Wholesale and Retail Market Models: Will they mesh well or cancel each other out?

John ReeseNew York State Department of Public Service

June 1, 2006at

Harvard Electric Policy Group

2

Bottom Line

• Properly designed wholesale and retail markets working together are the desired state

• We can sustain wholesale competition without wide-scale retail competition.

• Rumors of the demise of the retail markets are greatly exaggerated.

3

New York: Wholesale Competition

• NY utilities divestiture• Robust wholesale spot market, operated by

NYISO. – load pockets– mitigation measures– Investment has occurred where needed

• NYISO market design.

4

New York: Retail Competition

• 40% of load supplied by ESCO’s• Over 70% of large C&I customer load, over

40% of other business customer load• Policies to facilitate retail competition in place

– Uniform business practices, EDI, consumer protections, and best practices such as purchase of ESCO accounts receivables by utilities.

5

Retail Migration

Customer migration has been increasing, particularly in 2005, foCustomer migration has been increasing, particularly in 2005, for r both electricity and natural gas customersboth electricity and natural gas customers

Statewide Retail Market Migration

0

250000

500000

750000

1000000

2000 2001 2002 2003 2004 2005

Acc

ount

s

Electric Natural GasNote: Natural gas statistics as of November 2005

6

Wholesale vs Retail Prices

• On a statewide basis, residential and industrial real prices decreased between 1996 and 2005

• Wholesale and Retail prices have not been divorced from each other in the state – Retail prices have not been capped artificially

using utility deferrals– Wholesale fluctuations are visible in the retail

market.

7

Total Load Weighted Average % Change in Customer Electric Rates Statewide from 1996 - 2005 in Real (Inlfation-Adjusted) Dollars

(Data Source: EIA Form 826 Data and DPS 5 Year Book)

-7.29%

-18.25%

6.86%

-20%

-15%

-10%

-5%

0%

5%

10%

Residential Commercial Industrial

8

Total Average % Change in Customer Electric Rates by Utility from 1996 - 2005 in Real (Inflation-Adjusted) Dollars

(Data Source: EIA Form 826 Data and DPS 5 Year Book)

-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

CHG&E CONED NYSEG NMPC O&R RG&E

Residential Commercial Industrial

9

2006 Capacity by Fuel Type

17%

9%

35%

9%

15%

13%

1%

1%

Gas 6508

Oil 3659

Gas & Oil 13831

Coal 3505

Hydro 5700

Nuclear 5169

Other 341

Wind 245

10

Statewide Average Wholesale Prices

Actual NYISO Average Cost Normalized to Year 2000 Fuel Price Level

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

2000 2001 2002 2003 2004 2005 (ThroughOctober)

$/M

Wh

Actual Annual Average Cost (Energy + Ancillary Services)Annual Average Cost Normalized to Year 2000 Fuel Price Levels

11

Residential Average Monthly Revenue c/kWh Compared to the Wholesale Average Monthly Day Ahead Market Price

0

5

10

15

20

25

30

Oct-00 Apr-01 Nov-01 May-02 Dec-02 Jun-03 Jan-04 Aug-04 Feb-05 Sep-05 Mar-06

Year

c/kW

h

Con Edison NIMO NYSEG Rochester Central Hudson O&R WEST CAPITL NYC

12

Demand Side Response

• Energy Efficiency and Demand Response continue to play a major role in New York– As part of the electric industry restructuring, a Systems

Benefit Charge program, funded by utility customers and managed by NYSERDA was created and the program continues to make tremendous progress

– Wholesale and retail programs for DSR have been harmonized

– DSR programs in the wholesale markets are well established

– Mandatory hourly pricing for largest electric customers; about 5000MW + will be on default hourly pricing tariff (about 16% of peak load);

13

Demand Response

Wholesale Competition: Role of Demand Side Response(MW Enrollment as of October, 2005)

1,120

597

394

-

200

400

600

800

1,000

1,200

Demand Side Response Program

MW

Special Case Resources Emergency Demand Response Day Ahead Demand Response Program

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New Infrastructure

• The first preference is for merchant facilities• Regulated backstop solutions. Generation,

Transmission and Demand Response solutions • Utilities may sign LT contracts to facilitate

new generation entry• Public Policy contributions to fuel diversity

RPS and Clean Coal • As ESCOs gain load they should be facilitating

new entry

15

LOAD SERVED IN 2005 BY LSEs

0

10,000

20,000

30,000

40,000

CO

NED

GR

ID

NYS

EG

ES

CO

ES

CO

RG

&E CH

ES

CO

ES

CO

O&

R

ES

CO

LSE

GW

H

16

New York Regulatory PolicyUtility Default Service Pricing

• NYPSC issued in August 2004 a Policy Statement regarding utility default service customer pricing:– Large customers - utility prices should reflect market

prices. No new “hedges” for this customer group. MHP– Mass market customers - stable pricing is still needed until

risk mitigation products are available in the competitive market place. Utilities are given flexibility in structuring their supply portfolios to secure stable prices.

17

New York Regulatory PolicyUse of Long-Term Contracts

• No pre-approval of utility supply contracts • Long term supply contracts for public policy

reasons. • If utilities enter into long term contracts to

retain market share or to impede the development of a competitive market, costs may not be recoverable from ratepayers.

18

New York Regulatory PolicyUtility Supply Portfolios

• Most electric utilities use a portfolio approach to procure supplies for default customers

• Supply portfolios typically consist of “legacy” contracts, short term physical and financial contracts, and spot NYISO market purchases. The resulting portfolio cost is passed onto customers of the utility.

• The value of legacy contracts is spread to all utility customers.

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Competition Impact on Price Signals• Improved price signals for consumers improve wholesale

market efficiency– Hourly price signals = Demand Response = Wholesale

efficiency – If a utility is the dominant commodity provider, regulators

can implement specific price mechanisms to help facilitate DSR. Regulators are generally risk averse and reluctant to promote proper pricing signals.

– Under retail competition, ESCOs are expected to provide more value added services behind the meter, particularly to large customers, to help improve the efficiency in customer usage and contribute to Demand Response that would help the wholesale markets.

20

Competition Impact on New Supply

• If the utility retains a majority of the customer load …

• If customer load is distributed among many players…

• If generators require certainty through long-term contracts with credit worthy entities, then retail competition adds complexity to the issue.

21

New York Regulatory PolicyIssues under consideration

• Where do new hedges go? • What products should utilities offer? • What should default service look like?• Establishment of a volatility metric in

structuring portfolios?