STAFF STATUS REPORT NO. 7 ELECTRIC RESTRUCTURING

1. STAFF STATUS REPORT NO. 7ELECTRIC RESTRUCTURING OKLAHOMA CORPORATION COMMISSION DELIBERATIONS April 26, 2000

2. STAFF’S GENERAL RESTRUCTURING PRINCIPLES • ELECTRIC RESTRUCTURING IS AN EFFORT TO PROVIDE CUSTOMERS WITH CHOICE FOR GENERATION SERVICES • ELECTRIC RESTRUCTURING MUSTAVOID AN UNFAIR SHIFT OF RISK TO RATEPAYERS OKLAHOMA ELECTRIC RESTRUCTURING -- STAFF STATUS REPORT NO. 7

3. THE “GOOD INTENTIONS” OF THE OKLAHOMA LEGISLATION The proposed legislation, • Attempts to address the concerns of stakeholders • Provides customers with choice • In several ways facilitates the development of competitive generation services in Oklahoma OKLAHOMA ELECTRIC RESTRUCTURING -- STAFF STATUS REPORT NO. 7

4. STAFF’S RESTRUCTURING CONCERNS AND ISSUE AREAS 1. Rates for Small Consumer 2. Unbundling of Services 3. Consumer Education, Protection, and Bill of Rights 4. Affiliate Transactions & Code of Conduct 5. Competition and Enforcement 6. Market Monitoring 7. Stranded Cost Recovery 8. Reliability and Quality of Service 9. Licensing of Marketers 10. Jurisdiction 11. Public Benefits OKLAHOMA ELECTRIC RESTRUCTURING -- STAFF STATUS REPORT NO. 7

5. ASSESSMENT OF LEGISLATIONRECOMMENDED CHANGES AND ADDITIONS 1. Rates for Small Consumers • Oklahoma is a low cost electricity state • 26 other low cost states instituted low cost protection measures for small consumers: • moratorium on rate increases • rate caps • regulatory divestiture power • market power measures • affiliate transaction standards of review and asymmetrical pricing • consumer protection and education STAFF RECOMMENDATION: The price of electricity must not increase due to restructuring, particularly for small consumers (residential and small commercial) OKLAHOMA ELECTRIC RESTRUCTURING -- STAFF STATUS REPORT NO. 7

6. ASSESSMENT OF LEGISLATIONRECOMMENDED CHANGES AND ADDITIONS 2. Unbundling of Services • Unbundlingof electric services and assets must be structural, rather than functional • Utility assets transferred to unregulated generation affiliates must be valued at fair market price • Legislation does not provide a regulatory process ensuring that ratepayers and shareholders share in the excess over book value when generation assets and services are spun off to unregulated affiliates STAFF RECOMMENDATION:Unbundling must be structural, not functional -- assets deregulated must be valued at fair market value -- ratepayers must at least share in the value above book of assets that are deregulated OKLAHOMA ELECTRIC RESTRUCTURING -- STAFF STATUS REPORT NO. 7

7. ASSESSMENT OF LEGISLATIONRECOMMENDED CHANGES AND ADDITIONS 3. Consumer Education, Protection and Bill of Rights • Staff recommends funding for education of $12 – 14 million • Consumer education needs to begin now and continue for at least the first 5 years of restructuring • Must provide sufficient consumer protections with clearly established consumer rights STAFF RECOMMENDATION: Consumer education must begin immediately, continue through at least the first 5 years of restructuring, and must be funded at a level of $12-14 million -- a clear and comprehensive customer bill of rights must be established and enforced by regulators OKLAHOMA ELECTRIC RESTRUCTURING -- STAFF STATUS REPORT NO. 7

8. ASSESSMENT OF LEGISLATIONRECOMMENDED CHANGES AND ADDITIONS 4. Affiliate Transactions & Code of Conduct • Proposals concerning affiliate rules in the legislation must clearly state that they do not supersede applicable federal affiliate rules, but should, at the same time, permit the state to adopt more stringent standards over activities within the State’s jurisdiction • Legislation allows transfers of services/products between the distribution utility and unregulated affiliates in a manner detrimental to customers • Self-regulating municipals may not be able to fairly consider discrimination, market-power, and anti-competitive acts by municipal retail energy suppliers STAFF RECOMMENDATION: State must have full latitude to establish stringent affiliate rules (including services/assets transfers) and oversee actions of municipal REESs OKLAHOMA ELECTRIC RESTRUCTURING -- STAFF STATUS REPORT NO. 7

9. ASSESSMENT OF LEGISLATIONRECOMMENDED CHANGES AND ADDITIONS 5. Competition and Enforcement • Does not allow regulatory assessment of whether competition exists prior to deregulating generation and related services • Does not contain definitions of competition, effective competition, or workable competition • Fails to address the extent of ISO control and liability for decisions made by control area operators at the direction of the ISO • Fails to impose a duty on utilities to try to renegotiate or reduce federally mandated co-generation contract obligations • Fails to identify a bidding/aggregation process that provides small consumers comparable buying power as large users of electricity STAFF RECOMMENDTION:Regulators must be allowed to establish definitions of competition, continually assess its existence, and take action to promote competition and/or cure competition failures OKLAHOMA ELECTRIC RESTRUCTURING -- STAFF STATUS REPORT NO. 7

10. ASSESSMENT OF LEGISLATIONRECOMMENDED CHANGES AND ADDITIONS 6. Market Monitoring • No provision to correct abuses of market power or to remedy the failures of competition after institution of open access • No provision regarding regulatory authority to prevent mergers which would impair competition STAFF RECOMMENDATION: Regulators must be allowed to assess and remedy market power problems where ever they exist, and work to prevent mergers that harm competition OKLAHOMA ELECTRIC RESTRUCTURING -- STAFF STATUS REPORT NO. 7

11. ASSESSMENT OF LEGISLATIONRECOMMENDED CHANGES AND ADDITIONS 7. Stranded Cost Recovery • Fails to provide regulatory authority to determine the amount of recoverable stranded costs for an electric utility STAFF RECOMMENDATION: Regulators must be allowed to assess and determine the amount of recoverable stranded costs for an electric utility OKLAHOMA ELECTRIC RESTRUCTURING -- STAFF STATUS REPORT NO. 7

12. ASSESSMENT OF LEGISLATIONRECOMMENDED CHANGES AND ADDITIONS 8. Reliability and Quality of Service • No single entity responsible for reliability, which may make it difficult to coordinate activities with the FERC • Names OCC, certain coops, municipals, and GRDA as responsible for reliability, but does not give them jurisdiction to affect reserve requirements, order back-up service, review or remedy causes of service interruptions, or establish restoration priorities or emergency plans • Includes no provision to address customer service quality after restructuring STAFF RECOMMENDATION: The quality, reliability, and safety of customers’ service must not decline due to restructuring -- regulators must be allowed to oversee development of coordinated efforts to ensure this result OKLAHOMA ELECTRIC RESTRUCTURING -- STAFF STATUS REPORT NO. 7

13. ASSESSMENT OF LEGISLATIONRECOMMENDED CHANGES AND ADDITIONS 9. Licensing of Marketers • Must include requirements for strict procedures governing the disclosure of customer information • Fails to address resolution of disputes between retail electric energy suppliers and retail electric customers • Must prohibit discrimination by a distribution company in the provision of services to customers • Must mandate that all existing consumer protections continue STAFF RECOMMENDATION: Regulators must be allowed to develop and enforce customer related standards for REESs, including discrimination, service offerings, and service quality -- existing customer protections must continue as today OKLAHOMA ELECTRIC RESTRUCTURING -- STAFF STATUS REPORT NO. 7

14. ASSESSMENT OF LEGISLATIONRECOMMENDED CHANGES AND ADDITIONS 10.Jurisdiction • Must allow for regulatory reviews of proposed services to be unbundled • Must provide for periodic regulatory assessments to ensure that competition continues to exist after restructuring is initiated • Advisability of allowing electric cooperatives to completely remove themselves from State regulation, as provided in the current legislation (e.g., consumer complaints, reliability, quality of service) • Legislation contains no provisions for resolving disputes between electric companies and telephone companies (Harmonics) STAFF RECOMMENDATION:There must be full regulatory review of unbundling & the existence of competition -- regulatory authority must not be diminished without a demonstrated benefit to customers OKLAHOMA ELECTRIC RESTRUCTURING -- STAFF STATUS REPORT NO. 7

15. ASSESSMENT OF LEGISLATIONRECOMMENDED CHANGES AND ADDITIONS 11.Public Benefits • Provides only for public benefits programs currently funded • No provision for ensuring that rates and terms are advertised so that all customer types are informed fully (internet access alone may discriminate against low income electricity users) • No provision for strict procedures for customer privacy and release of customer information STAFF RECOMMENDATION:Public benefits programs such as universal service & low income service must be established and funded -- customers must be informed of changes by every means possible -- access to customer information must be stringently safeguarded OKLAHOMA ELECTRIC RESTRUCTURING -- STAFF STATUS REPORT NO. 7

16. COMMISSION’S “OKLAHOMA PLAN” FOR RESTRUCTURING • A significant risk inherent in electric restructuring is that it may be irreversible • Preserves most of the benefits of the present system and yet moves us toward retail choice and competition, and the potential benefits they may bring • The plan is consistent with current legislation, in that it achieves the goal of “increased customer choice” -- It also adheres to the principles and directives outlined by the legislation OKLAHOMA ELECTRIC RESTRUCTURING -- STAFF STATUS REPORT NO. 7

17. COMMISSION’S “OKLAHOMA PLAN” FOR RESTRUCTURING • The OCC’s “Oklahoma Plan” provides three options for customers: • Allows industrial and large commercial customers to buy electricity from retail electric energy suppliers at unregulated rates • Provides small consumers a portfolio of several electric service options (through local utility), including an environmentally friendly or “green” choice • All customers have the additional option to continue buying electric energy under a cost-of-service rate, that will be regulated by the OCC OKLAHOMA ELECTRIC RESTRUCTURING -- STAFF STATUS REPORT NO. 7