The Future of Default Service: Retail Suppliers’ Perspective

1. The Future of Default Service:Retail Suppliers’ Perspective Paul Gromer Peregrine Energy Group Massachusetts Restructuring Roundtable June 21, 2002

2. Topics • Goals • Customer classes covered • Proposal • Transition phase • Basic Service phase • End-state

3. Goals • To increase retail choices for customers so as to enable them to select products that better meet their needs. • To increase retail competition. • To ensure that the competitive market sets the price for Default Service. • To ensure that the price of Default Service reflects all of the costs of providing the service. • To adopt a path to an end state where nearly all customers are served by the competitive market, and Default Service is only a temporary, transitional service.

4. Customer classes covered • Large and medium customers • The market is working today for large and medium DS customers. • The market is likely to continue to improve throughout the remainder of the Standard Offer period. • Significant default service reform is not needed. • Small customers • The market is not yet serving these customers effectively. • An enhanced default service will be needed to: • Meet customers’ needs • Support the development of the retail market. • “Small” customers = • Residential • Possibly small commercial.

5. Retail suppliers’ proposal • A combination of the DOER and National Grid proposals • 3 Phases • Transition Phase • Jan. 2003 – Feb. 2005 • Basic Service Phase • March 2005 - ? • End-state

6. Transition Phase • Jan. 2003 – Feb. 2005 • 2 elements • Staggered procurements • DOER proposal • Staggered contracts for approx. 1/8 of Default Service load • Basic Service Pilot Program • For Default Service customers of one utility • Resolve any implementation issues before state-wide roll out.

7. Basic Service Phase • March 2005 - ? • National Grid proposal • Customers transferred to competitive suppliers via a retail auction. • Two-year terms • Price set through the auction • Terms of service set in a standard, contract approved by DTE. • Suppliers bear retail obligations and costs • Customer acquisition charge • The winning bidders pay a per-customer acquisition charge to reflect the value of the customer acquisition service provided by the utility • Proceeds would flow to customers

8. Advantages to Basic Service/retail auction approach • Spurs retail competition by removing barriers to the development of the retail market, and thereby attracting new competitors to the market • Enables retail suppliers to build instant scale • It is extremely expensive and inefficient to serve small numbers of small customers • Creates a level playing field, where retail suppliers compete against other retail suppliers • It is very tough for new entrants to compete against “Mother MassElectric”, especially given that Mother MassElectric started with all the customers and the retail suppliers started with 0. • Establishes a basic service price that reflects the costs of providing retail service • Retailers can’t compete against wholesale prices with retail costs hidden in distribution rates

9. Advantages to Basic Service/retail auction approach • Protects and benefits customers • Basic service prices set through competitive process • Terms and conditions set in deemed contract approved by DTE. • A developing competitive market will offer new choices to customers • Puts Massachusetts on a path to an end state with a fully competitive retail market.

10. End-state • Post Basic Service • Fully-functioning retail market for all customer classes. • (Nearly) all customers served by competitive retail suppliers. • Default Service is only a temporary, transitional service