGIES GROUP
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Penn. Customers Served By An
Alternative Supplier As Of April 2000
Source: PA Office of Consumer Advocate
THE GEE STRATEGIES GROUP
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Penn. Customers Served By An Alternative
Supplier As Of July 2001
* Includes 223,747 residential customers assigned to Competitive Default Service (CDS)
Source: PA Office of Consumer Advocate
THE GEE STRATEGIES GROUP
16
Penn. Customers Served By An
Alternative Supplier As Of October 2001
* Includes 242,336 residential customers assigned to Competitive Default Service (CDS)
Source: PA Office of Consumer Advocate
THE GEE STRATEGIES GROUP
17
Percent of Penn. Commercial Customers
Served by Alternative Supplier
Sources: PA Office of Consumer Advocate and Ken Rose
THE GEE STRATEGIES GROUP
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Percent of Penn. Industrial Customers
Served by Alternative Supplier
Sources: PA Office of Consumer Advocate and Ken Rose
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Any Good News?
 MARKET APPEARS TO HAVE STABILIZED OVER
LAST FEW MONTHS
 PA PUC HAS PERMITTED DISTRIBUTION COS.
TO SET LIMITS FOR CUSTOMER TO RETURN TO
STANDARD OFFER SERVICE (E.G., MUST STAY
12 MONTHS BEFORE SWITCHING BACK)
 PUC ENCOURAGED DISTRIBUTION COS. TO
OFFER SHORTER PERIOD SERVICE W/
PAYMENT OF MARKET-BASED GENERATION
RATES
THE GEE STRATEGIES GROUP
20
Any Other Good News?
 TEXAS MAY BE BETTER SITUATED TO AVOID
THESE FAILURES
 RATE DISCOUNT NOT AS DEEP AS
MASSACHUSETTS’: 6 PERCENT VS. 10 & 15
PERCENT
 DURATION OF RATE FREEZE KEYED TO
LESSER OF 5 YEARS OR EROSION OF 40 % OF
DISTRIBUTIONS COS.’ MARKET SHARE FOR
RESIDENTIAL AND SMALL COMMERCIAL
CUSTOMERS
 “PRICE TO BEAT” CAN BE ADJUSTED FOR
GAS COSTS AND PURCHASED POWER
COSTS UNLIKE PENNSYLVANIA’S
THE GEE STRATEGIES GROUP
21
Lessons
 ROAD TO HELL PAVED WITH GOOD
INTENTIONS
 POLICYMAKERS AT A DILEMMA: BY
EXCESSIVELY PROTECTING NONPARTICIPATING CUSTOMERS, YOU RISK
KILLING COMPETITION
 WRONGLY DESIGNED DISCOUNTS AND RATE
FREEZES CAN FRUSTRATE EMERGENCE OF
COMPETITIVE MARKETS
 NUMBERS DON’T LIE: NEW STATE PROGRAMS
SHOULD HEED PRIOR MISTAKES, AND DESIGN
MARKETS ACCORDINGLY
THE GEE STRATEGIES GROUP
22
The Federal Response
 PROPOSED LEGISLATION DOES NOT
ADDRESS THESE SPECIFIC MARKET
DESIGN DEFICIENCIES
 FOCUS IS ON BOLSTERING
FUNCTIONALITY OF WHOLESALE POWER
MARKETS AND ELIMINATING BARRIERS
FOR INCREASED GENERATION
 PROPOSALS BY CHAIRS OF SENATE
COMMITTEE ON ENERGY & NATURAL
RESOURCES (BINGAMAN) AND HOUSE
SUBCOMMITTEE ON ENERGY & AIR
QUALITY (BARTON)
THE GEE STRATEGIES GROUP
23
Senate and House Proposals On
Transmission
 EXTEND FERC OPEN ACCESS JURISDICTION TO ALL
TRANSMITTING UTILITIES, INCLUDING MUNIS ,COOPS, &
FPA’S: BOTH, BUT BARTON ALLOWS M’S & C’S TO SET OWN
RATES W/FERC REVIEW
 FERC AUTHORITY TO ORDER UTILITY TO JOIN RTO: BOTH
 FERC JURISDICTION OVER ALL RETAIL TRANSMISSION; YES
UNDER BINGAMAN, BARTON OPEN TO PROPOSALS FROM
STAKEHOLDERS & MEMBERS
 FERC EMINENT DOMAIN SITING AUTHORITY: RTO CAN USE
FERC BACK-UP AUTHORITY (BINGAMAN) ; FERC AUTHORITY
IF STATES NOT RESPONDING IN 12 MONTHS OR PROPOSAL
REJECTED AS NOT IN PUBLIC INTEREST (BARTON)
THE GEE STRATEGIES GROUP
24
Senate and House Proposals On
Electric Supply Issues
 INTERCONNECTION STANDARDS: BOTH
GIVE FERC AUTHORITY TO ORDER
 ADVANCED METERING: BARTON SEEKING
PROPOSALS
 FERC MERGER REVIEW: BINGAMAN
STREGTHENS, BARTON REPEALS
(DEFERS TO FTC & JUSTICE)
 RELIABILITY: BOTH GIVE FERC
OVERSIGHT OF ORGANIZATION SETTING
MANDATORY STANDARDS (I.E., NERC)
THE GEE STRATEGIES GROUP
25
Prognosis For Comprehensive
Federal Legislation?
 CROWDED
CONGRESSIONAL
AGENDA OWING TO
WAR & NATIONAL
SECURITY ISSUES
 DRILLING IN ARCTIC
NATIONAL WILDLIFE
REFUGE STILL MAJOR
STICKING POINT
 BUT ENERGY &
SECURITY LINK
GROWING
THE GEE STRATEGIES GROUP
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For More Information Contact:
The Gee Strategies Group
Robert W. Gee
President
1954 N. Cleveland St.
Arlington, VA 22201
(703) 465-9181 (voice and fax)
(703) 593-0116 (mobile)
Email: [email protected]
THE GEE STRATEGIES GROUP
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