Shocking Issues in Electricity Contracts

1. Shocking Issues in Electricity Contracts By: • Craig Enochs, Jackson Walker, L.L.P., Houston, Texas • John R. Werner, Constellation NewEnergy, Inc., Houston, Texas

2. Shocking Issues in Electricity Contracts - Outline • Background - • Why deregulation? • Market Structure (Then and Now) • Load Classifications – Where do your Clients fit? • <1MW • >1MW • Shocking Issues! • Consumer Protection Rules • Credit • Term • TDSP charges/liability/relationship • Products • Other States

3. Why deregulation? • Governments response to the energy crises in the early ’70s • ‘76 – Public Utility Regulatory Act (“PURA”): Regulation went from local (city) level to the state level.Limited retail choice by allowing only one electric energy provider to serve one area of the state. • ’78 – Public Utilities Regulatory Policies Act (“PURPA”): Created incentive for Independent Power Producers (non-utilities) to get into the generation business (utilities had to buy from a Qualifying Facility (Co-Generation) if the electricity was produced).

4. Why deregulation? continued • ’95 – PURA: Senate deregulated wholesale generation market by disallowing any future generation units to be included in rate base • ’99 PURA – Senate Bill 7: Forced integrated utilities to un-bundle their assets (generation, wires, customers) effectively un-bundling the utility monopolies • January ’02 – ERCOT Market Open – Customers have the right to choose their electricity provider

5. Vertically Integrated, Fully Regulated Monopoly Generatingstation Transmission wires Transmission substation Distribution wires Customers Fuel Before Deregulation Power Production Delivery Billing/Customer Service

6. Transmission & Distribution Retail Customers Generation After Deregulation All entities are separate and distinct now – transmission and distribution is the only entity regulated

7. Load Classifications – Where do your business clients fit in the newly deregulated world? • Less than 1MW – (1MW = about the size of a Super Wal-Mart®) OR • Greater than 1MW

8. <1MW Customers have PTB as an option. What is the PTB? • Utilities Rates frozen January 1999 Solely adjusted for the market rate of natural gas • Simple Calculation (old rate with natural gas @ $x + increase in natural gas since then)

9. II. Shocking Issues A. Customer Protection Rules - “First, you waive all protections the rules offer consumers”

10. II. Shocking Issues • Customer Protection Rules • Credit – “The utility never required collateral”

11. II. Shocking Issues • Customer Protection Rules • Credit • Term

12. II. Shocking Issues • Customer Protection Rules • Credit • Term • Old world, termination at will but you were a price taker or long-term deal under a regulated tariff

13. II. Shocking Issues • Customer Protection Rules • Credit • Term • Old world, termination at will but you were a price taker or long-term deal under a regulated tariff • New world typically less than 2 years, can be month-to-month

14. II. Shocking Issues • CPR • Credit • Term • TDSP - “If I switch providers, the utility won’t provide the same service it does now.”

15. II. Shocking Issues • CPR • Credit • Term • TDSP • Charges

16. II. Shocking Issues • CPR • Credit • Term • TDSP • Charges • Liability

17. II. Shocking Issues • CPR • Credit • Term • TDSP • Charges • Liability • Relationship

18. II. Shocking Issues • CPR • Credit • Term • TDSP • Products – “What is an index price heat rate baseload plus fixed price trigger product?”

19. II. Shocking Issues • CPR • Credit • Term • TDSP • Products • Pure Index v. Pure Fixed Price

20. Pure Index Energy Cost = (Total Usage x Index Rate) + (Total Usage x Retail Adder) + Wires and Taxes Retail Adder applies to all usage Total usage multiplied by the Index Rate (e.g., the Market Clearing Price of Energy (“MCPE”) or Heat Rate times NYMEX Gas Settlement Price ($/MWh) Load Shape (kW) Hour Ending 01 through 24 for Average Weekday

21. Fixed Price Product Energy Cost = (Total Usage x Fixed Price) + Wires and Taxes Total usage multiplied by the Fixed Price ($/MWh) Load Shape (kW) Hour Ending 01 through 24 for Average Weekday

22. II. Shocking Issues • CPR • Credit • Term • TDSP • Products • Pure Index v. Pure Fixed Price • Partial Index/Partial Fixed Price

23. Fixed Base Block Plus Index Energy Cost =(Block Usage x Block Rate) + (Index Usage x Index Rate) + (Total Usage x Retail Adder) Retail Adder applies to all usage All usage above block amounts (“Index Usage”) multiplied by the Index Rate (e.g., the Market Clearing Price of Energy (“MCPE”) or Heat Rate times NYMEX Gas Settlement Price $/MWh) Load Shape (kW) 7x24 Wholesale Block (@ Block Rate = Fixed Price) If load ever dips below the block, unused block quantities sold of at MCPE. Hour Ending 01 through 24 for Average Weekday

24. II. Shocking Issues • CPR • Credit • Term • TDSP • Products • Other States – “Can you supply my Hawaii location too?”

25. II. Shocking Issues • CPR • Credit • Term • TDSP • Products • Other States • Each region has different regulations, which may raise different issues.

26. II. Shocking Issues • CPR • Credit • Term • TDSP • Products • Other States • Each region has different regulations, which may raise different issues. • Texas deregulation only affects parts of Texas and nowhere else.