Phase II of Restructuring In Massachusetts “What Comes After Standard Offer?”

1. Phase II of RestructuringIn Massachusetts“What Comes After Standard Offer?” WMECO’s Concerns and Proposals January 30, 2004

2. Restructuring Progress Successes • Lower prices • Customer choice available • Large customers take competitive service • Smaller customers have received competitive wholesale prices • Sale of generation at high prices • Extinguish stranded costs for some utilities that had market based power prices

3. Three Ways to Go from Here • Return to Integrated service from electric companies • Force small customers away from distribution companies in hopes of creating retail choice • Continue the current course for a few more years, with market enhancements • WMECO prefers and proposes option 3

4. Why WMECO Does Not Endorse Option 2 (Forced Retail Choice) • No broad-based customer support is apparent • Effectively legislative “slamming” • Reliance on unproven new participants in the marketplace • Track record of new entrants is mixed • Bust up existing utilities to promote “wanna be” utilities • Financial assurance is paramount—maybe not solvable • If shifting metering, billing and information service, then lost jobs and new stranded costs • Multiple companies doing the same job will create economic inefficiencies • No easy way to retreat if unsuccessful

5. Details of WMECO’s Proposals • Continue default service after standard offer for 5 years for all customers • Allows wholesale power market to stabilize • Allows transmission expansion to occur, allowing competitive markets and unhindered flow of power from generators to load • With enhanced retail pricing, permits a true test if customers desire to switch • Utilities would continue to meter, bill and interact with customers

6. Details of WMECO’s Proposals • Set default service price at levels that encourages customers to switch • Increase default price by 10% over marginal supply cost (i.e., 10% above highest priced accepted bid) • For large C&I customers, continue to provide quarterly solicitations • Continue 50% annual overlapping solicitations for residential and small C&I customers, consider customers’ desires for stability vs. price signals before going further

7. Details of WMECO’s Proposals • Use of utility default service margin • Use portion of margin to offset • Remaining stranded costs, • Deferred costs, • Other customer costs (e.g. distribution) • Allow utilities to retain portion of margin • Creates incentive for utility to keep all costs low, including delivery costs

8. Why Allowing Utility Retention of a Portion of Default Service Margin Makes Sense • Creates a better pricing signal for retail choice • Customers have the option of not paying the margin by going to a competitive supplier • Recognizes that utilities were financially harmed by restructuring • WMECO previously earned a profit on power sales • Loss of half of earnings power and rate base resulting from forced generation divestiture • No profit from sale of generating plants—all proceeds went to offset customer obligation for stranded costs • Default service is a new obligation on utilities • Anyone providing this service would require compensation • Consistent with other states that have adopted a stay the course approach to restructuring • Connecticut and Maryland